**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K/A**

**Amendment No. 1**

**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe year ended December 31, 2005**

**CommissionFile Number 0-25882**

**EZENIA! INC.**

(Exact name of registrantas specified in its charter)

| **DELAWARE**

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

 

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

(Address of principalexecutive offices, including zip code)

**(781) 505-2100**

(Registrant’s telephone number, including area code)

----

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

None

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

Common Stock $.01 par value

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes  o   No  x

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or15(d) of the Act.   Yes  o   No  x

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x   No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.   Yes  o   No  x

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerate filer” and “largeaccelerated filer” in Rule 12b-2 of the Exchange Act). LargeAccelerated Filer   Yes  o   No  x   Accelerated Filer   Yes  o   No  x   Non-AcceleratedFiler   Yes  x   No  o

Indicate by checkmarkwhether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes  o   No  x

The aggregate market valueof the voting and non-voting common stock held by non-affiliates of theRegistrant was $28,146,459 (computed by reference to the price at which theRegistrant’s common stock was last sold on the OTC Bulletin Board on June 30,2005).

The number of shares outstanding of the Registrant’scommon stock as of March 24, 2006 was 14,623,422.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portionsof the definitive Proxy Statement to be delivered to Shareholders in connectionwith the Annual Meeting of Shareholders to be held May 24, 2006 areincorporated by reference into Part III hereof. With the exception of theportion of such Proxy Statement that is expressly incorporated herein, suchProxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.

 

----

EXPLANATORYNOTE

This Amendment No. 1 on Form 10-K/Aamends our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005, filed with the Securities and Exchange Commission onMarch 31, 2006 to correct a clerical error in Note 6 (Income Taxes) to ourConsolidated Financial Statements in two tables within the disclosure asrevised herein. Except as set forth herein, there have been no other changes tothe Form 10-K as originally filed.

This Amendment No. 1speaks as of the original filing date of the Form 10-K and does notreflect events occurring after the filing of the original Form 10-K,or modify or update the disclosures therein in any way other than as requiredto reflect the amendment described above.

----

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEX**

|                                                                                                                      | ** ** | **Page** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                             |       |     | 4          |   |   |
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                   |       |     | 5          |   |   |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003.                    |       |     | 6          |   |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2005, 2004 and 2003 |       |     | 7          |   |   |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 and 2003                     |       |     | 8          |   |   |
| Notes to the Consolidated Financial Statements                                                                       |       |     | 9          |   |   |

 

3

----

**Report of Independent Registered Public AccountingFirm**

The Board of Directors and StockholdersEzenia! Inc.

We have audited the accompanying consolidated balancesheets of Ezenia! Inc. and subsidiaries as of December 31, 2005 and 2004and the related consolidated statements of operations, stockholders’ equity,and cash flows forthe three yearperiod ended December 31,2005.Our audits also included the financial statement schedules listed in the Indexat Item 15(a). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and schedulebased on our audits.

We conducted our audits in accordance with the auditing standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. The Company is not required to have, nor werewe engaged to perform, an audit of its internal controls over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly,we express no such opinion.An audit also includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Ezenia! Inc. and subsidiaries at December 31, 2005and 2004 and the consolidated results of their operations and their cash flowsfor each of the three years in the periodended December 31, 2005,in conformity with accounting principles generally accepted in the UnitedStates of America. Also, in our opinion, the related financial statementschedule, whenconsidered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

See Note 6 for a discussion regarding restatementof previously filed disclosures regarding the components of the Company’sdeferred tax assets. The restatement has no effect on the consolidatedfinancial position, results of operations or cash flows of the Company.

|  | /s/ BROWN &  BROWN LLP |
|--|---------------------------------|

 

Boston, Massachusetts

March 28, 2006

4

----

**ConsolidatedBalance Sheets**

| ** **                                                                                                                                                               | ** ** | **December 31,**                                                       | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2005**                                                                    | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                               | ** ** | **(In thousands,  except for share related data)** | ** ** |
| **Assets**                                                                                                                                                               |       |                                                                        |       |   |   |
| Current assets                                                                                                                                                           |       |                                                                        |       |   |   |
| Cash and cash equivalents                                                                                                                                                |       | $                                                                           | 9,405      |   | $ | 5,520 |   |
| Accounts receivable, less allowances of $339 and  $371 in 2005 and 2004, respectively                                                                                    |       | 4,533                                                                       |       | 3,465 |   |
| Prepaid software licenses                                                                                                                                                |       | 2,477                                                                       |       | 2,630 |   |
| Prepaid expenses and other current assets                                                                                                                                |       | 311                                                                         |       | 306 |   |
| Deferred tax assets                                                                                                                                                      |       | 138                                                                         |       | — |   |
| Total current  assets                                                                                                                                                    |       | 16,864                                                                      |       | 11,921 |   |
| Equipment and improvements, net                                                                                                                                          |       | 247                                                                         |       | 85 |   |
| Total assets                                                                                                                                                             |       | $                                                                           | 17,111     |   | $ | 12,006 |   |
| **Liabilities  and stockholders’ equity**                                                                                                                           |       |                                                                        |       |   |   |
| Current liabilities                                                                                                                                                      |       |                                                                        |       |   |   |
| Accounts payable                                                                                                                                                         | ** ** | $                                                                           | 1,593      |   | $ | 734 |   |
| Accrued expenses                                                                                                                                                         |       | 415                                                                         |       | 571 |   |
| Employee compensation and benefits                                                                                                                                       |       | 46                                                                          |       | 200 |   |
| Deferred revenue                                                                                                                                                         |       | 7,125                                                                       |       | 6,663 |   |
| Total current  liabilities                                                                                                                                               |       | 9,179                                                                       |       | 8,168 |   |
| Commitments and  contingencies (Note 8)                                                                                                                                  |       |                                                                        |       |   |   |
| 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; 15,248,386 issued and 14,587,949 outstanding in 2005; 14,846,598  issued and 14,186,161 outstanding in 2004 |       | 152                                                                         |       | 148 |   |
| Capital in excess of par value                                                                                                                                           |       | 63,930                                                                      |       | 63,643 |   |
| Accumulated deficit                                                                                                                                                      |       | (53,289                                                                     | )          | (57,092 | ) |
| Treasury stock; 660,437 shares at cost                                                                                                                                   |       | (2,861                                                                      | )          | (2,861 | ) |
|                                                                                                                                                                     |       | 7,932                                                                       |       | 3,838 |   |
| **Total liabilities and  stockholders’ equity**                                                                                                                     |       | $                                                                           | 17,111     |   | $ | 12,006 |   |

 

See accompanying notes.

5

----

**ConsolidatedStatements of Operations**

| ** **                                        | ** ** | **Year ended December 31,**                                           | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                                                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(In thousands,  except for per share related data)** | ** ** |
| **Revenues**                                      |       |                                                                                 |       |   |   |   |   |
| Product revenue                                   | ** ** | **$**                                                                                | **11,726** |   | $ | 8,565 |   | $ | 7,663 |   |
| Product development revenue                       | ** ** | **1,178**                                                                            |       | 1,455 |   | 78 |   |
| Service revenue                                   | ** ** | **271**                                                                              |       | 371 |   | 476 |   |
|                                              |       | **13,175**                                                                           |       | 10,391 |   | 8,217 |   |
| **Costs of  revenues**                            |       |                                                                                 |       |   |   |   |   |
| Cost of product revenue                           | ** ** | **3,898**                                                                            |       | 3,107 |   | 3,355 |   |
| Cost of product development  revenue              | ** ** | **523**                                                                              |       | 388 |   | 39 |   |
| Cost of service revenue                           | ** ** | **59**                                                                               |       | 86 |   | 334 |   |
|                                              |       | **4,480**                                                                            |       | 3,581 |   | 3,728 |   |
| **Gross profit**                                  | ** ** | **8,695**                                                                            |       | 6,810 |   | 4,489 |   |
| **Operating expenses**                            |       |                                                                                 |       |   |   |   |   |
| Research and development                          | ** ** | **1,158**                                                                            |       | 1,087 |   | 1,921 |   |
| Sales and marketing                               | ** ** | **1,535**                                                                            |       | 1,370 |   | 1,119 |   |
| General and administrative                        | ** ** | **1,826**                                                                            |       | 1,959 |   | 1,891 |   |
| Depreciation                                      | ** ** | **44**                                                                               |       | 8 |   | — |   |
| Occupancy and other facilities  related expenses  | ** ** | **621**                                                                              |       | 579 |   | 675 |   |
| Total operating expenses                          | ** ** | **5,184**                                                                            |       | 5,003 |   | 5,606 |   |
| **Income (loss) from operations**                 | ** ** | **3,511**                                                                            |       | 1,807 |   | (1,117 | ) |
| Other income (expense)                            |       |                                                                                 |       |   |   |   |   |
| Interest income, net                              | ** ** | **191**                                                                              |       | 122 |   | 6 |   |
| Settlement fees                                   | ** ** | —                                                                               |       | (179 | ) | — |   |
| Other                                             | ** ** | **10**                                                                               |       | 7 |   | 16 |   |
|                                              |       | **201**                                                                              |       | (50 | ) | 22 |   |
| Income (loss) before income taxes                 | ** ** | **3,712**                                                                            |       | 1,757 |   | (1,095 | ) |
| Income tax benefit                                | ** ** | **(91**                                                                              | **)**      | (1,427 | ) | (267 | ) |
| **Net income (loss)**                             | ** ** | **$**                                                                                | **3,803**  |   | $ | 3,184 |   | $ | (828 | ) |
| **Basic and  diluted earnings (loss) per share:** |       |                                                                                 |       |   |   |   |   |
| Basic                                             | ** ** | **$**                                                                                | **.26**    |   | $ | .23 |   | $ | (.06 | ) |
| Diluted                                           | ** ** | **$**                                                                                | **.25**    |   | $ | .22 |   | $ | (.06 | ) |

 

See accompanying notes.

6

----

**ConsolidatedStatements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)**

| ** **                                 | ** ** | ** **                                                                      | ** ** | ** **                 | ** ** | **Capital**        | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**                 | ** ** | **Comprehensive** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------|------------|------------------------|------------|---------------------------|------------|-------------------|------------|
| ** **                                 | ** ** | **Common Stock**                                                           | ** ** | **in Excess of** | ** ** | **Accumulated**    | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** | **Income**                | ** ** |
| ** **                                 | ** ** | **Shares**                                                                      | ** ** | **Par Value**         | ** ** | **Par Value** | ** ** | **Deficit**  | ** ** | **Stock**              | ** ** | **Equity (Deficit)** | ** ** | **(Loss)**        | ** ** |
| ** **                                 | ** ** | **(In thousands, except for share related data)** | ** ** |
| **BALANCES AS OF DECEMBER 31, 2002**       |       | 13,633,630                                                                      |       |                       | 139        |               |       |         | 60,666     |                   |       |                      | (59,448    | )                 |       | (2,861 | ) |   | (1,504 | ) |   |   |   |   |   |
| Stock issued under employee  benefit plans |       | 66,750                                                                          |       |                       | 5          |               |       |         | 4          |                   |       |                      |       |              |       |   |   |   | 9 |   |   |   |   |   |   |
| Cancellation of put                        |       |                                                                            |       |                       |       |               |       |         | 2,875      |                   |       |                      |       |              |       |   |   |   | 2,875 |   |   |   |   |   |   |
| **Net loss**                               |       |                                                                            |       |                       |       |               |       |         |       |                   |       |                      | (828       | )                 |       |   |   |   | (828 | ) |   |   | (828 | ) |   |
| Comprehensive loss                         |       |                                                                            |       |                       |       |               |       |         |       |                   |       |                      |       |              |       |   |   |   |   |   |   |   | $ | (828 | ) |   |
| **BALANCES AS OF DECEMBER 31,  2003**      |       | 13,700,380                                                                      |       |                       | 144        |               |       |         | 63,545     |                   |       |                      | (60,276    | )                 |       | (2,861 | ) |   | 552 |   |   |   |   |   |   |
| Stock issued under employee  benefit plans |       | 485,781                                                                         |       |                       | 4          |               |       |         | 98         |                   |       |                      |       |              |       |   |   |   | 102 |   |   |   |   |   |   |
| **Net income**                             |       |                                                                            |       |                       |       |               |       |         |       |                   |       |                      | 3,184      |              |       |   |   |   | 3,184 |   |   |   | 3,184 |   |   |
| Comprehensive income                       |       |                                                                            |       |                       |       |               |       |         |       |                   |       |                      |       |              |       |   |   |   |   |   |   |   | $ | 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 |   |   |   |   |   |   |
|                                            |            |                                                                                 |            |                            |            |                    |            |              |            |                        |            |                           |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes.

7

 

----

**ConsolidatedStatements of Cash Flows**

| ** **                                                                                          | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                          | ** ** | **(In thousands)**                    | ** ** |
| **Operating activities**                                                                            |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                   | ** ** | **$**                                      | **3,803**  |   | $ | 3,184 |   | $ | (828 | ) |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                       |       |   |   |   |   |
| Depreciation                                                                                        | ** ** | **44**                                     |       | 8 |   | — |   |
| Bad debt (recoveries)                                                                               | ** ** | **(50**                                    | )          | (110 | ) | (50 | ) |
| Deferred taxes                                                                                      | ** ** | **(138**                                   | )          | — |   | — |   |
| Changes in  operating assets and liabilities:                                                       |       |                                       |       |   |   |   |   |
| Accounts receivable                                                                                 | ** ** | **(1,018**                                 | )          | (610 | ) | (915 | ) |
| Inventories                                                                                         | ** ** | —                                     |       | — |   | 112 |   |
| Prepaid software licenses                                                                           | ** ** | **153**                                    |       | (906 | ) | (716 | ) |
| Prepaid expenses and other current assets                                                           | ** ** | **(5**                                     | )          | (9 | ) | (36 | ) |
| Accounts payable, accrued expenses, and employee and  compensation benefits                         | ** ** | **549**                                    |       | 9 |   | 231 |   |
| Income taxes                                                                                        | ** ** | —                                     |       | — |   | (285 | ) |
| Deferred revenue                                                                                    | ** ** | **462**                                    |       | 1,629 |   | 2,391 |   |
| Net cash provided  by (used in) operating activities                                                | ** ** | **3,800**                                  |       | 3,195 |   | (96 | ) |
| **Investing activities**                                                                            |       |                                       |       |   |   |   |   |
| Purchases of equipment and  improvements                                                            | ** ** | **(206**                                   | )          | (93 | ) | — |   |
| Net cash used for  investing activities                                                             | ** ** | **(206**                                   | )          | (93 | ) | — |   |
| **Financing activities**                                                                            |       |                                       |       |   |   |   |   |
| Proceeds from issuance of stock  under employee benefit plans                                       | ** ** | **291**                                    |       | 102 |   | 9 |   |
| Net cash provided  by financing activities                                                          | ** ** | **291**                                    |       | 102 |   | 9 |   |
| Change in cash  and cash equivalents                                                                | ** ** | **3,885**                                  |       | 3,204 |   | (87 | ) |
| Cash and cash  equivalents at beginning of year                                                     | ** ** | **5,520**                                  |       | 2,316 |   | 2,403 |   |
| Cash and cash  equivalents at end of year                                                           | ** ** | **$**                                      | **9,405**  |   | $ | 5,520 |   | $ | 2,316 |   |
| Supplementary disclosure  of cash flow information:                                                 |       |                                       |       |   |   |   |   |
| Interest paid                                                                                       | ** ** | **$**                                      | **2**      |   | $ | 1 |   | $ | — |   |
| Income taxes (refunded) paid                                                                        | ** ** | **$**                                      | **—** |   | $ | (1,271 | ) | $ | — |   |
| Cancellation of  put                                                                                | ** ** | **$**                                      | **—** |   | $ | — |   | $ | 2,875 |   |

 

See accompanying notes.

8

----

**Notes to the Consolidated Financial Statements**

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

Ezenia! Inc. (“Ezenia”or the “Company”) operates in onebusiness segment, which is the design, development, manufacturing, marketingand sale of conferencing and real-time collaboration solutions for corporateand governmental networks and eBusiness.  Founded in 1991, Ezenia! develops and marketsproducts that enable organizations to provide high-quality group communicationand collaboration capabilities to commercial, governmental, consumer andinstitutional users. Ezenia’s products allow individuals and groups, regardlessof proximity constraints, to interact and share information in 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.

The consolidated financial statements include the accountsof Ezenia and its wholly owned subsidiaries. All significant inter-companytransactions and balances have been eliminated. All assets and liabilities ofEzenia’s foreign subsidiaries are translated at the rate of exchange at the endof the year, while sales and expense are translated at the average rate ineffect during the year. The net effect of these translation adjustments hasbeen immaterial.

Certain amounts in 2003have been reclassified to permit comparison with 2005 and 2004 classifications.

**2.   Management’sPlans**

Ezenia’ssuccess in achieving its goal of showing consistent quarterly top line andbottom line growth is largely dependent on whether it can continue to grow itsfuture order bookings, and related revenue targets. Prior to 2004, Ezenia incurred substantialrecurring operating losses and negative cash flow from operations and incurredan accumulated deficit of approximately $60.3 million at December 31, 2003.During 2005 and 2004, Ezenia achieved income from operations of $3.5 million and$1.8 million, net income of $3.8 million and $3.2 million, and generated cashfrom operations of $3.8 million and $3.2 million respectively, and has$9.4 million of cash and cash equivalents as of December 31, 2005. Accordingly, largely as a result of itssuccessive quarters of profitability, management believes, although there canbe no assurances, 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 that we will continue to generate positivecash flow from operations for 2006 and that existing cash reserves willtherefore be sufficient to meet our working and capital requirement needsduring this period.

**3.   Summary ofSignificant 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 results could differ from these estimates.

9

----

**Notes to the Consolidated Financial Statements (Continued)**

**3.**   Summary of Significant Accounting Policies (Continued)

**Revenue recognition**

Product revenue consists of sales of InfoWorkSpace  (“IWS”) software licenses andmaintenance agreements, IWS product related training, installation, andconsulting, and video products. Revenue from sales of IWS software licenses andmaintenance agreements is recognized ratably over the subscription softwarelicense contract periods, which are generally one year, pursuant to theguidance 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 are recognizedas the services are performed provided there is vendor specific objectiveevidence (VSOE) of fair value which is the price charged when the services aresold separately. Revenue from video product sales is recognized upon shipmentto the customer and the fulfillment of all contractual terms and conditions,pursuant to the guidance provided by Staff Accounting Bulletin No. 104, “*Revenue Recognition in Financial Statements*” (SAB 104),issued by the Securities and Exchange Commission.

Product development revenue relates to contractsinvolving customization of the IWS product according to customerspecifications. Revenue associated with contracts for product developmentrevenue with milestone-based deliverables requiring a customers’ acceptance isrecognized upon the customer’s acceptance in accordance with terms of thecontract, in conformity with the guidance provided by SOP 81-1, “*Accounting For Performance of Construction Type and Certain ProductionType Contracts*” issued by the AICPA. The associated cost recognitionwith these deliverables or milestones is deferred until the terms of acceptanceare satisfied and revenue is recognized.

Service revenue represents sales of service contractsrelated to the maintenance of video products. Maintenance revenue is deferredand recognized ratably over the term of the applicable agreement.

Products and software licenses are sold without anycontractual right of return by the customer. Deferred revenue representsamounts received from customers under subscription software licenses,maintenance agreements, or for product sales in advance of revenue recognition.Judgments are required in evaluating the creditworthiness of our customers. Inall instances, revenue is not recognized until we have determined, at theoutset of the arrangement that collectibility is reasonably assured. Amountsbilled to customers related to shipping and handling charges are recorded asrevenue upon shipment and the related costs are included in cost of goods sold.

**Product Warranties**

Our products are sold with warranty provisions thatrequire us to remedy deficiencies in quality or performance of our productsover a period of 90 days, at no cost to our customers. Our policy is toestablish warranty reserves at the time of sale when our estimates of the coststhat will be incurred to fulfill those warranty requirements become material.At December 31, 2005, we believe that our future cost of materials, laborand overhead for the servicing of our products sold through that date are notmaterial and no reserve is warranted. If actual product failures or material orservice delivery costs differ from our estimates, our warranty liability wouldneed to be revised accordingly.

**Third PartyTechnology**

Ezenia’s IWS product incorporates third partytechnology in the form of software licenses, which we purchase from othersoftware vendors. Software licenses purchased from vendors are reported asprepaid licenses and amortized to cost of revenue over the subscription period,which is generally one year.

10

----

**Notes to the Consolidated Financial Statements (Continued)**

**3.**   Summary of Significant Accounting Policies (Continued)

**Advertising**

Advertisingcosts are included in sales and marketing expense. Ezenia uses its website as itsmain form of advertising along with participating in various industry relatedtrade shows and currently does not incur material advertising costs.Advertising costs are expensed as incurred. Advertising expense approximated$49 thousand in fiscal 2005 and $39 thousand in fiscal 2004. Ezenia did notincur advertising expense for fiscal 2003.

**Cash equivalents**

Ezenia considers allliquid investments with a maturity of 90 days or less at the date of purchaseto be cash equivalents. Cash equivalents and marketable securities consist ofhighly rated U.S. and state government securities, commercial paper andshort-term money market funds.

**Financialinstruments and concentrations of credit risk**

Ezenia’s financial instruments consist primarily ofcash and cash equivalents, trade receivables, accounts payable and accruedexpenses. The carrying value of these financial instruments approximates fairvalue due to their short term to maturity. Financial instruments, whichpotentially subject Ezenia to concentrations of credit risk, are cashequivalents and accounts receivable.

Major financial institutions maintain all the Company’scash equivalents. Concentration of credit risk with respect to accountsreceivable is limited to certain customers to whom Ezenia makes substantialsales. To reduce risk, we routinely assess the financial strength of our customers. Ezenia maintains anallowance for doubtful accounts based on accounts past due according tocontractual terms and historical collection experience. Actual losses whenincurred are charged to the allowance. Write-offs related to accountsreceivable have been within management’s expectations.

Revenue from one customer accounted for approximately 20%of total revenues in 2005, 33% of total revenues in 2004, and 38% of totalrevenues in 2003. Accounts receivable from this customer amounted toapproximately $1.8 million, $1.8 million and $1.9 million at December 31,2005, 2004 and 2003, respectively. Revenue from international markets wasapproximately $362 thousand, $391 thousand and $1.1 million in 2005, 2004 and2003, respectively.

**Equipment andimprovements**

Equipmentand improvements 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 and maintenancecosts are expensed as incurred.

11

----

**Notes to the Consolidated Financial Statements (Continued)**

**3.**   Summary of Significant Accounting Policies (Continued)

**Research anddevelopment costs**

Research and developmentcosts are charged to expense as incurred. Internally developed software costsare expensed as incurred until it is determined that the technology needed toachieve performance requirements exists. To date, internally developed softwarehas been available for release concurrent with the establishment oftechnological feasibility and, accordingly, costs eligible for capitalizationhave been insignificant and expensed as incurred.

**Income taxes**

Deferred tax assets and liabilities are determined atthe end of each year based on the future tax consequences that can beattributed to net operating loss and credit carryovers as well as thedifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. The deferred tax assets arereduced by a valuation allowance if it is more likely than not that the taxbenefits will not be realized. The realization of deferred tax assets isdependant upon the generation of future taxable income. In determining thevaluation allowance, we consider past performance, expected future taxableincome, and qualitative factors which we consider to be appropriate to beconsidered in estimating future taxable income. The Company’s forecast ofexpected future taxable income is for future periods that can be reasonablyestimated. 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.

In the fourth quarter of 2005, as a result of ourassessment of future taxable income, we released approximately $138 thousand ofvaluation allowance against deferred tax assets resulting in a net tax benefitof approximately $91 thousand. The calculation of tax liabilities involvessignificant judgment in estimating the impact of uncertainties in theapplication of complex tax laws.

**Net income (loss)per share**

The Company reports net income (loss) per share inaccordance with the Statement of FinancialAccounting Standards (“SFAS”) No. 128, “*Earnings per Share*.” Diluted earnings per share include theeffect of dilutive stock options.

Sharesused in computing basic and diluted net income (loss) per share are as follows:

| ** **                                               | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Basic                                                    |       | 14,483,399 |       | 14,070,034 |       | 13,580,118 |       |
| Effect of assumed exercise ofstock options               |       | 644,240    |       | 467,560    |       | —     |       |
| Diluted                                                  |       | 15,127,639 |       | 14,537,594 |       | 13,580,118 |       |
| Outstanding  options excluded as impact is anti-dilutive |       | 760,752    |       | 783,752    |       | 1,860,702  |       |

 

**Accounting forstock-based compensation**

Ezenia has elected to account for its stock-basedcompensation plans pursuant to Accounting PrinciplesBoard Opinion No. 25, “*Accounting for StockIssued to Employees,*” (APB 25) and related interpretations ratherthan the alternative fair value accounting provided under SFAS No. 123, “*Accounting for Stock-Based Compensation* (“SFAS No. 123”).” Ezeniahas recognized no compensation expense related to its stock option plans andits stock purchase plan.

12

----

**Notes to the Consolidated Financial Statements (Continued)**

**3.**   Summary of Significant Accounting Policies (Continued)

Pro-forma information regarding net income (loss) andincome (loss) per share, as if we had used the fair value method pursuantto SFAS No. 123 to account for stock options issued underour various stock option plans,and shares purchased under the 1995 Employee Stock Purchase Plan, asamended,  is presented below. The fairvalue of stock activity under these plans was estimated at the date of grantusing a Black-Scholes option pricing model with the following assumptions as ofthe date of grant: risk-free interest rates equal to the then available ratefor zero-coupon U.S. government issues with a remaining term equal to theexpected life of the options; no dividend yields; an average volatility factorof the expected market price of Ezenia’s common stock over the expected life ofthe option of 1.50 in 2005, 1.24 in 2004 and 1.82 in 2003; and aweighted-average expected life of the option of 6.8 years in 2005, 6.4 years in 2004 and 7.4 years in 2003.

Forpurposes of pro-forma disclosures, the estimated weighted average grant date fair value of optionsgranted during the year of $1.44, $0.53 and $0.19 in 2005, 2004and 2003, respectively, is amortized to expense over the related vestingperiod. Pro-forma information is as follows:

| ** **                                                                                 | ** ** | **2005**                                                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(In thousands  except for per share information)** | ** ** |
| Net income (loss)  as reported                                                             |       | $                                                                             | 3,803      |     | $          | 3,184    |       | $ | (828 | ) |
| Deduct: total  stock-based employee compensation determined under fair value based methods |       | (273                                                                          | )          | (155     | )          | (805     | )          |
| Pro-forma net  income (loss)                                                               |       | $                                                                             | 3,530      |     | $          | 3,029    |       | $ | (1,633 | ) |
| Net income (loss)  per share as reported                                                   |       |                                                                          |       |     |       |     |       |
| Basic                                                                                      |       | .26                                                                           |       | .23      |       | (.06     | )          |
| Diluted                                                                                    |       | .25                                                                           |       | .22      |       | (.06     | )          |
| Pro-forma net  income (loss) per share                                                     |       |                                                                          |       |     |       |     |       |
| Basic                                                                                      |       | .24                                                                           |       | .21      |       | (.12     | )          |
| Diluted                                                                                    |       | .23                                                                           |       | .21      |       | (.12     | )          |

 

**Recent Accountingpronouncements**

In December 2004, theFinancial Accounting Standards Board issued SFAS No. 123R, *“Share**-**Based Payment”*(SFAS123R). This Statement is a revision of SFAS 123 and supersedes APB 25 and its relatedimplementation guidance. SFAS 123R establishes standards for transactions inwhich an entity exchanges its equity instruments for goods or services. Thisstandard requires a public entity to measure the cost of employee servicesreceived in exchange for an award of equity instruments based on the grant datefair value of the award. This eliminates the exception to account for suchawards using the intrinsic method previously allowable under APB Opinion No. 25.In March 2005, the Securities and Exchange Commission (SEC) released StaffAccounting Bulletin (SAB) 107, Share-Based Payment, which expresses views ofthe SEC Staff about the application of SFAS No. 123R. SFAS No. 123R was tobe effective for interim or annual reporting periods beginning on or after June 15,2005, but in April 2005 the SEC issued a rule that SFAS No. 123Rwill be effective only for annual reporting periods beginning on or after June 15,2005.

The Company is required toadopt SFAS 123R on January 1, 2006 and underthe modified-prospective transition method, the adoption is expected to materially increase stock compensation expense anddecrease  earnings. Accordingly, in fiscal2006, total stock-based compensation expense from stock options using the fairvalue provisions of SFAS 123R, is estimated to be approximately $800 

13

----

**Notes to the Consolidated Financial Statements (Continued)**

**3.**   Summary of Significant Accounting Policies (Continued)

thousand.In order to develop the fiscal 2006 stock-based compensation expense estimate,we utilized assumptions on items such asprojected option grants and expected life and volatility, which were similar tothe amounts in fiscal 2005. In addition, SFAS 123R requires that the excess taxbenefits related to stock compensation be reported as a cash inflow fromfinancing activities rather than as a reduction of taxes paid in cash fromoperations.

**4.   Inventories**

Inventories consist primarily of finished goodsrelating to legacy video conferencing hardware equipment Historically, as adesigner, developer and manufacturer of videoconferencing hardware solutions,Ezenia was exposed to a number of economic and industry factors that couldresult in portions of our inventory becoming either obsolete or in excess ofanticipated usage. Our policy is to establish inventory reserves whenconditions exist that suggest that our inventory may be in excess of anticipateddemand or is obsolete based upon our assumptions about future demand for ourproducts and market conditions. When recorded, our reserves are intended toreduce the carrying value of our inventory to its net realizable value.

Ezenia haspreviously provided for excess and obsolescence reserve for 100%of its inventory dueto the continued decline in demand relating to the legacy videoconferencingproduct line. 

During each of thethree years in the period ended December 31,2005 Ezenia was able to realize sales of its legacy videoconferencing hardwareproducts. The cost of these product sales was offset by adjustments to reducethe related inventory reserves. At December 31, 2005 and 2004, our net inventoryreserves are approximately $4.5 million.

**5.   Equipment andImprovements**

Propertyand equipment are recorded at cost less accumulated depreciation andamortization. Depreciation is calculated using the straight-line method overthe useful lives of the respective assets. Leasehold improvements are amortizedover the shorter of the estimated useful lives of the improvements or theremaining lease term. Ezenia made no purchases of equipment or improvements inthe year ended December 31, 2003. For the years ended December 31,2005 and December 31, 2004, we had the following activity net ofdepreciation:

| ** **                                 | ** ** | **2005**                | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Computer  equipment and purchased software |       | $                       | 172        |     |       | $ | 65 |   |   |
| Office equipment                           |       | 38                      |       |     | 26         |   |   |
| Furniture and  fixtures                    |       | 25                      |       |     | 2          |   |   |
| Leasehold  improvements                    |       | 64                      |       |     | —     |   |   |
| Total equipment and improvements           |       | $                       | 299        |     |       | $ | 93 |   |   |
| Less: accumulated  depreciation            |       | (52                     | )          |     | (8         | ) |   |
| Total equipment and  improvements, net     |       | $                       | 247        |     |       | $ | 85 |   |   |

 

14

----

**Notes to the Consolidated Financial Statements (Continued)**

**5.   Equipment andImprovements (Continued)**

Depreciation expense forthe years ended December 31, 2005 and 2004 was $44 thousand and $8thousand, respectively.

**6.   Income taxes**

Theprovision (benefit) for income taxes is as follows:

| ** **               | ** ** | **Year ended December 31** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **               | ** ** | **(In thousands)**                   | ** ** |
| Current:                 |       |                                      |       |   |   |   |   |
| Federal                  |       | $                                         | 45         |   | $ | (608 | ) | $ | (267 | ) |
| State                    |       | 2                                         |       | — |   | — |   |
| Foreign                  |       | —                                    |       | (819 | ) | — |   |
| Total current            |       | $                                         | 47         |   | $ | (1,427 | ) | $ | (267 | ) |
| Deferred:                |       |                                      |       |   |   |   |   |
| Federal                  |       | $                                         | (107       | ) | $ | — |   | $ | — |   |
| State                    |       | (31                                       | )          | — |   | — |   |
| Foreign                  |       | —                                    |       | — |   | — |   |
| Total deferred           |       | $                                         | (138       | ) | $ | — |   | $ | — |   |
| Total income tax benefit |       | $                                         | (91        | ) | $ | (1,427 | ) | $ | (267 | ) |

 

The amount reported as current income tax benefit in2005 is comprised of current income tax expense of approximately $47 thousandin estimated federal alternative minimum tax expense and state income taxexpense and, a deferred tax benefit of approximately $138 thousand associatedwith the release of a portion of the Company’s valuation allowance. The amountreported as income tax benefit in 2004 is the result of an $819 thousand netsettlement reached with the ITC and a $608 thousand refund received inconnection with the 2002 carry back of net operating losses incurred in 2001.The amount reported as income tax benefit in 2003 is the result of the reversalof tax reserves recorded in prior years.

Areconciliation of the expected income tax (benefit) computed using the federalstatutory income tax rate to the Company’s effective income tax rate at December 31for the years ended 2005, 2004, and 2003 is as follows:

| ** **                                        | ** ** | **Year ended December 31** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(In thousands)**                   | ** ** |
| Federal income  tax at federal statutory tax rate |       | $                                         | 1,262      |   | $ | 597 |   | $ | (373 | ) |
| State taxes, net  of federal benefit              |       | 266                                       |       | 105 |   | — |   |
| Research and  development and other tax credits   |       | 45                                        |       | 708 |   | — |   |
| Change in  valuation allowance                    |       | (773                                      | )          | (1,259 | ) | 1,038 |   |
| Prior year refunds and reversal of reserves       |       | —                                    |       | (1,427 | ) | (267 | ) |
| Utilization  of net operating loss                |       | (688                                      | )          | — |   | — |   |
| Permanent  differences and other                  |       | (203                                      | )          | (151 | ) | (665 | ) |
| Total income tax expense  (benefit)               |       | $                                         | (91        | ) | $ | (1,427 | ) | $ | (267 | ) |

 

15

----

**Notes to the Consolidated Financial Statements (Continued)**

**6.**   Income taxes (Continued)

The American Jobs Creation Act of 2004 (the “Act”) wassigned into law on October 22, 2004. The Act contains numerous amendmentsand additions to the U.S. corporate income tax rules. None of these changes,either individually or in the aggregate, is expected to have a significanteffect on Ezenia’s income tax liability. The Company is continuing to evaluatethe Act and does not expect to complete this evaluation until after Congressand the Treasury Department provide guidance clarifying certain provisions.

TheCompany’s deferred tax assets consist of the following:

| ** **                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| **(In thousands)**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating  loss carryforwards  |       | $          | 21,239     |       | $          | 21,927 |   |
| Purchased intangibles              |       | 5,389      |       | 6,013      |       |
| Tax credit carryforwards           |       | 3,077      |       | 3,342      |       |
| Reserves, accruals  and allowances |       | 2,422      |       | 2,156      |       |
| Depreciation and  amortization     |       | (12        | )          | —     |       |
| Total gross  deferred tax asset    |       | 32,115     |       | 33,438     |       |
| Valuation allowance                |       | (31,977    | )          | (33,438    | )          |
| Net deferred tax  asset            |       | $          | 138        |       | $          | — |   |

 

At December 31, 2005, Ezenia had domestic federalnet operating loss carryforwards of approximately $53.1 million available toreduce future taxable income, which expire at various dates beginning in 2020through 2025. Ezenia also has federal research and development tax creditcarryforwards of approximately $2.4 million available to reduce future taxliabilities. Ezenia has state net operating loss carryforwards of approximately$53.2 million as of December 31, 2005 available to reduce state futuretaxable income, which expire at various dates beginning in 2005 through 2010.Ezenia also has state research and development tax credit carryforwards ofapproximately $918 thousand as of December 31, 2005.

Under the provisions of the Internal Revenue Code,certain substantial changes in the Company’s ownership may result in alimitation on the amount of net operating loss carryforwards and research anddevelopment credit carryforwards which may be utilized annually to offsetfuture 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, andresearch and development expenditures amortizable over sixty months. Managementhas determined at this time that it is more likely than not that the Companywill recognize a portion of the benefits of its federal and state deferred taxassets. Accordingly, in 2005 a provision for current income tax ofapproximately $47 thousand relating primarily to federal alternative minimumtaxes was recorded, which was offset by the release of a valuation allowance ofapproximately $138 thousand in the fourth quarter. As a result, a valuationallowance of approximately $31.9 million has been established at December 31,2005, resulting in a net deferred tax asset of approximately $138 thousand. 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.

16

----

**Notes to the Consolidated Financial Statements (Continued)**

6.   Income taxes (Continued)

Restatement of 2004 and 2003 deferred tax items:

In connection with the Company’s review of income tax returns previously filed in relation to our disclosures relative to certaintemporary differences we have restated certain of the deferred tax assetamounts and corresponding valuationallowance from our previously filedForm 10-K’s for the years ended December 31, 2004 and 2003, respectively.  While the adjustments individually arematerial to our tax disclosures there was no impact to our balance sheet,statement of operations, stockholders equity or cash flows.  Accordingly, the following represents therestated amounts as compared to amounts previously disclosed in our prior Form10-K.

TheCompany’s deferred tax assets are comprised of the following:

| ** **                                                         | ** ** | ** **             | ** ** | ** **             | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                         | ** ** | **2004**               | ** ** | **2003**               | ** ** | **(as originally** | ** ** | **(as originally** | ** ** |
| ** **                                                         | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **reported)**           | ** ** | **reported)**           | ** ** |
| Net operating loss carryforwards                                   |       |                   | $          | 21,927                 |       |                    |       | $                       | 21,363     |   |   |   | $ | 21,400 |   |   |   | $ | 18,512 |   |   |
| Purchased 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 currently deductible for  tax purposes |       |                   | 2,156      |                   |       |                    | 3,138      |                    |       |   | 2,156 |   |   |   | 1,425 |   |   |
| Depreciation and other                                             |       |                   | —     |                   |       |                    | 316        |                    |       |   | — |   |   |   | 316 |   |   |
|                                                               |       |                   | 33,438     |                   |       |                    | 34,697     |                    |       |   | 33,287 |   |   |   | 31,322 |   |   |
| Valuation allowance                                                |       |                   | (33,438    | )                      |       |                    | (34,697    | )                       |       |   | (33,287 | ) |   |   | (31,322 | ) |   |
| Total deferred tax assets                                          |       |                   | $          | —                 |       |                    |       | $                       | —     |   |   |   | $ | — |   |   |   | $ | — |   |   |

 

The restatements in 2003 were primarily related toa $2,851 thousand understatement of state net operating loss carryforwards, anunderstatement of cumulative temporary differences related to purchasedintangibles of $259 thousand and of various reserves, accruals and allowancesof $1,713 thousand offset by an overstatement of tax credit carryforwards of$1,448 thousand.  The 2004 restatementsrelate primarily to a $527 thousand understatement of federal net operatinglosses offset 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**                | ** ** | **2003**                | ** ** |
|--------------------------------------------------|------------|------------------------|------------|------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                       | ** ** | **2004**               | ** ** | **2003**               | ** ** | **(as originally** | ** ** | **(as originally** | ** ** |
| ** **                                       | ** ** | **(as restated)** | ** ** | **(as restated)** | ** ** | **reported)**           | ** ** | **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 |   |   |   | 1,038 |   |   |
| 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 | ) |   |

 

17

----

**Notes to the Consolidated Financial Statements (Continued)**

**7.**   OtherIncome

Ezenia had previouslysettled a patent infringement suit against Accord in the United States DistrictCourt for the District of Massachusetts. The settlement agreement, provided,among other things, that Ezenia receive $6.5 million in return for a covenantnot to sue with respect to the patents that were the subject of the litigation.Ezenia received the payment in 2000, net of foreign tax withholding of $975 housand,pending a resolution of certain tax matters related to the settlement with thetax 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.

**8.   Commitmentsand Contingencies**

Ezenia’s contractualobligations relate primarily to its facilities leases and a contractualpurchase commitment. In 2005, Ezenia moved its headquarters facilityfrom Burlington, Massachusetts to Nashua, New Hampshire and incurred a $170 thousand lease termination fee. Theprimary facility in Nashua, New Hampshire  is leasedunder an operating lease, which expires in June 2010. Wealso have three other leases for officespace in the United States, located in Colorado Springs, Colorado, Sterling,Virginia, and Alexandria, Virginia for sales, development and technical supportoperations. On February 28, 2005 we entered into a new five year operatinglease to move our Alexandria, Virginia sales and service office to a newfacility in Sterling, Virginia. At the same time, we entered into a subleaseagreement to lease our Alexandria, Virginia facility for the remaining 14months of our lease term. As a result of the move, we willlower our overall facility costs in Virginia. These leases expire at variousdates through November 2011. Rent expense was approximately $199 thousand,$278 thousand, and $361 thousand in 2005, 2004 and 2003, respectively.

Thefollowing table summarizes our outstanding contractual obligations:

| ** **                     | ** ** | **2006**                | ** ** | **2007-2009** | ** ** | **2010-2011** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------|------------|---------------|------------|-----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Operating leases               |       | $                       | 153        |          |       | $             | 536        |      |       |   | $ | 225 |   |   | $ | 914 |   |
| Purchase  commitments          |       | 2,750                   |       |          | —     |          |       |      | —     |   |   | 2,750 |   |
| Total contractual  obligations |       | $                       | 2,903      |          |       | $             | 536        |      |       |   | $ | 225 |   |   | $ | 3,664 |   |

 

Purchase commitmentsrepresent obligations under agreements, which are not unilaterally cancelableby us, are legally enforceable and specify fixed or minimum amounts of goods orservices at fixed or minimum prices. If order bookings are less than expected in2006, it is possible that we will be unable to meet our minimum purchasecommitment resulting in a possible material adjustment later in the year.

Ezenia is subject to avariety of claims and suits that arise from time to time in the ordinary courseof its business. Currentlywe are not a defendant in any claims or suits.  As of December 31, 2004, Ezeniahad reserved approximately $160 thousand for potential liabilities that weexpected to incur as a result of lawsuits filed during the fourth quarter of2004. During the quarter ended June 30, 2005, we resolved these suits forapproximately $15 thousand and therefore reversed the excess accrual ofapproximately $145 thousand, which is included as a credit in general andadministrative expense as a change in estimate.

18

----

**Notes to the Consolidated Financial Statements (Continued)**

**9.**   Stockholders Equity

TheCompany has authorized 2,000,000 shares of undesignated Preferred Stock. Eachseries of Preferred 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.

Inconnection with the Company’s prior acquisition of the IWS business unit we issued 400,000 shares of our common stockof which 290,000 of those shareswere subject to a put right by the seller of the IWS business unit. Such commonstock subject to the put right was reported as temporary equity. In July 2003,in connection with an amendment to a software development agreement, the selleragreed to estimate its put right and, accordingly, the $2.9 million valueassociated with the 290,000 shares of common stock that was no longer subjectto the put option, was credited to stockholders equity.

**10.**   BenefitPlans

**Stock option plans**

The Company’s Amended and Restated 1991 StockIncentive Plan (the “1991 Plan”) provided for the sale or award of commonstock, or the grant of incentive stock options or nonqualified stock optionsfor the purchase of common stock, for up to 6,090,541 shares to officers,employees and consultants. The 1991 Plan terminated on March 31, 2001, andno further options have been granted under the 1991 Plan subsequent to thatdate. At December 31, 2005, there were 655,252 shares of common stockreserved to be issued upon exercise of outstanding options granted under the1991 Plan.

The 2001 Stock Incentive Plan was approved and adoptedby the Board of Directors on April 11, 2001 (the“2001 Stock Incentive Plan”).The 2001 Stock Incentive Plan provided for the sale or award of common stock,or the grant of non-qualified stock options for the purchase of common stock,for up to 5,000,000 shares to officers, directors, employees and consultants ofthe 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 31,2004 and no further options have been granted under the 2001 Stock IncentivePlan subsequent to this date.  At December 31,2005, there were 239,437 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 IncentivePlan”). The 2004 Stock Incentive Plan provides for the sale oraward of common stock or the grant of non-qualified stock options for thepurchase of common stock, for up to 7,500,000 shares to officers, directors,employees and consultants of the Company. The Board of Directors administersthe 2004 Stock Incentive Plan, and the terms of grants and awards made pursuantto the 2004 Stock Incentive Plan. Vesting of options granted under the 2004Stock Incentive Plan accelerates upon change of control or acquisition asdefined in the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan willterminate on December 31, 2014. At December 31, 2005, there were916,950 shares of common stock reserved to be issued upon exercise ofoutstanding options granted under the 2004 Stock Incentive Plan.

**1994Non-employee director stock option plan**

In April 1995, the Board ofDirectors and shareholders approved the Director Plan, which was amended by theBoard of Directors on June 5, 2002 (the “Director Plan”). The DirectorPlan provided that the Board of Directors, at its discretion, was permitted togrant options to non-employee directors, 

19

----

**Notes to the Consolidated Financial Statements (Continued)**

**10.**   Benefit Plans (Continued)

subjectto terms and conditions as determined by the Board of Directors. TheDirector Plan terminated on November 9, 2004, and no further options havebeen granted under the Director Plan subsequent to that date. At December 31,2005, there were 34,000 shares of common stock reserved to be issued uponexercise of outstanding options granted under the Director Plan.

Asummary of option activity under the 2004 Stock Incentive Plan, 2001 StockIncentive Plan, the 1991 Plan and the Director Plan is as follows:

| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| Outstanding at  December 31, 2002 |       | 2,084,327  |       |                                      | $          | 4.66 |   |   |
| Granted                                |       | 770,250    |       |                                      | 0.19       |   |   |
| Terminated                             |       | (981,125   | )          |                                      | 3.76       |   |   |
| Exercised                              |       | (66,750    | )          |                                      | 0.15       |   |   |
| Outstanding at December 31, 2003  |       | 1,806,702  |       |                                      | $          | 3.29 |   |   |
| Granted                                |       | 337,750    |       |                                      | 0.53       |   |   |
| Terminated                             |       | (220,450   | )          |                                      | 1.07       |   |   |
| Exercised                              |       | (485,781   | )          |                                      | 0.22       |   |   |
| 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 |   |   |

 

Relatedinformation for options outstanding and exercisable as of December 31,2005 under these option plans is as follows:

| ** **  | **Range of exercise prices** | ** ** | ** ** | **Outstanding  Options** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-------------|---------------------------------------------|------------|------------|--------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| $0.11-$0.97 |                                        |       | 871,437    |                     |       |                                                    | 8.49       |                                       |       |                     | $          | 0.79                                       |       |   |   | 123,534 |   |   |   | $ | 0.33 |   |   |
| 1.02-1.92   |                                        |       | 91,950     |                     |       |                                                    | 8.91       |                                       |       |                     | 1.61       |                                       |       |   | 16,750 |   |   |   | 1.48 |   |   |
| 2.10-2.74   |                                        |       | 234,500    |                     |       |                                                    | 9.66       |                                       |       |                     | 2.41       |                                       |       |   | 7,000 |   |   |   | 2.74 |   |   |
| 3.63-4.50   |                                        |       | 12,252     |                     |       |                                                    | 4.48       |                                       |       |                     | 4.36       |                                       |       |   | 12,252 |   |   |   | 4.36 |   |   |
| 7.81-9.13   |                                        |       | 635,500    |                     |       |                                                    | 3.39       |                                       |       |                     | 8.33       |                                       |       |   | 635,500 |   |   |   | 8.33 |   |   |
|        |                                        |       | 1,845,639  |                     |       |                                                    | 6.88       |                                       |       |                     | 3.65       |                                       |       |   | 795,036 |   |   |   | 6.83 |   |   |

 

**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,provides eligible employees the right to purchase common stock at a price pershare equal to 85% of the lower of the fair market value of the common stock atthe beginning or end of each offering period. Participation in the offering islimited to 10% of an employee’s compensation (not to exceed amounts allowedunder Section 423 of the Internal Revenue Code), may be terminated at anytime by the employee and automatically ends on termination of employment withthe Company. A total of 900,000 shares of common stock have been reserved for 

20

----

**Notes to the Consolidated Financial Statements (Continued)**

**10.**   Benefit Plans (Continued)

issuanceunder the 1995 Employee Stock Purchase Plan. Pursuant to the terms of the 1995 Employee Stock Purchase Plan,no options under the 1995 Employee Stock Purchase Plan can be issued after January 31,2005 and, as such, the 1995 Employee StockPurchase Plan is now terminated. In fiscal year 2005, 35,394shares of common stock were issued at thegrant date fair value of $0.85 per share under the 1995Employee Stock Purchase Plan. No shares were issued under the 1995 Employee StockPurchase Plan during fiscal year 2004, 2003, and 2002.

**Savings plan**

The Company sponsors asavings plan for its employees, which has been qualified under Section 401(k) ofthe Internal Revenue Code. Eligible employees are permitted to contribute to the401(k) plan through payroll deductions within statutory and plan limits. Contributionsfrom the Company are made at the discretion of the Board of Directors andapproximated $22,000,$18,000, and $30,000 in 2005, 2004,and 2003, respectively.

**11.**   Quarterlyfinancial information (unaudited)

| ** **              | ** ** | **Quarter ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 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                   |       |                   | $          | .05 |   |   | $ | .06 |   |   | $ | .07 |   |   |   | $ | .08 |   |   |
| Diluted                 |       |                   | $          | .05 |   |   | $ | .06 |   |   | $ | .07 |   |   |   | $ | .07 |   |   |
| 2004                    |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                 |       |                   | $          | 2,625 |   |   | $ | 2,486 |   |   | $ | 2,498 |   |   |   | $ | 2,782 |   |   |
| Gross profit            |       |                   | 1,578      |   |   | 1,606 |   |   | 1,622 |   |   |   | 2,004 |   |   |
| Income from  operations |       |                   | 406        |   |   | 387 |   |   | 422 |   |   |   | 592 |   |   |
| Net income              |       |                   | $          | 409 |   |   | $ | 1,103 |   |   | $ | 427 |   |   |   | $ | 1,244 |   |   |
| Net income per share:   |       |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                   |       |                   | $          | .03 |   |   | $ | .08 |   |   | $ | .03 |   |   |   | $ | .09 |   |   |
| Diluted                 |       |                   | $          | .03 |   |   | $ | .08 |   |   | $ | .03 |   |   |   | $ | .08 |   |   |

 

**12.   Subsequentevents**

On February 7, 2006, Ezenia entered into anagreement amending its operating lease for its sales and service facilitylocated in Colorado Springs, Colorado. Under the agreement, an additional 2,010square feet of space was added to the premises and the term of the lease wasextended an additional five years.

On February 17, 2006,Ezenia received a favorable ruling on its Motion for Summary Judgment on twoclaims brought against Datacraft Mexico, S.A. (“Datacraft”) for breach ofcontract. The claims stem from a balance due of approximately $276 thousand forthe delivery of goods to Datacraft in 2002 and 2003. The Company expects, as aresult of this ruling, to have these claims settled in 2006.

21

----

**SIGNATURES**

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

|        | EZENIA! INC.                                        |
|--------|-----------------------------------------------------|
|   | /s/  KHOA D. NGUYEN                                 |
|   | Khoa D. Nguyen                                      |
|   | *Chairman,  Chief Executive Officer, President and* |
|   | *Chief  Financial Officer*                          |
|   | *(Principal  Financial and Accounting Officer,*     |
|   | *Authorized  Officer)*                              |
|   | *Date: April 10, 2006*                         |

 

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,                                                                                  |       | April 10, 2006 |
| Khoa  D. Nguyen          |          |    President and Chief Financial Officer (Principal  Financial and Accounting Officer, Authorized Officer) |       |                |
| /s/ RONALD L.  BRELAND   |          | Director                                                                                                             |       | April 10, 2006 |
| Ronald  L. Breland       |          |                                                                                                                 |       |                |
| /s/ GERALD P. CARMEN     |          | Director                                                                                                             |       | April 10, 2006 |
| Gerald  P. Carmen        |          |                                                                                                                 |       |                |
| /s/ THOMAS G.  MCINERNEY |          | Director                                                                                                             |       | April 10, 2006 |
| Thomas  G. McInerney     |          |                                                                                                                 |       |                |
| */*s/ JOHN A. MCMULLEN   |          | Director                                                                                                             |       | April 10, 2006 |
| John  A. McMullen        |          |                                                                                                                 |       |                |
| */*s/ JOHN F. STEWART    |          | Director                                                                                                             |       | April 10, 2006 |
| John F. Stewart          |          |                                                                                                                 |       |                |

 

22

----

Exhibit Index
| Exhibit  Number |   | Description of Exhibit                                                                                                                                                                              |   |   |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| 23.2            |   | Consent of Brown & Brown, LLP                                                                                                                                                                   |
| 31.1            |   | Consent of the Company’s Chief Executive Officer  and 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 and Chief Financial Officer pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

 

23

----