**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

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

**Forthe year ended December 31, 2004**

**CommissionFile Number 0-25882**

**EZENIA! INC.**

(Exact name of registrantas specified in its charter)
| DELAWARE | ** ** | **04-3114212** |
|----------|------------|----------------|

 

**Northwest Park, 154Middlesex Turnpike, Burlington, Massachusetts 01803**

(Address of principalexecutive offices, including zip code)

**(781) 505-2100**

(Registrant’s telephonenumber, including area code)

----

SecuritiesRegistered Pursuant to Section 12(b) of the Act:

None

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

Common Stock $.01 parvalue

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes  x  No  o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. Yes  x  No  o

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the SecuritiesExchange Act of 1934). Yes  o  No  x

The aggregate market value of the voting andnon-voting common stock held by non-affiliates of the Registrant was $8,865,802(computed by reference to the price at which the Registrant’s common stock waslast sold on the OTC Bulletin Board on June 30, 2004). Shares of CommonStock held by each executive officer and director have been excluded since suchpersons may be deemed affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant’scommon stock as of March 15, 2005 was 15,063,005.

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the definitiveProxy Statement to be delivered to Shareholders in connection with the AnnualMeeting of Shareholders to be held May 25, 2005 are incorporated byreference into Part III hereof. With the exception of the portion of suchProxy Statement that is expressly incorporated herein, such Proxy Statementshall not be deemed filed as part of this Annual Report on Form 10-K.

 

----

 

**Ezenia!Inc.2004 Form 10-K Annual ReportTable of Contents**
|                   | ** ** | ** **                                                                                                         | ** ** | Page   |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|--------|
| **PART I**   |
| Item 1.           |       | Business                                                                                                           |       |   | 3 |   |
| Item  2.          |       | Description  of Property                                                                                           |       |   | 10 |   |
| Item 3.           |       | Legal  Proceedings                                                                                                 |       |   | 10 |   |
| Item  4.          |       | Submission  of Matters to a Vote of Security Holders                                                               |       |   | 10 |   |
| **PART II**  |
| Item 5.           |       | Market  for Registrant’s Common Equity and Related Stockholder Matters                                        |       |   | 11 |   |
| Item  6.          |       | Selected  Financial Data                                                                                           |       |   | 12 |   |
| Item  7.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       |   | 13 |   |
| Item  7A.         |       | Quantitative  and Qualitative Disclosures about Market Risk                                                        |       |   | 22 |   |
| Item  8.          |       | Financial  Statements and Supplementary Data                                                                       |       |   | 23 |   |
| Item  9.          |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                              |       |   | 42 |   |
| Item  9A.         |       | Controls  and Procedures                                                                                           |       |   | 42 |   |
| **PART III** |
| Item 10.          |       | Directors  and Executive Officers of the Registrant                                                                |       |   | 43 |   |
| Item  11.         |       | Executive  Compensation                                                                                            |       |   | 43 |   |
| Item  12.         |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters    |       |   | 43 |   |
| Item  13.         |       | Certain  Relationships and Related Transactions                                                                    |       |   | 44 |   |
| Item  14.         |       | Principal  Accountant Fees and Services                                                                            |       |   | 44 |   |
| Item  15.         |       | Exhibits,  Financial Statements Schedules and Reports on Form 8-K                                             |       |   | 45 |   |
| Signatures        |       |                                                                                                               | 47         |   |

 

This Report contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements are subject to certain risks and uncertainties,including without limitation those discussed in Item 7 under the heading “Factorswhich may affect future operations.” Such forward-looking statements speak onlyas of the date on which they are made, and the Company cautions readers not toplace undue reliance on such statements.

The Company’s trademarks include Ezenia!, the Ezenia!Logo, InfoWorkSpace, LaunchPad, and Encounter. All other trademarks referred toin this document are property of their respective companies.

2

----

**PART I**

**ITEM 1. BUSINESS**

Founded in 1991, Ezenia! Inc. (“Ezenia” or the “Company”)currently develops and markets products that enable organizations to providehigh-quality group communication and collaboration capabilities to commercial,governmental, consumer and institutional users. The Company’s products allowindividuals and groups, regardless of proximity constraints, to interact andshare 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 caninteract through a natural meeting experience, allowing groups to work togethereffectively and disseminate vital information quickly in a secure environment.

Ezenia offers one of the most comprehensive lines ofcollaborative products available commercially. Ezenia’s InfoWorkSpace (IWS)software product, combined with its legacy videoconferencing products, enablesvoice communication, instant messaging, white boarding, virtual workspaces, andvideo conferences across a wide range of networks including local area-networks(LAN), intranets, the Internet, and circuit-based networks. Furthermore,because Ezenia products include both software only solutions and configurablehardware solutions, they can be deployed with relative ease at small sites orin locations with a large number of users.

Ezenia has historicallysold its legacy videoconferencing products worldwide through leading resellers,integrators and marketers of video collaboration, and networking solutions, andwill continue to do so as long as demand exists. Most recently, for the IWSproduct and services, Ezenia sells to the customers in the Federal government,mostly in the Department of Defense and the Intelligence Community, eitherdirectly, or in many instances, in partnership with the premier defensecontractors and/or integrators. It is in Ezenia’s interest to leverage thepartnerships with well-established contractors and/or integrators to furtherexpand the deployment and provide the support of IWS in large-scaleopportunities.

**CompanyBackground and Evolution—True Collaboration versus Videoconferencing**

In 1991, Ezenia, known at the time as VideoServer,designed, developed, manufactured, and sold Multipoint Control Systems or Units(MCS or MCU) for both the circuit-oriented, Integrated Services Digital Network(ISDN)-based and packet-switched, Internet Protocol (IP)-basedvideoconferencing applications. The Company MCS were unique at the time withits PC-based, flexible hardware design approach and system configurations,leveraging commercial off-the-shelf base operating systems. Traditionalvideoconferencing vendors back then concentrated mostly on the development ofmore and more sophisticated, standard-based endpoints to be used inpoint-to-point videoconferencing. The Company focused its business, not on theendpoints, but on systems deployed in the infrastructure backroom, to enablethree or more sites or parties involved in videoconferencing to properly communicateamong themselves, by switching video sources based on audio processing ofcurrent and immediately preceding speakers. The Company’s technical advantageswere derived by masking and compensating for incompatibilities betweenendpoints from different manufacturers, algorithmic transcoding, compensationfor different bandwidth requirements, and simultaneous multi-windowed videoarrangements on the monitor known as “Hollywood Squares”, just to name a few.

For the circuit-switched market segment, the Companyoffered the Series 2000 MCS which can scale up to forty eight (48) portsor sites with a variety of network capabilities including but not limited toV.35, T1and E1 interfaces, Asynchronous Transfer Mode (ATM) and Frame Relay. MultipleSeries 2000 MCS can be cascaded together to allow for large-scalevideoconferences. To this day, the Series 2000 MCS is still considered thecornerstone of rock solid reliability in the industry and in many customerinstallations. The Company still produces, ships, and provides support for the Series 2000MCS.

3

----

For the packet-switched market segment, the Companyoffered a low-end, software-only solution NetServer 1000 which provides acost-effective solution for departmental applications. For comparabledeployments to its ISDN counterparts, the Company offered the NetServer 3000MCS which can also scale up to forty eight (48) ports or sites. Similarly,multiple NetServer 3000 MCS can also be cascaded together to supportlarge-scale video conferences. The Company also offered the NetGate which, withits associated gatekeeper software, controls, monitors, polices, andfacilitates communications traffic between the ISDN and IP environments. TheCompany still produces, ships, and provides support for the NetServer andNetGate MCS.

In the late 90’s, the Company fully realized thelimitations and narrowed applicability of the videoconferencing applicationswhich, among many deficiencies, are monolithic, require highly specializedsupport and services, stand apart from the normal office environment that mostinformation workers are accustomed to, and behave at best unfriendly with theneed to truly collaborate and disseminate information in real time. Contrary tohow most videoconferencing vendors would like to indoctrinate potential customers,video—in particular talking heads as in the case of most video conferences—wasand is, now more than ever, far from being the “piece de resistance” of true,meaningful real-time collaboration. Furthermore, its monolithic approach,whereby you either get a successful videoconference session or get nothing,relegates all other more critical collaboration activities second to videotalking heads. Most importantly, the lack of presence awareness detection andinability to leverage the web for ease of access prevent flexible, on-demand,free-flowing collaboration sessions whereby participants can come, go, or beinvited at will.

In March 2001, the Company completed the firstphase of its transformation with the acquisition of the IWS business from GeneralDynamics. As an application solution and technology built on top of Placeware’s(see Third Party Technology note below) web conferencing technology, IWS allowsusers to be aware of the online presence of colleagues, enables true multimediacollaboration sessions starting with the simplest instant messaging(keyboard-to-keyboard) and expanding to the most complex all-encompassing(mouse-to-mouse) sharing and dissemination of mission critical informationsimultaneously with in-session, super-imposed audio conferencing and/or videostreaming, leverages commercially off-the-shelf base operating systems such asthe Windows and Solaris platforms, and fits into the virtual office environmentthat most information workers are familiar with.

The use and growth ofreal-time collaborative technologies within commercial or governmentalenterprises, while still early in its adoption curve, are beginning toaccelerate. The investment in information and collaborative technologies helpscustomers flatten their organizations, improve enterprise wide communication,shorten the decision-making process, and facilitate real-time reactions tocritical issues. Rather than just providing access to inert data stored on aserver, the goal today is to find ways to enable information workers tocollaborate and share their expertise to derive knowledge from databases inreal time and in a secure environment. Collaborative technologies are aboutcreating informational value through better, faster and more efficient humaninteraction and cooperation, not just more data. Businesses and governmentalorganizations today need solutions that make it easier for people to worktogether, share information and expertise, coordinate activities acrossdepartments, networks, agencies, building complexes, facilities spread all overthe country, and field deployments around the world.

**Products**

Ezenia’s expertise is indeveloping products that deliver highly secure and flexible support forinformational collaboration, in-session audio conferencing, and video streamingcapabilities across a wide range of platforms. The Company’s products have beendesigned with a scaleable, modular architecture to give customers theflexibility to add capacity, processing power and conferencing features as thecustomer network and application requirements grow. Using a common set ofhardware and software building blocks, customers can choose from a wide rangeof product configurations that differ in capacity, price, 

4

----

networkconnectivity and features, all of which share the same operating software userinterface. Products may be configured for use in customer premises environmentsor may be configured with specialized packaging for use in a telephone carrier’scentral office setting. The Company believes a key differentiator for itsproducts are the built-in robust security features, allowing them to beinstalled in some of the highest clearance and security sites in the market.

***InfoWorkSpace***

InfoWorkSpace is a comprehensive suite ofcollaboration applications designed to allow any organization to moreefficiently communicate, particularly when attempting to work as, and within, agroup. From an overall perspective, IWS when used effectively can reduce oreven eliminate the dependency on travel, traditional video conferencing, traditionalaudio conferencing and phone, and even e-mail and file servers. Essentially,IWS is like a corporate campus or enterprise whose resources can be accessed byan information worker through his or her own desktop or laptop PC. Users canbrowse through the virtual campus, facility, or building to locate the room tobe used for a meeting, or just pick the needed contact(s) and initiate themeeting with the click of the mouse.

Our customers, including the U.S. IntelligenceCommunity, the U.S. Joint Forces Command, and various branches of the U.S.Armed Forces including the Marines, Navy, Air Force and Army, have leveragedthe flexibility of IWS to aid in a myriad of missions. From daily missionbriefs to Medivac procedures in Afghanistan to operational support in Fallujah,IWS has increasingly become a vital part of the U.S. defense network. IWS’sstability, scalability and security allow our customers to depend on oursoftware to complete mission-critical assignments and save lives in some of theworld’s most dangerous areas.

At a basic level, IWS is a cross-platform solution ina box, supporting both UNIX and Windows base operating systems. A standardsoftware suite comes complete with our server software package, database,application server, and user directory along with a number of ancillary add-ons.This provides a self-sufficient workgroup environment for a user base of up toseveral hundred users. However, with a few simple system configurations, IWSservers can be federated in such a way that multiple servers can trust oneanother in order to support collaboration across an enterprise with thousandsof war fighters or participants.

IWS security infrastructure is built upon the bestpractices that have been in use in operating systems for decades. Much like aUNIX administrator can limit access to a directory or even a file to a limitedset of users, IWS administrators can lock rooms down to restrict users fromseeing sensitive data that is outside their area of responsibility. Permission-basedaccess allows administrators to finely tune a user’s access profile to the filelevel, if necessary. Data can be encrypted using standard SSL protocols andaccess can be controlled with PKI and X.509 certificates. All data within theapplication can be audited and searched for specific words or patterns of words.IWS provides a high level of security capabilities as well as a safety net tocapture any breaches that may arise from human errors.

The stability, scalability, flexibility and securitycapabilities of IWS are critically important for our customers, but the truepower of IWS is obviously in the collaboration applications available. Userscan participate in an interactive conference with absolutely no set upprocedures. This is a significant leap forward from where the industry was justa few years ago, using videoconferences as the only interactive medium. WithIWS, no longer is a heavy piece of hardware required at each terminal point ofcollaboration. No longer is it necessary to schedule a conference with a bridgeoperator, and no longer does it require a whole new network infrastructure tosupport an interactive conferencing capability. Information workers, oncelogged in to IWS can initiate a conference by going to a virtual room andinviting the participants as needed. Rooms are either pre-defined or created ondemand as the needs dictate. Once inside a room, either by joining or beinginvited into a session, participants can have an audio 

5

----

conference straight fromthe software. No set up is required. No additional cost is incurred. As amatter of fact, participants can be in multiple rooms at the same time,offering an even more productive virtual environment than in the physical world.Participants can share and work on documents from the file cabinet associatedwith a room. Users can have an interactive white board session and save theresults.  Users can also manage theircalendar and participate in message boards and save that information back tothe server where they can access it any time from any place.

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

·       Textchat, in a one-to-one arrangement, in a conference environment, or in multiplecombinations of one-on-one and/or conference environments

·       Audiochat, in a one-to-one arrangement, in a conference environment, or in multiplecombinations of one-on-one and/or conference environments

·       Interactivewhiteboard where all users can see and modify the white board in real time

·       Applicationsharing, where the screen view of any application on any desktop or laptop PCof any information worker can be broadcasted to all other participants

·       Securedfile cabinet, from which permission-based access allows for documents to bestored, retrieved, and monitored at any time from any place

·       SSLand PKI encryption, when configured, renders traffic secure across the wire

·       Fullsystem auditing, which allows all data and actions to be audited and searchable

·       Instantmessaging, a lightweight application that provides all interactive capabilities

·       Virtualmeeting area, a more robust application that provides both the real-timecollaborative capabilities as well as the static functions like file cabinet,message board, calendaring, etc.

***Encounter MCS Family***

The Encounterproduct line includes:

·       Encounter3000 NetServer: real-time collaboration server designed to support the largeenterprise and service provider customers.

·       Encounter3000 NetGate: gateway solution that allows traditional videoconferencingsystems to participate in IP-based collaboration sessions.

·       Encounter1000 NetServer: real-time collaboration server geared towards smaller,departmental workgroups or more distributed organizations

***Series 2000 MCS***

The Series 2000MCS product line, designed for switched digital circuit networks, includes anumber of platform configurations that can be expanded by the customerselection of optional processing modules and software applications. Thefollowing table lists the configurations offered by the Company:
| **MODEL** | ** ** | **CAPACITY** | ** ** | **TARGET MARKET/APPLICATION**                                            |
|-----------|------------|--------------|------------|--------------------------------------------------------------------------|
| 2007      |       | 8 users      |       | Mid-range CPE for distributed network environments                       |
| 2020      |       | 48 users     |       | Large CPE/central office network with extensive  multimedia applications |
| CO        |       | 48 users     |       | High availability central office server                                  |

 

6

----

**Market and Channels**

At this time, Ezenia markets its IWS products andrelated services to customers within the US federal government, primarily to theUS Department of Defense and to the US Intelligence Community worldwide. Ezeniaalso provides these products and services to the defense and intelligenceorganizations of foreign allies of the United States government.

The IWS products and services are sold on an annualsubscription and renewal basis, during which software updates and basictechnical support are included as part of the base offerings. Enhanced serviceofferings are also offered in a subscription model. Training, installation, andcustomization are sold on an incidental basis. 

The government marketplace worldwide is bestunderstood as a matrix of customers, sales vehicles (contracts), and saleschannels. Ezenia employs a sales model which is an analog to this governmentmarket matrix. IWS products and related services are made available to specificsegments of the government marketplace using various vehicles, including Ezenia’sown GSA Schedule, and multiple channels both directly, with the Company’s ownsales force, and indirectly. For indirect channels, Ezenia partners withGeneral Dynamics, SAIC, and Northrop Grumman among others.

In fiscal year 2004, approximately 60% of the Companysales of IWS products and related services were attributed to our indirectchannels and Ezenia’s top three customers were US Joint Forces Command, DefenseIntelligence Agency, and the US Army.

Meanwhile, our legacy MCS sales were primarily tointernational customers and end users.  Ezenia delivered these products throughdistributors, dealers, vertical market resellers, and systems integrators, aswell as directly to end-users

Revenue from internationalmarkets accounted for approximately 2%, 14%, and 24% of the Company’s revenuefor the years ended December 31, 2004, 2003, and 2002, respectively. Ezenia!conducts its sales and marketing activities from its principal offices inBurlington, Massachusetts, as well as from two other sales locations in theUnited States.

**Research and Product Development**

The Company believes that its future success dependson its ability to continue to enhance and expand its existing enterprisecollaboration products and to develop new products that maintain its technologyleadership. Ezenia has invested and will continue to invest in the developmentof products and core technologies while also leveraging the integration of “best-of-breed”software components through strategic partnerships. Extensive productdevelopment input is obtained via direct feedback from end users and suggestedimprovements from strategic partners and resellers. The Company carefullymonitors migration of industry standards and remains committed to developingproducts utilizing such standards. This includes the development ofinteroperable collaboration products to meet either industry needs and/orDOD-driven interoperability criteria, while maintaining a keen focus on thesecurity aspects of enterprise collaboration, including solutions in the Webconferencing arena.

As of December 31,2004, Ezenia’s research and development staff consisted primarily of softwareengineers augmented with US-based and US-citizen software contractors. Many ofour software engineers carry top-secret levels of security clearance. TheCompany’s net research and development expenditures were approximately $1.1million, $1.9 million, and $4.6 million in 2004, 2003 and 2002, representingapproximately 10%, 23%, and 41% of revenue, respectively. All softwaredevelopment costs have been expensed as incurred because costs eligible forcapitalization have not been material to date.

7

----

**Customer Support and Service**

The Company provides technical support and services toits resellers and direct customers. A high level of continuing service andsupport is critical to the Company’s objective of developing long-lastingrelationships with customers and partners. The Company’s partners and resellersoffer a broad range of support including installation, maintenance and on-siteand headquarters-level technical support of products to their end-usercustomers. Ezenia provides a comprehensive service program including problemmanagement, training, diagnostic tools, software updates and upgrades, as wellas spare parts programs to facilitate and supplement the efforts of ourpartners and resellers.

The Company offers a technical support hotline to itsresellers and customers, which is staffed by our network engineers whogenerally provide either immediate or same-day responses to most questions. Asour products have built-in remote diagnostic capabilities, most problems can bediagnosed without incurring actual travel and on-site visits. When necessary,however, support engineers are dispatched to the customer’s facility forcritical situations. All of our support engineers carry top-secret level ofsecurity clearance.

With respect to the Series 2000and Encounter MCS, the Company warranties related software and hardwareproducts for 90 days. The Company also offers post-warranty support programsranging from services on a time-and-material basis to full-service contracts ona 24-hour, 7-day-a-week basis as well as training courses.

**Manufacturing—Series 2000and Encounter Systems**

The Company’smanufacturing operations consist primarily of materials management, qualitycontrol, test engineering, production, shipping and logistics related to itslegacy videoconferencing hardware products. The Company employs an outsourcedmanufacturing model in which it designs the significant hardware subassembliesfor its products and uses independent third-party contract assembly companiesto perform printed circuit board assembly and other production activities withinternal efforts generally limited to final product configuration, assembly andtesting. This manufacturing model offers the capability to quickly fulfillorders with limited lead times thus providing enhanced customer satisfactionand improved inventory management. Because****ofthe generally short cycle between order and shipment and because the majorityof the Company’s sales in each quarter result from orders booked in thatquarter, the Company does not have a material backlog. The Company achievedInternational Standard Organization (ISO) 9002 certification in 1994.

**Third Party Technology**

The Company utilizescertain technology which it licenses from third parties, including softwarewhich is integrated with internally developed software, and used in the Company’sproducts to perform key functions. There can be no assurance that functionallysimilar technology will continue to be available on commercially reasonableterms in the future, or at all. In particular, in February 2005 theCompany entered into a new agreement with Microsoft Corporation, with aneffective date of January 1, 2005, to extend an existing softwaredistribution license agreement through December 2007. The softwaredistribution license agreement allows the Company to integrate Microsoft’s livecommunication software into the Company’s IWS product line. 

**Competition**

The market for multimedia collaboration products ishighly competitive. For our InfoWorkSpace software product, we consider ourprimary real-time collaboration competitors to be IBM Lotus, Documentum andGroove Networks. We also face competition or potential competition fromcompanies that provide similar, but not directly competing products, such asCentra Software, WebEx 

8

----

Communications, Oracle,Cisco Systems, and Microsoft, or companies that could expand their offeringsand develop a product similar to ours. Many of these companies, as well asother current and potential competitors, have substantially greater financial,technical and sales and marketing resources than the Company. If we are unableto retain our existing customers in the US government, or are unable toconvince a sufficient number of new companies or customers with an interest incollaborative technologies to adopt our InfoWorkSpace collaborative softwareproduct over alternative technologies marketed by our competitors, ourfinancial results will suffer, through price reductions and loss of marketshare.

With respect to our legacy videoconferencing hardwareproducts, we consider our primary videoconferencing competitors to be Polycom,RADvision and Tandberg Telecom(Tandberg).

The principal competitivefactors in the market for multimedia collaboration are, and should continue tobe, breadth of capabilities, security, demonstrated interoperability, price,performance, network management capabilities, reliability and customer support.We plan to compete by offering secure collaboration and enterprise productswith a broad range of capabilities and high performance. However, we cannot becertain that potential customers will be attracted to our products, especiallyif our competitors were to invest substantially more money into their productsand technology.

**Proprietary Rights**

The Company relies on a combination of contractualrights, trade secrets and copyright laws to establish and protect itsintellectual property rights. The Company believes that, because of the rapidpace of technological change in the data communications and telecommunicationsindustries, the intellectual property protection for its products is only onefactor in the Company’s success, complementing the knowledge, abilities andexperience of the Company’s employees, the frequency of its productenhancements, its relationships with its partners, its relationships with itscustomers and their satisfaction with the performance of IWS, the effectivenessof its marketing activities, and the responsiveness and quality of itsservices.

In August 2002, the Company entered into anagreement with Tandberg Telecom AS to sell all patents and pending applicationsrelated to its videoconferencing products, which was completed in October 2002.In exchange for an up-front license fee of$1.25 million, a loan for an additional $1.25 million which was forgiven at theclosing, and an additional $2.4 million also received at the closing, theCompany granted Tandberg a fully paid, non-exclusive, non-transferable licenseunder the patents and pending applications relating to the Company’s videoconferencingtechnology (the video patent portfolio). Additionally, the Company retained afully paid, non-exclusive, non-transferable license for the Company’s use inconnection with its videoconferencing and enterprise collaboration products.

In June 2000, theCompany settled its patent infringement suit against Accord Networks Ltd.(Accord) in the United States District Court for the District of Massachusetts.The settlement agreement provided, among other things, that the Company receive$6.5 million, which the Company received net of foreign tax withholding of $975thousand, pending a resolution of certain tax matters related to the settlementwith the tax authorities in Israel. In April 2004, the Company reached asettlement agreement with the Israeli Tax Commission (ITC), resulting in thereceipt by the Company of cash proceeds related to the disputed amount, net ofinterest earned and associated fees, of approximately $706 thousand.

**Employees**

At December 31, 2004, the Company employed atotal of 35 persons, including 11 in research and development, 8 in customersupport, 9 in sales and marketing, and 7 in finance and administration. None ofthe Company’s employees are represented by a labor organization.

9

----

The Company’s successdepends, to a significant degree, upon the continuing contributions of its keymanagement, sales, marketing and research and development personnel, many ofwhom would be difficult to replace, including Khoa Nguyen, the Company’s ChiefExecutive Officer, President and Chief Financial Officer. Early in 2004, Mr. Nguyen experienced a medical problemthat required him to take a short-term leave of absence in order to recuperateand, since June 2004, Mr. Nguyen returned to work full time on a daily basis. The Company doesnot carry key-man life insurance on any of its employees, including Mr. Nguyen.The Company does not have employment contracts with its key personnel otherthan Mr. Nguyen. The Company believes that its future success will dependin large part upon its ability to attract and retain such key employees.

**Executive Officer of the Registrant**

Khoa D. Nguyen, age 51, is the sole executive officerof the Company. Mr. Nguyen has served as a Director since December 1997and was named Chairman of the Board of Directors in March 2000. Mr. Nguyenhas served as President and CEO of the Company since April 1998 and as theChief Financial Officer since August 2002. Previously he had beenExecutive Vice President and Chief Operating Officer of the Company since September 1997.Prior to joining the Company, Mr. Nguyen was employed at PictureTelCorporation, a videoconferencing company, where he served as Chief TechnologyOfficer and General Manager of the Group Systems and Networking Productsdivisions from February 1994 to August 1996, and Vice President ofEngineering from January 1993 to February 1994. From August 1991to December 1992, he was Vice President of Engineering at VTELCorporation, a videoconferencing company, and has also held various engineeringmanagement positions with International Business Machines, a computermanufacturer.

Officers are elected on anannual basis to serve at the discretion of the Board of Directors.

**ITEM 2. DESCRIPTION OF PROPERTY**

The Company’s corporateoffice and principal research, development and manufacturing facility islocated in Burlington, Massachusetts, in an approximately 9,000 square footfacility. On March 15, 2005 the Company entered into an agreement to movethe Company’s corporate office to a 6,000 square foot facility located inNashua, New Hampshire at the conclusion of its’ current lease. The Company decidedto move into this facility as part of an effort to reduce expenses and excesscapacity. The Company also has a sales and service office located in Sterling,Virginia and a research, development and service office located in ColoradoSprings, Colorado. As of December 31, 2003, the Company had closed allforeign offices, and therefore, no longer has any leases outside of the UnitedStates.

**ITEM 3. LEGAL PROCEEDINGS**

The Company is engagedfrom time to time in routine lawsuits incidental to its business. Companymanagement does not believe that any current proceedings, individually or inthe aggregate, are likely to have a material effect on its business or resultsof operations.

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

No matters were submitted to a vote of security holdersduring the fourth quarter of fiscal 2004.

10

----

**PART II**

**ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

In May 2003,after failing to comply with certain continued listing standards for the NASDAQSmallCap Market, including maintaining a minimum bid price of at least $1.00 pershare, or the requirement for the company to have a minimum $2.5 million instockholders equity, the Company received a delisting notification from NASDAQ.After exercising its right for an appeal of this determination to a NASDAQListing Qualifications Panel, the Panel determined to delist the Company’ssecurities in August 2003. Since then, the Company’s common stock has beenquoted on the OTC Bulletin Board, under the symbol “EZEN.OB”. Prior to thedelisting in August 2003, Ezenia’s common stock was listed on the NASDAQSmallCap Market under the symbol “EZEN.” The following table sets forth, forthe periods indicated, the high and low bid or sale prices per share of ourcommon stock as reported on both the OTC Bulletin Board or, prior to the delistingnoted above, the NASDAQ SmallCap Market.
| ** **                    | ** ** | **Quarter ended** | ** ** |
|-------------------------------|------------|------------------------|------------|
| ** **                    | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2004                          | ** ** |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Common stock  price—high |       |                   | $          | .47 | ** ** |   |   | $ | .80 | ** ** |   |   | $ | 1.26 | ** ** |   |   | $ | 1.48 | ** ** |   |
| Common stock price—low   |       |                   | $          | .22 | ** ** |   |   | $ | .28 | ** ** |   |   | $ | .51 | ** ** |   |   | $ | .87 | ** ** |   |
| 2003                          | ** ** |                   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Common stock  price—high |       |                   | $          | .21 | ** ** |   |   | $ | .96 | ** ** |   |   | $ | .84 | ** ** |   |   | $ | .47 | ** ** |   |
| Common stock price—low   |       |                   | $          | .11 | ** ** |   |   | $ | .12 | ** ** |   |   | $ | .21 | ** ** |   |   | $ | .21 | ** ** |   |

 

As of March 24, 2005,the Company had approximately 118 shareholders of record. This does not reflectpersons or entities that hold their stock in nominee or “street” name throughvarious brokerage firms. The Company has not paid dividends on its commonstock. The Company anticipates it will reinvest future earnings, if any, andtherefore, does not intend to pay dividends in the foreseeable future.

11

----

**ITEM 6. SELECTEDFINANCIAL DATA**
| ** **                                                                           | ** ** | **Year ended December 31**                             | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004 (1)**                                                     | ** ** | **2003 (2)** | ** ** | **2002 (3)** | ** ** | **2001 (4)** | ** ** | **2000(5)** | ** ** |
| ** **                                                                           | ** ** | **(In thousands, except per share amounts)** | ** ** |
| **OPERATING  DATA**                                                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Revenue                                                                              |       | $                                                                     | 10,391     |   | $ | 8,217 |   | $ | 11,373 |   | $ | 15,107 |   | $ | 28,152 |   |
| Operating income (loss)                                                              |       | 1,807                                                                 |       | (1,117 | ) | (15,094 | ) | (33,621 | ) | (21,388 | ) |
| Income (loss) before  cumulative effect of change in accounting principle            |       | 1,757                                                                 |       | (1,095 | ) | (10,799 | ) | (33,490 | ) | — |   |
| Cumulative effect of change in  accounting principle                                 |       | —                                                                |       | — |   | (10,667 | ) | — |   | — |   |
| Net income (loss)                                                                    |       | 3,184                                                                 |       | (828 | ) | (18,565 | ) | (31,340 | ) | (17,984 | ) |
| Income (loss) per share before cumulative effect of change in  accounting principle: |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | .23                                                                   |       | (.06 | ) | (.58 | ) | (2.29 | ) | — |   |
| Diluted                                                                              |       | .22                                                                   |       | (.06 | ) | (.58 | ) | (2.29 | ) | — |   |
| Net income (loss) per share:                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | .23                                                                   |       | (.06 | ) | (1.36 | ) | (2.29 | ) | (1.32 | ) |
| Diluted                                                                              |       | .22                                                                   |       | (.06 | ) | (1.36 | ) | (2.29 | ) | (1.32 | ) |
| **BALANCE SHEET DATA**                                                               |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                            |       | $                                                                     | 5,520      |   | $ | 2,316 |   | $ | 2,403 |   | $ | 5,531 |   | $ | 34,743 |   |
| Total current assets                                                                 |       | 11,921                                                                |       | 7,082 |   | 5,564 |   | 28,358 |   | 57,403 |   |
| Common stock subject to put                                                          |       | —                                                                |       | — |   | 2,875 |   | 2,875 |   | — |   |
| Stockholders’ equity (deficit)                                                  |       | 3,838                                                                 |       | 552 |   | (1,504 | ) | 16,450 |   | 47,491 |   |

----

(1)          2004 amounts include atax benefit of   1.4 million, or $0.10 pershare, related to a net benefit of approximately $819 thousand as a result ofthe ITC settlement, and approximately $608 thousand relating to a tax refundfor tax years 1996, 1997, and 1998.

(2)          2003 amounts include atax benefit of $267,000, or $0.02 per share, related to a change in theestimate for potential liabilities related to federal and state income taxespaid in prior years.

(3)          2002 amounts include awrite-down of inventory of $3.7 million, or $0.27 per share, an impairment ofgoodwill of $10.7 million, or $0.78 per share relating to the change inaccounting principle, an impairment of fixed assets of $2.3 million, or $0.17per share, a tax benefit of $2.7 million, or $0.19 per share, related primarilyto a tax refund, and a gain on sale of patents of $4.9 million, or $.36 pershare.

(4)          2001 amounts include acharge to operations of $2.0 million, or $0.15 per share, related to therestructuring of certain of the Company’s operations, a write-down of goodwilland other long-term assets totaling $7.1 million, or $0.52 per share, and a taxbenefit of $2.2 million, or $0.16 per share, relating to the reversal ofreserves recorded in prior years.

(5)          2000 amounts include theestablishment of a valuation allowance for deferred tax assets recorded inprior years approximating $7.8 million, or $0.57 per share, income, net of tax,recognized from the settlement of the Accord litigation of $5.5 million, or$0.40 per share, and a gain recognized from the sale of the Company’s networkaccess card product line of $3.3 million, or $0.24 per share.

Effective January 1, 2002, the Company adoptedthe provisions of Statement of Financial Accounting Standards (SFAS) No. 142,“Goodwill and Other Intangible Assets.” This statement affects the Company’streatment of goodwill and other intangible assets. Had SFAS No. 142 beenadopted for the year ended December 31, 2001, the net loss and loss pershare would have been $28,298,000 and $2.07 per share, respectively. No otheryears presented above would have been affected.

12

----

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

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

**Critical Accounting Policies**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to revenuerecognition, bad debts, inventories and warranty obligations. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying value of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions. Webelieve the following critical accounting policies and the related judgmentsand estimates affect the preparation of our consolidated financial statements.

**Revenue Recognition**

Product Revenue consists of sales of InfoWorkspacesoftware licenses and maintenance agreements, InfoWorkSpace product relatedtraining, installation, and consulting, and video products. Revenue from salesof InfoWorkSpace software licenses and maintenance agreements is recognizedratably over the subscription contract periods, which are generally one year. Revenuefrom InfoWorkSpace training, installation, and consulting services arerecognized as the services are performed provided there is vendor specificobjective evidence (VSOE) of fair value which is the price charged when theservices are sold separately. Revenue from video product sales is recognizedupon shipment to the customer and the fulfillment of all contractual terms andconditions, pursuant to the guidance provided by Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements (SAB 104), issued by the Securitiesand Exchange Commission.

Product development revenue relates to contractsinvolving customization of the InfoWorkSpace product according to customerspecifications. Revenue associated with contracts for product developmentrevenue that are deliverable or milestone-based and require our customers’acceptance, are recognized upon their acceptance in accordance with terms ofthe contract. The associated cost recognition with these deliverables ormilestones are deferred until the terms of acceptance are satisfied and revenueis 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 softwarelicenses are sold without any contractual right of return to the customer. Deferredrevenue represents amounts received from customers under subscription softwarelicenses, maintenance agreements, or for product sales in advance of revenuerecognition. Judgments are required in evaluating the creditworthiness of ourcustomers. In all instances, revenue is not recognized until we havedetermined, at the outset of the arrangement that collectibility is reasonablyassured. Amounts billed to customers related to shipping and handling chargesare recorded upon shipment and the related costs are included in cost of goodssold.

13

----

**Allowance for Doubtful Accounts**

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

At December 31, 2004,our accounts receivable balance of approximately $3.5 million is reported netof allowances of approximately $371 thousand. We believe our reportedallowances are adequate. If the financial conditions of our customers were todeteriorate, however, resulting in their inability to make payments, we mayneed to record additional allowances, which would result in additional expensesbeing recorded for the period in which such determination was made.

**Inventory Reserves**

Historically, as a designer, developer andmanufacturer of videoconferencing hardware solutions, we were exposed to anumber of economic and industry factors that could result in portions of ourinventory becoming either obsolete or in excess of anticipated usage. Ourpolicy is to establish inventory reserves when conditions exist that suggestthat our inventory may be in excess of anticipated demand or is obsolete basedupon our assumptions about future demand for our products and marketconditions. When recorded, our reserves are intended to reduce the carryingvalue of our inventory to its net realizable value.

The Company provided for excess and obsolescencereserve of inventory of approximately $2.3 million in the year ended December 31,2002 due to the continued decline in demand relating to the legacyvideoconferencing product line. Based on a settlement agreement negotiated witha software vendor, the Company later incurred an additional write-down ofinventory of approximately $1.4 million.

During the year ended December 31,2004 the Company was able to realize sales of its legacy videoconferencinghardware products. The cost of these product sales was offset by adjustments toreduce the related inventory reserves. At December 31, 2004, our netinventory reserves are approximately $4.5 million, representing 100% of thecost basis of our inventory. While the Company expects that there could beadditional sales of legacy videoconferencing hardware products after the yearended December 31, 2004, current accounting rules and relatedinterpretations, specifically Accounting Research Bulletin No. 43 (ARB43), stipulate that our net inventory value cannot be marked up “based onchanges in underlying facts and circumstances”.

**Impairment**

Asof December 31, 2002, the Company had written off the remaining value ofits long-lived assets. Prior to December 2002, the Company reviewedthe carrying values of long-lived assets and amortizable intangibles forimpairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. An impairment loss for anasset to be held and used is recognized when the estimated fair value of theasset is less than its carrying value. The fair value of long-lived assets isgenerally based on estimated future cash flows from operations. The estimatesreflect the Company’s assumptions about selling prices, production and salesvolume levels, costs and market conditions over the estimated remainingoperating period, which generally ranges from one to five years.

14

----

**Product Warranties**

Our products are sold withwarranty provisions that require us to remedy deficiencies in quality orperformance of our products over a period of 90 days, at no cost to ourcustomers. Our policy is to establish warranty reserves at the time of salewhen our estimate of the costs that will be incurred to fulfill those warrantyrequirements becomes material. As of December 31, 2004, the Companybelieved that costs to cover our future cost of materials, labor and overheadfor the servicing of our products sold through that date were not material andno reserve was warranted. If actual product failures or material or servicedelivery costs differ from our estimates, our warranty liability would need tobe revised accordingly.

**Resultsof operations—years ended December 31, 2004, 2003 and 2002**

**Revenue**

Revenue increased to approximately $10.4 million in2004 from approximately $8.2 million in 2003. The increase in revenue wasprincipally related to a 64% increase in sales related to the Company’sInfoWorkSpace product line. The increase in sales of InfoWorkSpace can beattributed to an increasing rate of product acceptance within the developingcollaborative software market as well as greater spending within the Company’scustomer base, especially within the area of product development revenue whichgrew from approximately $78 thousand in 2003 to approximately $1.5 million in2004. Product development revenue is revenue related to product customizationwork performed for customers seeking enhancements to our current product. Theincrease in revenues from InfoWorkSpace related products and services wasoffset by a decline in the Company’s legacy videoconferencing products andrelated service revenues, to approximately $633 thousand (6% of total revenues)in 2004 from approximately $2.3 million (28% of total revenues) in 2003. Weexpect to see a continued decline in videoconferencing-related products andservices revenue.

Revenue decreased toapproximately $8.2 million in 2003 from approximately $11.4 million in 2002.The decrease in revenue was principally related to a significant decline insales of videoconferencing products and related service revenues as thevideoconferencing market continued to weaken. Videoconferencing products andrelated services were approximately $2.3 million (28% of total revenues) in2003 compared to $6.7 million (59% of total revenues) in 2002. The decline inrevenues from videoconferencing products and related services in 2003 waspartially offset by an increase in revenue of $1.2 million associated with theCompany’s InfoWorkSpace product line.

**Gross profit**

Cost of revenues includes material costs, costs ofthird-party software licenses, manufacturing labor and overhead, customer supportcosts, and engineering and development costs associated with productdevelopment revenue. Gross profit as a percentage of revenues increased in2004, to 65.5%, from 54.6% in 2003 and 27.7% in 2002. The increase in grossprofit is primarily attributed to reduced InfoWorkSpace licensing costs and theincrease in higher margin product development work in 2004 of 73% from 51% ascompared to prior years. Gross profit in 2003 was significantly impacted by ourrealized legacy videoconferencing hardware sales of $1.9 million during theyear, which had no net reported cost basis due to the write down of inventoryin the previous year. Adjusting for this impact, reported gross profit wouldhave been 41.5% in 2003.

The reported gross profitfor 2002 was significantly and negatively impacted by a write-down of inventoryduring the year of approximately $3.7 million. Excluding the write-down, thegross margin for 2002 would have been 60.2%. Excluding the 2002 write-down, thedecrease in gross profit in 2003 relates primarily to higher fixed costs ofrevenues as compared with 2002.

15

----

**Research and development**

Research and developmentexpenses include payroll, employee benefits, other headcount related costs, andmiscellaneous costs associated with product development. Research anddevelopment expenses decreased to approximately $1.1 million in the year ended December 31,2004, from approximately $1.9 million in 2003, and from approximately $4.6million in 2002. The decrease in spending in 2004 as compared with 2003 wasprimarily due to cost saving initiatives undertaken by the Company in 2003 tobetter align its cost structure with its revenues. The decrease realized in2003 as compared with 2002, was the result of the elimination of all researchand development related to the legacy videoconferencing product line as aresult of a July 2002 restructuring, as well as the cost savinginitiatives undertaken by the Company in 2003.

**Sales and marketing**

Sales and marketingexpenses include payroll, employee benefits, and other headcount related costsassociated with sales and marketing personnel and advertising, tradeshows,seminars, and other marketing-related programs. Sales and marketingexpenses increased to approximately $1.4 million in the year ended December 31,2004, from approximately $1.1 million in 2003. The increase is primarilyrelated to higher salary, commission and travel costs associated with anincrease in InfoWorkSpace personnel, as well as higher consulting andadvertising costs. The decreased spending in 2003 as compared with 2002, wasprimarily due to the substantial reduction of sales and marketing activitiesrelated to the legacy videoconferencing product line resulting from the July 2002restructuring, and in 2003, to additional cost savings initiatives the Company hasundertaken during the year to better align its cost structure with itsrevenues.

**General and administrative**

General and administrativecosts include payroll, employee benefits, and other headcount-related costsassociated with the finance, human resources, management information systems,and other administrative headcount, and legal and investor relations costs, andother administrative fees. General and administrative expenses increased toapproximately $1.9 million in the year ended December 31, 2004, from $1.5million in 2003. The increased spending in 2004 as compared with 2003 wasprimarily due to an increase in legal and compensation related costs partiallyoffset by decreases in consultant costs and bad debt recoveries. General andadministrative expenses decreased approximately $500 thousand from the yearended December 31, 2003 as compared with the year ended December 31,2002. The decrease was primarily due to cost savings associated with thereduction in workforce related to the July 2002 restructuring, and toadditional cost savings initiatives the Company undertook during 2003 to betteralign its cost structure with its revenues.

**Occupancyand other facilities related expenses**

Occupancy and otherfacilities-related expenses decreased to approximately $579 thousand in theyear ended December 31, 2004, from approximately $675 thousand in 2003,and from approximately $2.7 million in 2002. These costs include rent expenseand other operating costs associated with the Company’s headquarters facilityin Burlington, Massachusetts, two other sales and development offices in theUnited States, in Colorado and Virginia, and prior to 2003, former sales andservice offices in the United Kingdom, Hong Kong and China. In June 2002,the Company negotiated the termination of the lease of its Burlington, Massachusettsheadquarters and manufacturing facility, and in July 2002 moved to morecost-efficient headquarters office space, and closed its offices outside of theUnited States as a part of the July 2002 restructuring. In December 2003,the Company moved its’ Colorado development office to more cost efficient space.The decreased spending in both 2004 and 2003, as compared with the prior year,was primarily due to cost savings associated with the office consolidations in July 2002,the Colorado office 

16

----

move in December 2003,and to additional cost savings initiatives the Company initially undertookduring 2003 to better align its cost structure with its revenues.

**Interest income, net**

Interest income, net,consists of interest on cash, cash equivalents and marketable securities. Interestincome increased to approximately $122 thousand in 2004 from approximately $6thousand in 2003, and approximately $14 thousand in 2002. The increase in 2004was due primarily to approximately $66 thousand of interest received inconnection with the Company’s settlement reached in April 2004 with theITC, approximately $30 thousand of interest received as a result of an incometax refund of approximately $608 thousand received in December 2004, andan increase in the amount of cash available for investment during the year ascompared to the prior years. The decrease in 2003 of approximately $8,000 fromthe prior year was primarily due to a reduction in the amount of cash availablefor investment during the year.

**Settlement fees and other income**

The settlement feesreported for the year ended December 31, 2004 are one-time legal andprofessional fees related to the Company’s settlement reached in April 2004with the ITC concerning tax matters associated with its patent infringement suitagainst Accord, which was settled in June 2000. Other income consistsprimarily of sales of previously written off assets and other miscellaneousnon-operating income.

**Income tax benefit**

The income tax benefitreported in the year ended December 31, 2004 of approximately $1.4 millionrelated to the Company’s settlement with the ITC resulting in the receipt in April 2004of $975 thousand, net of approximately $156 thousand of withholding tax on thegross settlement amount. The income tax benefit in 2004 also includedapproximately $608 thousand refund of prior year taxes relating to the carryback of the net operating losses incurred in 2001 to prior years. The incometax benefit reported in the year ended December 31, 2003 of approximately$267 thousand related to a change in the estimate for potential liabilitiesrelated to federal and state income taxes paid in prior years. The income taxbenefit amount reported in 2002 of approximately $2.9 million related primarilyto the Federal Job Creation and Worker Assistance Act of 2002, which allowedthe Company to carry back net operating losses incurred in 2001 for a period ofup to five years, rather than two years, as had previously been the case. Theadditional carry back period enabled the Company to file a carry back claim,resulting in the utilization of approximately $12.5 million of net operatinglosses that would have expired in 2022, and the recovery of approximately $2.7million of income taxes paid in prior years. The income tax benefit in 2002 alsoincludes approximately $200 thousand related to the reversal of tax reservesdue to the favorable settlement of certain tax related matters.

**Riskfactors which may affect future operations**

This annual report includes discussions of the Company’slong-term growth outlook, including various forward-looking statements. Thefollowing risks and uncertainties, among others, could affect the degree towhich such expectations are realized. Forward looking statements contained inthis Form 10-K report are based on current expectations, estimates,forecasts and projections about the industry in which we operate, management’sbeliefs, and assumptions made by management. Words such as “plans,” “expects,” “anticipates,”“intends,” “believes,” “could,” “seeks,” “estimates,” or variations of suchwords and similar expressions are intended to identify such forward-lookingstatements. These statements are not guarantees of future performance andinvolve certain risks, uncertainties and assumptions that are difficult topredict.

17

----

***Liquidity and history of losses***.   As furtherdescribed under Liquidity and Capital Resources, despite the Company’shistorical operating losses, management believes, although there can be noassurances, due to the growing acceptance of its InfoWorkSpace product, theexpected growth of Internet-based collaboration products, in general, and theInfoWorkSpace product, in particular, and its successive quarters ofprofitability and continued vigilance on cost control, that its cash andavailable resources will enable the Company to continue as a going concern.****Therecan be no assurances that the Company can achieve its goal of showingconsistent quarterly revenue and profit growth, which are both largelydependent on whether it can meet its future new order bookings targets.

***Dependence on major customers****.  *While the Company is focusing efforts on broadeningits customer base, sales to a relatively small number of customers within theUS government, specifically within the Department of Defense, have accountedfor a significant portion of the Company’s revenue. The Company believes thatits dependence on a relatively small number of customers within the USgovernment will continue during 2005. This concentration of customers may causerevenues and operating results to fluctuate from quarter-to-quarter based onmajor customers’ requirements, and the timing of their orders and shipments.The Company’s agreements with its customers generally do not include minimumpurchase commitments or exclusivity arrangements. The Company’s operatingresults could be materially and adversely affected if any present or futuremajor customer were to choose to reduce its level of orders, were to change toanother vendor for purchases of a similar product, were to realize a reductionin their approved funding for collaborative technologies, or were to delaypaying or fail to pay amounts due the Company.

***Third PartyTechnology***.   TheCompany utilizes certain technology which it licenses from third parties,including software which is integrated with internally developed software, andused in the Company’s products to perform key functions. There can be noassurance that functionally similar technology will continue to be available oncommercially reasonable terms in the future, or at all. In particular, in February 2005the Company entered into a new three-year agreement with Microsoft Corporationto extend an existing software distribution license agreement. The softwaredistribution license agreement allows the Company to integrate Microsoft’s livecommunication software with the Company’s proprietary software, to createInfoWorkSpace.

***Reduced demand for traditionalvideoconferencing products****.  *Thedemand for traditional videoconferencing technology has experienced a rapiddecline. The Company’s videoconferencing product and related services revenuedeclined to approximately $633 thousand in 2004, from approximately $2.3million in 2003 and approximately $6.7 million in 2002. The Company expectsthat sales of this legacy hardware technology will continue to decline in 2005.

***Evolving markets*.  **Salesof real-time collaboration products account for a significant and increasingportion of the Company’s revenue. The Company’s success depends, to asignificant extent, on the acceptance and the rate of adoption ofInternet-based collaboration products, in general, and the InfoWorkSpaceproduct, in particular. There can be no assurance that any of the markets forthe Company’s products will develop to the extent, in the manner, or at therate anticipated by the Company. In addition, future prices the Company is ableto obtain for its products may decrease as a result of new productintroductions by others, price competition, technological change or otherfactors.

***Rapid technological change****.  *The market for the Company’s products ischaracterized by rapidly changing technology, evolving industry standards,emerging network architectures and frequent new product introductions. Theadoption rate of new technologies and products may adversely impact near-termgrowth of the conferencing market as users evaluate the alternatives. TheCompany has invested, and for 2005 plans to continue to invest, in productdevelopment and products incorporating certain of these new technologies. Manyother companies are also developing products incorporating these newtechnologies that are competitive with the Company’s current and futureofferings. The Company’s success 

18

----

will depend, in part, uponits ability through continued investments to maintain technological leadership,to enhance and expand its existing product offerings and to select and developin timely manner new products that achieve market acceptance.

***Competition****.  *The market for multimedia collaboration products ishighly competitive. The Company expects competition to increase significantlyin the future, as the market for similar products is expected to significantlyexpand. A number of companies have introduced or announced their intention tointroduce products that could be competitive with the Company’s products, andthe rapidly evolving nature of the markets in which the Company competes mayattract other new entrants, as they perceive opportunities. Some of the Company’scurrent and potential competitors have longer operating histories and greaterfinancial, technical, sales, and marketing resources. If the Company wereunable to retain its existing customers in the US government, or were unable toconvince a sufficient number of new companies or customers with an interest incollaborative technologies to adopt the InfoWorkSpace collaborative softwareproduct over alternative technologies marketed by the Company’s competitors,the Company’s financial results would suffer.

The principal competitive factors in the market formultimedia collaboration are, and should continue to be, breadth ofcapabilities, demonstrated interoperability, price, performance, networkmanagement capabilities, reliability, customer support and security. TheCompany plans to compete by offering collaboration and enterprise products witha broad range of capabilities and high performance. However, the Company cannotbe certain that potential customers will be attracted to the Company’s products,especially if competitors were to invest substantially more money into theirproducts and technology.

***Acceptance of InfoWorkSpace inthe commercial market.  ***In 2001, the Companypurchased the operating assets and intellectual property of the InfoWorkSpacebusiness unit of General Dynamics Electronic Systems. The Company entered intothe purchase agreement with the expectation that the transaction would resultin certain benefits including, among other things, benefits relating toexpanded and complementary product offerings, enhanced revenues, increasedmarket opportunity, new technology, the addition of engineering personnel, andthe expectation that the Company would be successful in expanding the marketfor InfoWorkSpace products, both within certain organizations of the USgovernment, including the Department of Defense and the Intelligence Community,but also commercially. To date, the Company’s commercial marketing efforts havenot been successful in achieving its targeted revenue or operating performancegoals in this space. There can be no assurance of success in the commercialmarket for InfoWorkSpace, in 2005 or beyond.

***Protection of proprietary technology****.  *The Company’s success depends, to a large extent, onits ability to protect its proprietary technology. The Company relies primarilyon a combination of contractual rights, trade secrets and copyrights to protectits intellectual property rights, including the fully-paid, non-exclusive,non-transferable license granted by Tandberg to the Company for use inconnection with its videoconferencing and enterprise collaboration products.

***Retention of key employees.  ***TheCompany’s success depends, to a significant degree, upon the continuingcontributions of its key management, sales, marketing, and research anddevelopment personnel, many of whom would be difficult to replace, includingKhoa Nguyen, the Company’s Chief Executive Officer, President and Chief FinancialOfficer. The Company does not carry akey-man life insurance on any of its employees, including Mr. Nguyen. Earlyin 2004, Mr. Nguyen experienced a medical problem that required him to ashort term leave of absence in order to recuperate. Mr. Nguyen has returned towork full time on a daily basis in June 2004. The Company does not haveemployment contracts with its key personnel other than Mr. Nguyen. TheCompany believes that its future success will depend in large part upon itsability to attract and retain such key employees.

***Stock price volatility.  ***Themarket price of the Company’s common stock, like that of other technologycompanies, is highly volatile and is subject to wide fluctuations in responseto quarterly variations in 

19

----

operating results,announcements of technological innovations or new products by the Company orits competitors, changes in financial estimates by securities analysts or otherevents or factors. The Company’s stock price may also be affected by broadermarket trends unrelated to the Company’s performance.

***Board of director recruitment*.  **Currentlyand, we believe, temporarily, we have three directors on our Board, two of whommeet the standards for independence as specified by the SEC and the nationalstock exchanges. Historically we have had an audit committee comprised of atleast three independent directors, as required by the national stock exchanges.Our current independent directors, both of whom are members of our auditcommittee, meet the standards for independence as specified by the SEC. One ofour directors, Gerald P. Carmen, has the necessary financial expertise to serveas chairman of our audit committee. We are currently attempting to identifyadditional qualified individuals to serve as independent directors of theCompany. However, the market for highly qualified individuals available andwilling to serve as directors to companies similar to ours is intense, andthere can be no assurance that we will be able to identify, recruit andultimately secure the services of such individuals in a timely manner or at all.

**Liquidity and Capital Resources**

At December 31, 2004, theCompany had cash and cash equivalents of approximately $5.5 million. TheCompany had profits from operations of approximately $1.8 million for the yearended December 31, 2004, and a net profit for the year of approximately$3.2 million, as compared with an operating loss in the year ended December 31,2003 of $1.1 million, and a net loss of approximately $828 thousand in 2003.

The Company generated cash from operations of $3.2million in fiscal 2004 compared to a use of cash from operations of $96thousand in 2003 and cash generated from operations of $17 thousand in 2002. TheCompany’s investing activities have been nominal in fiscal 2004 and 2003resulting in only $93 thousand of cash invested in property and equipment in2004 and no outlay of cash relative to 2003 investing activities. The Companyhas generated cash from financing activities of $102 thousand and $9 thousandin 2004 and 2003, respectively, primarily from proceeds of sales of the Company’scommon stock pursuant to the Company’s various stock plans.

The Company’s contractual obligations relate primarilyto its facilities leases and a contractual purchase commitment. The Companyleases its primary facility in Burlington, Massachusetts, under an operatinglease, which expires in June 2005. The Company plans to move its primaryfacility to Nashua, New Hampshire, and has entered into a new operating lease,effective March, 2005, expiring in 2010 (the “Nashua Lease”). The Company alsohas three other leases for office space in the United States, located inColorado Springs, Colorado, Sterling, Virginia, and Alexandria, Virginia forsales, development and technical support operations. The Company has enteredinto a sub lease agreement for its Alexandria, Virginia office. These leasesexpire at various dates through March 2010. Future minimum leaseobligations at December 31, 2004 under all of these non-cancelableoperating leases, including the effects of the Nashua Lease and the Alexandria,Virginia sublease, are approximately $296 thousand in 2005, $232 thousand in2006, $71 thousand in 2007, $72 thousand in 2008, $73 thousand in 2009, and $14thousand in 2010.

In February 2005 the Company entered into a newthree-year agreement to extend an existing software distribution licenseagreement. Under the agreement, the Company is required to purchase a minimumof $3 million of product during the first year of the agreement.

The Company includes standard intellectual propertyindemnification provisions in its licensing agreements in the ordinary courseof business. Pursuant to the Company’s product license agreements, the Companywill indemnify, hold harmless, and agree to reimburse the indemnified party forlosses suffered or incurred by the indemnified party, generally businesspartners or customers, in connection with certain patent, copyright or otherintellectual property infringement claims by third parties with respect to theCompany’s products. Other agreements with the Company’s customers provideindemnification for claims 

20

----

relating to propertydamage or personal injury resulting from the performance of services by theCompany or its subcontractors. Historically, the Company’s costs to defendlawsuits or settle claims relating to such indemnity agreements have beeninsignificant. Accordingly, the estimated fair value of these indemnificationprovisions is immaterial.

In August 2002, the Companyentered into an agreement with Tandberg Telecom AS to sell all patents andpending applications related to its videoconferencing products, which wascompleted in October 2002. In exchange for an up-front license fee of$1.25 million, a loan for an additional $1.25 million which was forgiven at theclosing, and an additional $2.4 million also received at the closing, theCompany granted Tandberg a fully paid, non-exclusive, non-transferable licenseunder the patents and pending applications relating to the Company’svideoconferencing technology (the video patent portfolio). Additionally, theCompany retained a fully paid, non-exclusive, non-transferable license for theCompany’s use in connection with its videoconferencing and enterprisecollaboration products.

In May 2003, after failingto comply with certain continued listing standards for the NASDAQ SmallCapMarket, including maintaining a minimum bid price of at least $1.00 per share,or the requirement for the Company to have a minimum $2.5 million instockholders equity, the Company received a delisting notification from NASDAQ.After exercising its right for an appeal of this determination to a NASDAQListing Qualifications Panel, the Panel determined to delist the Company’ssecurities from The NASDAQ Stock Market in August 2003. Since then, theCompany’s common stock has been quoted on the OTC Bulletin Board. The marketvalue and liquidity of the Company’s common stock, as well as the Company’sability to raise additional capital, has been and may continue to be materiallyadversely affected by this delisting decision.

In March 2001, the Companycompleted the acquisition of all of the operating assets and intellectual propertyof the InfoWorkSpace business unit of General Dynamics Electronic Systems,which included the issuance by the Company of 400,000 shares of the Company’scommon stock valued, for purposes of the transaction, at $10.00 per share. The400,000 shares issued were accompanied by an option allowing the seller to putthe shares to the Company at $10.00 per share. The seller exercised the putoption with respect to 110,000 shares in January 2002, and the shares werereacquired at an aggregate price of $1.1 million later that month. The putagreement, as amended, gave the seller the option to require the Company torepurchase the balance of 290,000 shares for a period of thirty days beginningin March 2004. As of December 31, 2002, common stock subject to theput option was reported as temporary equity. For purposes of computing dilutedearnings per share, such shares were included in the calculation using thereverse treasury stock method when dilutive. In July 2003, in connectionwith an amendment to a software development agreement, the seller agreed toterminate the put agreement it had with the Company. Accordingly, as of December 31,2003, the value associated with the 290,000 shares of common stock that are nolonger subject to the put option, has been included within stockholders equity.

Operating costs were in linewith the Company’s expectations for the year ended December 31, 2004. The Company did not achieve its new order bookingstarget for InfoWorkSpace products during the year ended December 31, 2004,although new order bookings for each of the quarters did indicate moreconsistency in the demand for InfoWorkSpace as compared to quarterly new orderbookings totals for the year ended December 31, 2003. Order bookings,which are purchase orders placed by customers, are properly not recorded asrevenue or recognized as revenue until all requirements of that order aresatisfied, although the cash flow received from these orders may more closelyfollow the receipt date of the order.

The Company’s success inachieving its goal of showing consistent quarterly top line and bottom linegrowth is largely dependent on whether it can continue to meet its future orderbookings, and related revenue, targets. Accordingly, despite the Company’shistorical operating losses management believes, largely as a result of itsincreased IWS bookings, successive quarters of profitability, and the expected 

21

----

growthand acceptance of Internet-based collaboration products, in general, and theInfoWorkSpace product, in particular, that its existing cash resources andcontinued vigilance on controlling costs will enable the Company to continue asa going concern at least through March 31, 2006 and for the forseeable futurethereafter.

Thefollowing table summarizes our outstanding contractual obligations:
| ** **                     | ** ** | **2005**                | ** ** | **2006-2008** | ** ** | **2009-2010** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------|------------|---------------|------------|-----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Operating leases               |       | $                       | 296        |          |       | $             | 375        |      |       |   | $ | 86 |   |   | $ | 757 |   |
| Purchase  commitments          |       | 3,000                   |       |          | —     |          |       |      | —     |   |   | 3,000 |   |
| Total contractual  obligations |       | $                       | 3,296      |          |       | $             | 375        |      |       |   | $ | 86 |   |   | $ | 3,757 |   |

 

**Recent Accounting pronouncements**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123R, “Share-Based Payment” (SFAS123R). This Statement is a revision of SFAS 123 and supersedes APB 25 and itsrelated implementation guidance. SFAS 123R requires a company to measure thegrant-date fair valueof equity awards given to employees in exchange for services and recognize thatcost over the period that such services are performed. SFAS 123R is effectivefor the first interim or annual reporting period that begins after June 15,2005.

The Company is currentlyevaluating the two methods of adoption allowed by SFAS 123R: the modified-prospectivetransition method and the modified-retrospective transition method.Adoption of SFAS 123R may materially increase stock compensation expense anddecrease net income. 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.

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

To date, the Company has not utilized derivativefinancial instruments or derivative commodity instruments. The Company investscash in highly liquid investments, consisting of highly rated U.S. and stategovernment securities, commercial paper and short-term money market funds.These investments are subject to minimal credit and market risk and the Companyhas no debt other than its contractual lease obligations. A 10% change ininterest rates would not have a material impact on the Company’s financialposition, operating results or cash flows. The Company has closed its foreignoffices, and sales to foreign customers from the United States are in U.S.dollars. Therefore, the Company has no significant foreign currency risk.

22

----

 

**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

**INDEX**
|                                                                                                                  | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------|------------|----------|
| Reports of Independent Auditors                                                                                  |       | 24, 25   |
| Consolidated Balance Sheets as of  December 31, 2004 and 2003                                               |       | 26       |
| Consolidated Statements of  Operations for the years ended December 31, 2004, 2003 and 2002                 |       | 27       |
| Consolidated Statements of  Stockholders’ Equity for the years ended December 31, 2004, 2003  and 2002 |       | 28       |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2004, 2003 and 2002                 |       | 29       |
| Notes  to the Consolidated Financial Statements                                                                  |       | 30       |

 

23

----

**Report ofIndependent**Registered Public Accounting Firm

The Board of Directors andStockholders

Ezenia! Inc.

We have audited the accompanying consolidated balancesheets of Ezenia! Inc. and subsidiaries as of December 31, 2004 and 2003and the related consolidated statements of operations, stockholders’ equity,and cash flows for each of the two years in the periods ended December 31,2004. Our audits also included the financial statement schedules listed in theIndex at Item 15(a). These financial statements and schedules are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provides a reasonable basisfor our opinion.

In our opinion, suchconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Ezenia! Inc. andsubsidiaries at December 31, 2004 and 2003 and the consolidated results oftheir operations and their cash flows for each of the two years in the periodsended December 31, 2004 in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

/s/ BROWN &BROWN, LLP

Boston, Massachusetts

February 28, 2005 exceptfor notes 11 and 15 for which the date is March 15, 2005.

24

----

**Report ofIndependent Auditors**

The Board of Directors and StockholdersEzenia! Inc.

We have audited the accompanying consolidated balancesheet of Ezenia! Inc. and subsidiaries as of December 31, 2002, and the relatedconsolidated statements of operations, stockholders’ equity (deficit), and cashflows for each of the two years in the period ended December 31, 2002. Ouraudits also included the financial statement schedule listed in the Index at Item15(a) for the years ended December 31, 2002 and 2001. These financialstatements and schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

We conducted our audits in accordance with auditingstandards generally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Ezenia! Inc. and subsidiaries at December 31, 2002, andthe consolidated results of their operations and their cash flows for each ofthe two years in the period ended December 31, 2002, in conformity withaccounting principles generally accepted in the United States. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

The accompanying financial statements have beenprepared assuming that Ezenia! Inc, will continue as a going concern. As morefully described in Note 2, the Company has incurred substantial recurringoperating losses and negative cash flows. These conditions raise substantialdoubt about the Company’s ability to continue as a going concern. The financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassification of liabilities that may result from the outcome of this uncertainty.

As discussed in Note 5 tothe consolidated financial statements, on January 1, 2002, the Company adoptedStatement of Financial Accounting Standards No. 142, *“GOODWILLAND OTHER INTANGIBLE ASSETS.”*

/s/ ERNST & YOUNG LLP

Boston, Massachusetts

March 25, 2003

25

----

**ConsolidatedBalance Sheets**
| ** **                                                                                                                                                               | ** ** | **December 31,**                                                                        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                               | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                                                                                                                                                               | ** ** | **(In thousands,  except for share related data)**                  | ** ** |
| **Assets**                                                                                                                                                               |       |                                                                                         |       |   |   |   |   |   |   |
| Current assets                                                                                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                |       |                                                                                         | $          | 5,520 |   |   |   | $ | 2,316 |   |   |
| Accounts receivable, less allowances of $371 and  $1,068 in 2004 and 2003, respectively                                                                                  |       |                                                                                         | 3,465      |   |   |   | 2,745 |   |   |
| Prepaid software licenses                                                                                                                                                |       |                                                                                         | 2,630      |   |   |   | 1,724 |   |   |
| Prepaid expenses and other current assets                                                                                                                                |       |                                                                                         | 306        |   |   |   | 297 |   |   |
| Total current  assets                                                                                                                                                    |       |                                                                                         | 11,921     |   |   |   | 7,082 |   |   |
| Equipment and improvements, net                                                                                                                                          |       |                                                                                         | 85         |   |   |   | — |   |   |
| Total assets                                                                                                                                                             |       |                                                                                         | $          | 12,006 |   |   |   | $ | 7,082 |   |   |
| **Liabilities  and stockholders’ equity**                                                                                                                           |       |                                                                                         |       |   |   |   |   |   |   |
| Current liabilities                                                                                                                                                      |       |                                                                                         |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                         | ** ** |                                                                                         | $          | 734 |   |   |   | $ | 185 |   |   |
| Accrued expenses                                                                                                                                                         |       |                                                                                         | 571        |   |   |   | 205 |   |   |
| Employee compensation and benefits                                                                                                                                       |       |                                                                                         | 200        |   |   |   | 186 |   |   |
| Accrued license costs                                                                                                                                                    |       |                                                                                         | —     |   |   |   | 920 |   |   |
| Deferred revenue                                                                                                                                                         |       |                                                                                         | 6,663      |   |   |   | 5,034 |   |   |
| Total current  liabilities                                                                                                                                               |       |                                                                                         | 8,168      |   |   |   | 6,530 |   |   |
| Commitments and  contingencies (Note 11)                                                                                                                                 |       |                                                                                         |       |   |   |   |   |   |   |
| 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; 14,846,598 issued and 14,186,161 outstanding in 2004; 14,360,817  issued and 13,700,380 outstanding in 2003 |       |                                                                                         | 148        |   |   |   | 144 |   |   |
| Capital in excess of par value                                                                                                                                           |       |                                                                                         | 63,643     |   |   |   | 63,545 |   |   |
| Accumulated deficit                                                                                                                                                      |       |                                                                                         | (57,092    | ) |   |   | (60,276 | ) |   |
| Treasury stock; 660,437 shares at cost                                                                                                                                   |       |                                                                                         | (2,861     | ) |   |   | (2,861 | ) |   |
|                                                                                                                                                                     |       |                                                                                         | 3,838      |   |   |   | 552 |   |   |
| **Total liabilities and  stockholders’ equity (deficit)**                                                                                                           |       |                                                                                         | $          | 12,006 |   |   |   | $ | 7,082 |   |   |

 

See accompanying notes.

26

----

**ConsolidatedStatements of Operations**
| ** **                                                                                  | ** ** | **Year ended December 31,**                                           | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                                                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                  | ** ** | **(In thousands,  except for per share related data)** | ** ** |
| **Revenues**                                                                                |       |                                                                                 |       |   |   |   |   |
| Product revenue                                                                             | ** ** | **$**                                                                                | **8,565**  |   | $ | 7,663 |   | $ | 8,830 |   |
| Product development revenue                                                                 | ** ** | **1,455**                                                                            |       | 78 |   | — |   |
| Service revenue                                                                             | ** ** | **371**                                                                              |       | 476 |   | 2,543 |   |
| ** **                                                                                  |       | **10,391**                                                                           |       | 8,217 |   | 11,373 |   |
| **Costs of revenues**                                                                       |       |                                                                                 |       |   |   |   |   |
| Cost of product revenue                                                                     | ** ** | **3,107**                                                                            |       | 3,355 |   | 7,490 |   |
| Cost of product development revenue                                                         | ** ** | **388**                                                                              |       | 39 |   |   |   |
| Cost of service revenue                                                                     | ** ** | **86**                                                                               |       | 334 |   | 731 |   |
| ** **                                                                                  |       | **3,581**                                                                            |       | 3,728 |   | 8,221 |   |
| **Gross  profit**                                                                           | ** ** | **6,810**                                                                            |       | 4,489 |   | 3,152 |   |
| **Operating expenses**                                                                      |       |                                                                                 |       |   |   |   |   |
| Research and development                                                                    | ** ** | **1,087**                                                                            |       | 1,921 |   | 4,641 |   |
| Sales  and marketing                                                                        | ** ** | **1,370**                                                                            |       | 1,119 |   | 3,959 |   |
| General  and administrative                                                                 | ** ** | **1,959**                                                                            |       | 1,891 |   | 2,438 |   |
| Amortization  of goodwill and other intangible assets                                       | ** ** | **—**                                                                           |       | — |   | 1,005 |   |
| Depreciation                                                                                | ** ** | **8**                                                                                |       | — |   | 1,187 |   |
| Occupancy  and other facilities related expenses                                            | ** ** | **579**                                                                              |       | 675 |   | 2,671 |   |
| Impairment  of goodwill and other long-term assets                                          | ** ** | **—**                                                                           |       | — |   | 2,345 |   |
| Total  operating expenses                                                                   | ** ** | **5,003**                                                                            |       | 5,606 |   | 18,246 |   |
| **Income  (loss) from operations**                                                          | ** ** | **1,807**                                                                            |       | (1,117 | ) | (15,094 | ) |
| Other income (expense)                                                                      |       |                                                                                 |       |   |   |   |   |
| Interest  income, net                                                                       | ** ** | **122**                                                                              |       | 6 |   | 14 |   |
| Settlement  fees                                                                            | ** ** | **(179**                                                                             | **)**      | — |   | — |   |
| Gain  on sale of patents                                                                    | ** ** | **—**                                                                           |       | — |   | 4,900 |   |
| Loss  on liquidation of foreign subsidiaries                                                | ** ** | **—**                                                                           |       | — |   | (619 | ) |
| Other                                                                                       | ** ** | **7**                                                                                |       | 16 |   | — |   |
| ** **                                                                                  |       | **(50**                                                                              | **)**      | 22 |   | 4,295 |   |
| Income  (loss) before income taxes and cumulative effect of change in accounting  principle | ** ** | **1,757**                                                                            |       | (1,095 | ) | (10,799 | ) |
| Income  tax benefit                                                                         | ** ** | **(1,427**                                                                           | **)**      | (267 | ) | (2,901 | ) |
| Income  (loss) before cumulative effect of change in accounting principle                   | ** ** | **3,184**                                                                            |       | (828 | ) | (7,898 | ) |
| Cumulative  effect of change in accounting principle                                        | ** ** | **—**                                                                           |       | — |   | (10,667 | ) |
| **Net  income (loss)**                                                                      | ** ** | **$**                                                                                | **3,184**  |   | $ | (828 | ) | $ | (18,565 | ) |
| **Basic and  diluted earnings per share:**                                                  |       |                                                                                 |       |   |   |   |   |
| Before  cumulative effect of change in accounting principle                                 |       |                                                                                 |       |   |   |   |   |
| Basic                                                                                       | ** ** | **$**                                                                                | **.23**    |   | $ | (.06 | ) | $ | (.58 | ) |
| Diluted                                                                                     | ** ** | **.22**                                                                              |       | (.06 | ) | (.58 | ) |
| Cumulative  effect of change in accounting principle                                        |       |                                                                                 |       |   |   |   |   |
| Basic  and diluted                                                                          | ** ** | **—**                                                                           |       | — |   | (.78 | ) |
| Net  loss                                                                                   | ** ** | **—**                                                                           |       | — |   | — |   |
| Basic                                                                                       | ** ** | **$**                                                                                | **.23**    |   | $ | (.06 | ) | $ | (1.36 | ) |
| Diluted                                                                                     | ** ** | **$**                                                                                | **.22**    |   | $ | (.06 | ) | $ | (1.36 | ) |

 

See accompanying notes.

27

----

**ConsolidatedStatements of Stockholders’ Equity (Deficit)**
| ** **                                 | ** ** | ** **                                                                      | ** ** | ** **                 | ** ** | ** **         | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **             | ** ** | ** **                | ** ** |
|--------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-------------------|------------|--------------|------------|------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | ** **                                                                      | ** ** | **Capital**                | ** ** | ** **         | ** ** | **Other**         | ** ** | ** **   | ** ** | **Total**              | ** ** | **Comprehensive**         | ** ** |
| ** **                                 | ** ** | **Common Stock**                                                           | ** ** | **in Excess of** | ** ** | **Accumulated**    | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** ** | **Income**                | ** ** |
| ** **                                 | ** ** | **Shares**                                                                      | ** ** | **Par Value**         | ** ** | **Par Value** | ** ** | **Deficit**       | ** ** | **Loss**     | ** ** | **Stock**              | ** ** | **Equity (Deficit)** | ** ** | **(Loss)** | ** ** |
| ** **                                 | ** ** | **(In thousands, except for share related data)** | ** ** |
| **BALANCES AS OF DECEMBER  31, 2001**      |       | 13,741,880                                                                      |       |                       | 139        |               |       |              | 59,566     |         |       |                   | (40,883    | )                         |       |   | (611 | ) |   |   | (1,761 | ) |   |   | 16,450 |   |   |   |   |   |   |
| Stock issued under employee  benefit plans |       | 1,750                                                                           |       |                       |       |               |       |              |       |         |       |                   |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Foreign currency translation  adjustment   |       |                                                                            |       |                       |       |               |       |              |       |         |       |                   |       |                      |       |   | (8 | ) |   |   |   |   |   |   | (8 | ) |   |   | $ | (8 | ) |   |
| Liquidation of foreign  subsidiaries       |       |                                                                            |       |                       |       |               |       |              |       |         |       |                   |       |                      |       |   | 619 |   |   |   |   |   |   |   | 619 |   |   |   |   |   |   |
| Exercise of put                            |       | (110,000                                                                        | )          |                       |       |               |       |              | 1,100      |         |       |                   |       |                      |       |   |   |   |   |   | (1,100 | ) |   |   |   |   |   |   |   |   |   |
| **Net loss**                               |       |                                                                            |       |                       |       |               |       |              |       |         |       |                   | (18,565    | )                         |       |   |   |   |   |   |   |   |   |   | (18,565 | ) |   |   | (18,565 | ) |   |
| Comprehensive loss                         |       |                                                                            |       |                       |       |               |       |              |       |         |       |                   |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | (18,573 | ) |   |
| **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 |   |   |   |   |   |   |
| Comprehensive income                       |       |                                                                            |       |                       |       |               |       |              |       |         |       |                   |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 3,184 |   |   |
| **BALANCES AS OF DECEMBER  31, 2004** |   | 14,186,161 |   |   | $ | 148 |   |   |   | $ | 63,643 |   |   |   | $ | (57,092 | ) |   |   | $ | — |   |   |   | $ | (2,861 | ) |   |   | $ | 3,838 |   |   |   |   |   |   |
|---------------------------------------|--------|------------|--------|--------|---|-----|--------|--------|--------|---|--------|--------|--------|--------|---|---------|---|--------|--------|---|--------|--------|--------|--------|---|--------|---|--------|--------|---|-------|--------|--------|--------|--------|--------|--------|

 

Seeaccompanying notes.

28

 

----

**ConsolidatedStatements of Cash Flows**
| ** **                                                                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                | ** ** | **(In thousands)**                    | ** ** |
| **Operating  activities**                                                                                 |       | ** **                                 |       |   |   |   |   |
| Net income (loss)                                                                                         | ** ** | **$**                                      | **3,184**  |   | $ | (828 | ) | $ | (18,565 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       | ** **                                 |       |   |   |   |   |
| Depreciation                                                                                              | ** ** | **8**                                      |       | — |   | 1,187 |   |
| Amortization                                                                                              | ** ** | **—**                                 |       | — |   | 1,005 |   |
| Bad debt expense (recoveries)                                                                             | ** ** | **(110**                                   | **)**      | (50 | ) | 250 |   |
| Loss on liquidation of foreign subsidiaries                                                               | ** ** | **—**                                 |       | — |   | 619 |   |
| Write-down of goodwill, other long-term assets and  cumulative effect of accounting change           | ** ** | **—**                                 |       | — |   | 13,012 |   |
| Changes in operating assets and liabilities, less  amounts attributable to acquisition of InfoWorkSpace:  |       | ** **                                 |       |   |   |   |   |
| Accounts receivable                                                                                       | ** ** | **(610**                                   | **)**      | (915 | ) | 283 |   |
| Inventories                                                                                               | ** ** | **—**                                 |       | 112 |   | 3,770 |   |
| Prepaid software licenses                                                                                 | ** ** | **(906**                                   | **)**      | (716 | ) | (234 | ) |
| Prepaid expenses and other current assets                                                                 | ** ** | **(9**                                     | **)**      | (36 | ) | 430 |   |
| Accounts payable, accrued expenses and employee and  compensation benefits                                | ** ** | **9**                                      |       | 231 |   | (2,111 | ) |
| Income taxes                                                                                              | ** ** | **—**                                 |       | (285 | ) | (207 | ) |
| Deferred revenue                                                                                          | ** ** | **1,629**                                  |       | 2,391 |   | 578 |   |
| Net cash provided by (used in) operating activities                                                       | ** ** | **3,195**                                  |       | (96 | ) | 17 |   |
| **Investing  activities**                                                                                 |       | ** **                                 |       |   |   |   |   |
| Acquisition of  InfoWorkSpace                                                                             | ** ** | **—**                                 |       | — |   | (3,100 | ) |
| Net purchases of  equipment and improvements                                                              | ** ** | **(93**                                    | **)**      | — |   | (61 | ) |
| Other, net                                                                                                | ** ** | **—**                                 |       | — |   | 24 |   |
| Net cash used for investing activities                                                                    | ** ** | **(93**                                    | **)**      | — |   | (3,137 | ) |
| **Financing  activities**                                                                                 |       | ** **                                 |       |   |   |   |   |
| Net proceeds from  issuance of stock under employee benefit plans                                         | ** ** | **102**                                    |       | 9 |   | — |   |
| Net cash provided by financing activities                                                                 | ** ** | **102**                                    |       | 9 |   | — |   |
| Effect of  exchange rate on cash and cash equivalents                                                     | ** ** | **—**                                 |       | — |   | (8 | ) |
| Change in cash and cash equivalents                                                                       | ** ** | **3,204**                                  |       | (87 | ) | (3,128 | ) |
| Cash and cash  equivalents at beginning of year                                                           | ** ** | **2,316**                                  |       | 2,403 |   | 5,531 |   |
| Cash and cash equivalents at end of year                                                                  | ** ** | **$**                                      | **5,520**  |   | $ | 2,316 |   | $ | 2,403 |   |
| Supplementary disclosure of cash flow information:                                                        |       | ** **                                 |       |   |   |   |   |
| Interest paid                                                                                             | ** ** | **$**                                      | **1**      |   | $ | — |   | $ | — |   |
| Income taxes (refunded) paid                                                                              | ** ** | **$**                                      | **(1,271** | ) | $ | — |   | $ | — |   |
| Cancellation of  put                                                                                      | ** ** | **$**                                      | **—** |   | $ | 2,875 |   | $ | — |   |

 

See accompanying notes.

29

----

**Notes to the Consolidated Financial Statements**

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

Ezenia! Inc. operates in one business segment, whichis the design, development, manufacturing, marketing and sale of conferencingand real-time collaboration solutions for corporate and governmental networksand eBusiness. Founded in 1991, Ezenia! develops and markets products thatenable organizations to provide high-quality group communication andcollaboration capabilities to commercial, governmental, consumer andinstitutional users. The Company’s products allow individuals and groups,regardless of proximity constraints, to interact and share information in anatural, spontaneous way—voice-to-voice, face-to-face, mouse-to-mouse,keyboard-to-keyboard, flexibly, securely and in real-time. Using our products,individuals can interact through a natural meeting experience, allowing groupsto work together effectively and disseminate vital information quickly in asecure environment.

The consolidated financial statements include theaccounts of the Company and its wholly owned subsidiaries. All significantinter company transactions and balances have been eliminated. All assets andliabilities of the Company’s foreign subsidiaries are translated at the rate ofexchange at the end of the year, while sales and expense are translated at theaverage rate in effect during the year. The net effect of these translationadjustments is shown in the accompanying financial statements as a component ofstockholders’ equity .

Certain amounts in 2002and 2003 have been reclassified to permit comparison with 2004 classifications.

**2. Management’s Plans**

Prior to 2004, the Companyhad incurred substantial recurring operating losses and negative cash flow fromoperations and had incurred an accumulated deficit of approximately $60.3 millionat December 31, 2003. During 2004 the Company achieved income fromoperations of $1.8 million, net income of $3.2 million and generated cash fromoperations of $3.2 million and has $5.5 million of cash and cash equivalents asof December 31, 2004. There can be no assurances that the Company cancontinue to achieve the above-mentioned cash flow results, or its goal ofshowing consistent quarterly revenue and profit growth, which are both largelydependent on whether it can meet its future new order bookings targets. Accordingly,despite the Company’s historical operating losses, management believes,although there can be no assurances, due to the growing acceptance of itsInfoWorkSpace product, the expected growth of Internet-based collaborationproducts, in general, and the InfoWorkSpace product, in particular, and itssuccessive quarters of profitability and continued vigilance on cost control,that its cash and available resources will enable the Company to continue as agoing concern at least through March 31, 2006 and for the forseeable futurethereafter.

**3. Summary of Significant Accounting Policies**

**Use of Estimates**

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

30

----

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

**3. Summary of Significant AccountingPolicies (Continued)**

**Revenue recognition**

Product Revenue consists of sales of InfoWorkspacesoftware licenses and maintenance agreements, InfoWorkSpace product relatedtraining, installation, consulting, and video products. Revenue from sales ofInfoWorkSpace software licenses and maintenance agreements is recognizedratably over the subscription contract periods, which are generally one year.Revenue from InfoWorkSpace training, installation, and consulting services arerecognized as the services are performed provided there is vendor specificobjective evidence (VSOE) of fair value which is the price charged when theservices are sold separately. Revenue from video product sales is recognizedupon shipment to the customer and the fulfillment of all contractual terms andconditions, pursuant to the guidance provided by Staff Accounting Bulletin No.104, Revenue Recognition in Financial Statements (SAB 104), issued by theSecurities and Exchange Commission.

Product development revenue relates to contractsinvolving customization of the InfoWorkSpace product according to customerspecifications. Revenue associated with contracts for product developmentrevenue that are deliverable or milestone-based and require our customers’acceptance, are recognized upon their acceptance in accordance with terms ofthe contract. The associated cost recognition with these deliverables ormilestones are deferred until the terms of acceptance are satisfied and revenueis recognized.

Service revenue represents sales of service contractsrelated to the maintenance of video products.

Products and software licensesare sold without any contractual right of return to the customer. Deferredrevenue represents amounts received from customers under subscription softwarelicenses, maintenance agreements, or for product sales in advance of revenuerecognition. Judgments are required in evaluating the creditworthiness of ourcustomers. In all instances, revenue is not recognized until we havedetermined, at the outset of the arrangement that collectibility is reasonablyassured. Amounts billed to customers related to shipping and handling chargesare recorded upon shipment and the related costs are included in cost of goodssold.

**Product Warranties**

Our products are sold withwarranty provisions that require us to remedy deficiencies in quality orperformance of our products over a period of 90 days, at no cost to ourcustomers. Our policy is to establish warranty reserves at the time of salewhen our estimate of the costs that will be incurred to fulfill those warrantyrequirements become material. At December 31, 2004, the Company believesthat costs to cover our future cost of materials, labor and overhead for theservicing of our products sold through that date are not material and noreserve is warranted. If actual product failures or material or servicedelivery costs differ from our estimates, our warranty liability would need tobe revised accordingly.

**Third Party Technology**

The Company’sInfoWorkSpace product incorporates third party technology in the form ofsoftware licenses, which the Company purchases from other software vendors. Softwarelicenses purchased from vendors are reported as prepaid licenses and amortizedto cost of revenue over the subscription period, which is generally one year.

31

----

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

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

**Advertising**

Advertising costs areincluded under sales and marketing expenses. The Company uses its website as itsmain form of advertising and currently does not incur material advertisingcosts. Advertising costs are expensed as incurred. Advertising expenseapproximated $39 thousand in fiscal 2004. The company did not incur advertisingexpense for fiscal 2003 and incurred approximately $35 thousand in advertisingexpense in fiscal 2002.

**Cash equivalents**

The Company considers allliquid investments with maturity of 90 days or less at the date of purchase tobe cash equivalents. Cash equivalents and marketable securities consist ofhighly rated U.S. and state government securities, commercial paper and short-termmoney market funds.

**Financialinstruments and concentrations of credit risk**

The Company’s financialinstruments consist primarily of cash and cash equivalents, trade receivables,accounts payable and accrued expenses. The carrying value of these financialinstruments approximates fair value due to their short term to maturity. Financialinstruments, which potentially subject the Company to concentrations of creditrisk, are cash equivalents and accounts receivable.

Major financialinstitutions maintain all the Company’s cash equivalents. Concentration ofcredit risk with respect to accounts receivable is limited to certain customersto whom the Company makes substantial sales. To reduce risk, the Companyroutinely assesses the financial strength of its customers. The Companymaintains an allowance for doubtful accounts based on accounts past dueaccording to contractual terms and historical collection experience. Actuallosses when incurred are charged to the allowance. Write-offs related toaccounts receivable have been within management’s expectations.

Revenue from one customeraccounted for 33% of total revenues in 2004, 38% of total revenues in 2003, and27% of total revenues in 2002. Accounts receivable from these customersamounted to approximately $1.8 million, $1.9 million and $.2 million at December 31,2004, 2003 and 2002, respectively. Revenue from international markets wereapproximately $391 thousand, $1.1 million and $2.9 million in 2004, 2003 and2002, 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.

**Research anddevelopment costs**

Research and developmentcosts are charged to expense as incurred. To date, costs of internally developedsoftware eligible for capitalization have been immaterial and therefore havebeen expensed as incurred.

32

----

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

**3. Summary of Significant AccountingPolicies (Continued)**

**Income taxes**

Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of the existingassets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted taxrates expected to apply to taxable income in the years in which the temporarydifferences are expected to be realized or settled. The effect on deferred taxassets and liabilities of a change in tax rates is recognized in income in theperiod that includes the enactment date. Valuation allowances are establishedwhen necessary to reduce deferred tax assets to the amount expected to berealized. The Company’s management recorded a valuation allowance against thedeferred tax assets as management believes it is more likely than not that theywill not be realized.

**Net income (loss) per share**

The Company reports net income (loss) per share inaccordance with the SFAS No. 128, “*Earnings per Share*.”Diluted earnings per share include the effect of dilutive stock options andshares subject to a put option (see Note 5) when dilutive.

Sharesused in computing basic and diluted net income (loss) per share are as follows:
| ** **                                               | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Basic                                                    |       | 14,070,034 |       | 13,580,118 |       | 13,633,630 |       |
| Effect  of assumed exercise of stock options             |       | 467,560    |       | —     |       | —     |       |
| Diluted                                                  |       | 14,537,594 |       | 13,580,118 |       | 13,633,630 |       |
| Outstanding options excluded  as impact is anti-dilutive |       | 783,752    |       | 1,860,702  |       | 2,084,327  |       |

 

**Accountingfor impairment of long-lived assets**

In accordance with SFAS No. 144,“*Accounting for Impairment or Disposal of Long-LivedAssets,*” (2002) and SFAS No. 121, “*Accountingfor Impairment of Long-Lived Assets*,” (2001 and 2000) the Companyrecorded an impairment loss on long-lived assets previously used in operationswhen indicators of impairment were presented. In 2002, management reviewed thevalue and period of amortization or depreciation of its long-lived assets andevaluated the significant assumptions used in determining the original cost oflong-lived assets. These assumptions considered revenue growth, operatingresults, cash flows and other indicators of value. Management then determinedthere had been a permanent impairment of the value of long-lived assets basedupon events or circumstances that have occurred since acquisition. The extentof the impairment amount recognized was based upon a determination of the fairvalue of the impaired asset.

**Accountingfor stock-based compensation**

The Company has elected to account for its stock-basedcompensation plans following Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees,*” (APB 25) andrelated interpretations rather than the alternative fair value accountingprovided under SFAS No. 123, “*Accounting for Stock-BasedCompensation*.” The Company has recognized no compensation expenserelated to its stock option plans and its stock purchase plan

33

----

**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 the Company had used the fair value method ofSFAS No. 123 to account for stock options issued under its various stockoption plans, and shares purchased under the Stock Purchase Plan, is presentedbelow. The fair value of stock activity under these plans was estimated at thedate of grant using a Black-Scholes option pricing model with the followingassumptions as of the date of grant: risk-free interest rates equal to the thenavailable rate for zero-coupon U.S. government issues with a remaining termequal to the expected life of the options; no dividend yields; an averagevolatility factor of the expected market price of the Company’s common stockover the expected life of the option of 1.24 in 2004, 1.82 in 2003 and 1.62 in2002; and a weighted-average expected life of the option of 6.4 years in 2004,7.4 years in 2003 and 5.2 years in 2002.

Forpurposes of pro-forma disclosures, the estimated weighted average fair value ofoptions granted during the year of $.53, $.19 and $.23 in 2004, 2003 and 2002,respectively, is amortized to expense over the related vesting period.Pro-forma information is as follows:
| ** **                                                                                 | ** ** | **2004**                                                                      | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                                 | ** ** | **(In thousands  except for per share information)** | ** ** |
| Net income (loss)  as reported                                                             |       | $                                                                             | 3,184      |     | $          | (828     | )          | $ | (18,565 | ) |
| Deduct: total  stock-based employee compensation determined under fair value based methods |       | (155                                                                          | )          | (805     | )          | (2,109   | )          |
| Pro-forma net income (loss)                                                                |       | $                                                                             | 3,029      |     | $          | (1,633   | )          | $ | (20,674 | ) |
| Net income (loss)  per share as reported                                                   |       |                                                                          |       |     |       |     |       |
| Basic                                                                                      |       | .23                                                                           |       | (.06     | )          | (1.36    | )          |
| Diluted                                                                                    |       | .22                                                                           |       | (.06     | )          | (1.36    | )          |
| Pro-forma net  income (loss) per share                                                     |       |                                                                          |       |     |       |     |       |
| Basic                                                                                      |       | .21                                                                           |       | (.12     | )          | (1.51    | )          |
| Diluted                                                                                    |       | .21                                                                           |       | (.12     | )          | (1.51    | )          |

 

**Recent Accounting pronouncements**

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123R, “Share-Based Payment” (SFAS123R). This Statement is a revision of SFAS 123 and supersedes APB 25 and itsrelated implementation guidance. SFAS 123R requires a company to measure thegrant-date fair valueof equity awards given to employees in exchange for services andrecognize that cost over the period that such services are performed. SFAS 123Ris effective for the first interim or annual reporting period that begins afterJune 15, 2005.

The Company is currentlyevaluating the two methods of adoption allowed by SFAS 123R: the modified-prospective transition method andthe modified-retrospectivetransition method. Adoption of SFAS 123R may materially increase stockcompensation expense and decrease net income. In addition, SFAS 123Rrequires that the excess tax benefits related to stock compensation be reportedas a cash inflow from financing activities rather than as a reduction of taxespaid in cash from operations. Although the Company is in the process ofevaluating the impact of applying the various provisions of SFAS No. 123R,we expect that this statement may have a material impact on our results ofoperations.

34

----

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

**4. Saleof Patents**

In August 2002, theCompany entered into an agreement to sell all patents and pending applicationsup-front license fee of $1.25 million, a loan for an additional $1.25million which was forgiven at the closing, and an additional $2.4 million alsoreceived at the closing, the Company granted the Buyer a fully-paid,non-exclusive, non-transferable license under the patents and pendingapplications relating to the Company’s videoconferencing technology. Additionally,the Company retained a fully paid, non-exclusive, non-transferablelicense for use in connection with its videoconferencing and enterprisecollaboration products.

**5. Acquisitions**

In March 2001, the Company completed theacquisition of all of the operating assets and intellectual property of theInfoWorkSpace business unit of General Dynamics Electronic Systems for $17.0million in cash, of which the final payment of $2.0 million was paid in January 2002,400,000 shares of the Company’s common stock valued, for purposes of thetransaction, at $10.00 per share, and, pursuant to the terms of the purchaseagreement, the payment by the Company of approximately $1.0 million at theclosing to cover the seller’s transitional operating costs (net of revenueearned during the period) for the period between the signing of the purchaseagreement and the closing of the transaction. The acquisition was accounted foras a purchase. The 400,000 shares issued were accompanied by an option allowingthe seller to put the shares to the Company at $10.00 per share (the “PutAgreement”). The seller exercised the put option with respect to 110,000 sharesin January 2002, and the shares were reacquired at an aggregate price of$1.1 million. The Put Agreement, as amended (the “Amended Put Agreement”), gavethe seller the option to require the Company to repurchase the balance of290,000 shares in 2004, unless during a certain time period the last reportedclosing price of the common stock had been equal to or greater than $11.00 pershare for fifteen (15) consecutive trading days. As of December 31, 2002,common stock subject to the put option was reported as temporary equity.

In July 2003, in connection with an amendment toa software development agreement, the seller agreed to terminate the AmendedPut Agreement. Accordingly, as of December 31, 2003, the value associatedwith the 290,000 shares of common stock that are no longer subject to the putoption, was included within stockholders equity.

The total purchase priceand related acquisition costs were recorded as follows:
| ** **                  | ** ** | **(In thousands)** | ** ** |
|-----------------------------|------------|-------------------------|------------|
| Equipment and  improvements |       |                    | $          | 481 |   |   |
| Prepaid software  licenses  |       |                    | 1,124      |   |   |
| Goodwill                    |       |                    | 19,504     |   |   |
| Other intangible assets     |       |                    | 2,531      |   |   |
| Deferred revenue            |       |                    | (1,125     | ) |   |
|                        |       |                    | $22,515    |   |   |

 

Certain factors negatively impacted expected sales ofInfoWorkSpace product during 2001. During the fourth quarter of 2001, theCompany determined the fair value of InfoWorkSpace product line had declinedfrom the value at the date it was acquired. In accordance with SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets tobe Disposed Of, the Company evaluated the recoverability of its long-livedassets, including intangibles related to the InfoWorkSpace acquisition, anddetermined that the estimated future undiscounted cash flows were below theircarrying value at 

35

----

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

**5.Acquisitions (Continued)**

December 31, 2001. Accordingly,the Company recorded an impairment charge of approximately $6.3 million in thefourth quarter of 2001, to reflect its estimate of the impairment of goodwillassociated with the acquisition of InfoWorkSpace. The estimated fair value wasbased on anticipated future cash flows discounted at a rate of 18%, which theCompany considered to be commensurate with the risk involved.

Effective January 1, 2002, the Company adoptedthe provisions of Statement of Financial Accounting Standard (SFAS) No. 142,“Goodwill and Other Intangible Assets.” This statement affects the Company’streatment of goodwill and other intangible assets. The statement requires thatgoodwill existing at the date of adoption be reviewed for possible impairmentand that impairment tests be periodically repeated, with impaired assetswritten down to fair value. Additionally, existing goodwill and intangibleassets must be assessed and classified within the statement’s criteria. Intangibleassets with finite useful lives will continue to be amortized over thoseperiods, and amortization of goodwill and intangible assets with indeterminablelives will cease. As a result of the adoption of SFAS No. 142, certainintangible assets totaling approximately $865,000 were reclassified as goodwillas they did not meet the requirement for classification as intangible assetsunder SFAS No. 142.

The Company completed thefirst step of the transitional goodwill impairment test in June 2002 asrequired by SFAS No. 142 and determined that the fair value of its solereporting unit was less than its net assets indicating potential goodwillimpairment existed. The second step of the transitional goodwill impairmenttest was completed in December 2002, resulting in a write-off of allremaining goodwill. The impairment loss recognized is included in theaccompanying financial statements as a cumulative effect of a change inaccounting principle.

**6. Inventories**

Inventories consist primarily of finished goodsrelating to legacy video conferencing hardware equipment Historically, as adesigner, developer and manufacturer of videoconferencing hardware solutions,the Company 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 ofanticipated demand or is obsolete based upon our assumptions about futuredemand for our products and market conditions. When recorded, our reserves areintended to reduce the carrying value of our inventory to its net realizablevalue.

The Company provided for excess and obsolescencereserve of inventory of approximately $2.3 million in the year ended December 31,2002 due to the continued decline in demand relating to the legacyvideoconferencing product line. Based on a settlement agreement negotiated witha software vendor (see Note 6 to the financial statements), the Company laterincurred an additional write-down of inventory of approximately $1.4 million.

During the year ended December 31, 2004 theCompany was able to realize sales of its legacy videoconferencing hardwareproducts. The cost of these product sales was offset by the correspondingadjustments to reduce the related inventory reserves. At December 31,2004, our net inventory reserves are approximately $4.5 million, representing100% of the cost basis of our inventory. While the Company expects that therecould be additional sales of legacy videoconferencing hardware products afterthe year ended December 31, 2004, current accounting rules andrelated interpretations, specifically Accounting Research Bulletin No. 43(ARB 43), stipulate that our net inventory value cannot be marked up “based onchanges in underlying facts and circumstances”.

36

----

**7. Equipment and Improvements**

In theyear ended December 31, 2002, the Company wrote off all equipment andimprovements as a result of impairment and assets abandoned as part of a leasetermination. The Company made no purchases of equipment or improvements in theyear ended December 31, 2003. For the year ended December 31, 2004,the Company had the following activity:
| **(in thousands)**          | ** ** | ** ** | ** ** | **Cost** | ** ** | **Accumulated  Depreciation** | ** ** | **Net** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|-------------------------------|------------|---------|------------|
| Computer software  and equipment |       |       | $          | 65       |       |                          |       | $       | 5          |   |   | $ | 60 |   |
| Office equipment                 |       |       | 26         |     |       |                          | 3          |    |       | 23 |   |
| Furniture and  fixtures          |       |       | 2          |     |       |                          | —     |    |       | 2 |   |
|                             |       |       | $          | 93       |       |                          |       | $       | 8          |   |   | $ | 85 |   |

 

**8. Incometaxes**

Theprovision (benefit) for income taxes is as follows:
| ** ** | ** ** | **Year ended December 31** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** ** | ** ** | **(In thousands)**                   | ** ** |
| Current:   |       |                                      |       |   |   |   |   |   |   |   |   |
| Federal    |       |                                      | $          | (608 | ) |   |   | $ | (267 | ) |   | $ | (2,908 | ) |
| State      |       |                                      | —     |   |   |   | — |   |   | — |   |
| Foreign    |       |                                      | (819       | ) |   |   | — |   |   | 7 |   |
|       |       |                                      | $          | (1,427 | ) |   |   | $ | (267 | ) |   | $ | (2,901 | ) |

 

The amount reported as income tax benefit in 2004 isthe result of a $819 thousand net settlement reached with the ITC and a $608thousand refund received in connection with the 2002 carry back of netoperating losses incurred in 2001. The amount reported as income tax benefit in2003 is the result of the reversal of tax reserves recorded in prior years. Theamount reported as income tax benefit in 2002 is primarily a result of theFederal Job Creation and Worker Assistance Act of 2002, enacted in March 2002,which allowed the Company to carry back net operating losses incurred in 2001for a period of up to five years.

Thetotal income tax expense (benefit) differs from the income tax at the statutoryfederal income tax rate due to the following:
| ** **                                            | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                            | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                            | ** ** | ** **                                | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Federal income  tax at statutory rate                 |       |                                      | $          | 597 |   |   |   | $ | (373 | ) |   | $ | (6,498 | ) |
| State income  taxes, net of federal benefit           |       |                                      | 105        |   |   |   | — |   |   | (126 | ) |
| Foreign taxes,  net                                   |       |                                      | —     |   |   |   | — |   |   | 7 |   |
| Research and  development and other tax credits  |       |                                      | 708        |   |   |   | — |   |   | — |   |
| Valuation  allowance                                  |       |                                      | 1,965      |   |   |   | 1,038 |   |   | 3,978 |   |
| Prior year  refunds and reversal of reserves          |       |                                      | (1,427     | ) |   |   | (267 | ) |   | (250 | ) |
| Adjustment of  prior year                             |       |                                      | (4,127     | ) |   |   | — |   |   | — |   |
| Other                                                 |       |                                      | 752        |   |   |   | (665 | ) |   | (12 | ) |
| Total income tax  expense (benefit)                   |       |                                      | $          | (1,427 | ) |   |   | $ | (267 | ) |   | $ | (2,901 | ) |

 

37

----

**8. Incometaxes (Continued)**

The following is a summaryof the significant components of the Company’s deferred tax assets andliabilities:
| ** **                                                         | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                         | ** ** | **(In thousands)**              | ** ** |
| Deferred tax assets:                                               |       |                                 |       |   |   |   |   |
| Purchased intangibles                                              |       |                                 | $          | 6,013 |   |   | $ | 5,903 |   |
| Net operating loss carryforwards                                   |       |                                 | 21,400     |   |   | 18,512 |   |
| Research and development and other credits                         |       |                                 | 3,718      |   |   | 5,166 |   |
| Accruals and allowances not currently deductible for  tax purposes |       |                                 | 2,156      |   |   | 1,425 |   |
| Depreciation and other                                             |       |                                 | —     |   |   | 316 |   |
| Valuation allowance                                                |       |                                 | (33,287    | ) |   | (31,322 | ) |
| Total deferred  tax assets                                         |       |                                 | $          | — |   |   | $ | — |   |

 

At December 31, 2004,the Company has available federal and state net operating loss carryforwards ofapproximately $53 million expiring at various dates through 2024, federalresearch and development credit carryforwards of approximately $2,383,000 andstate and research and development credit carryforwards of approximately$921,000. Certain of the state NOL’s will begin to expire in 2005. 

**9. OtherIncome**

The Company 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 the Company receive $6.5 million in return for acovenant not to sue with respect to the patents that were the subject of thelitigation. The Company received the payment in 2000, net of foreign taxwithholding of $975 thousand, pending a resolution of certain tax mattersrelated to the settlement with the tax authorities in Israel. In April 2004,the Company reached a settlement agreement with the Israel Tax Commission(ITC), resulting in the receipt by the Company of cash proceeds related to thedisputed amount, net of interest earned, tax withholding, and settlement feesof approximately $179 thousand, of approximately $706 thousand.

**10. 2002 Restructuring and Cost Reduction Plans**

In 2002, the Companyimplemented a restructuring and cost reduction plan, which consisted of thetermination of 55 employees (approximately 50% of its workforce), closing itsforeign sales operations and significantly reducing sales and service operationof its videoconferencing product lines. The reduction in workforce covered allfunctional areas, including research and development, sales and marketing,general and administrative, manufacturing and technical support. Cost of therestructuring was approximately $400,000, consisting principally of severancepayments to Foreign Service employees, and was paid by December 31, 2002.

**11. Commitments and Contingencies**

The Company’s contractual obligations relate primarilyto its facilities leases and a contractual purchase commitment. The Companyleases its primary facility in Burlington, Massachusetts, under an operatinglease, which expires in July 2005. The Company plans to move its primaryfacility to Nashua, New Hampshire, and has entered into a new operating lease,effective March 15, 2005, expiring in 2010 (the “Nashua Lease”). TheCompany also has three other leases for office space in the United States, 

38

----

**11.Commitments and Contingencies (Continued)**

located in ColoradoSprings, Colorado, Sterling, Virginia, and Alexandria, Virginia for sales,development and technical support operations. On February 28, 2005 the Companyentered into a new five year operating lease to move its’ Alexandria, Virginiasales and service office to a new facility in Sterling, Virginia. At the sametime, the Company entered into a sublease agreement to lease its’ Alexandria,Virginia facility for the remaining 14 months of the Company’s lease term. Withthe move, the Company will lower its’ overall facility costs in Virginia. Theseleases expire at various dates through March 2010. Rent expense wasapproximately $278,000, $361,000 and $1,075,000 in 2004, 2003 and 2002,respectively.

Thefollowing table summarizes our outstanding contractual obligations:
| ** **                     | ** ** | **2005**                | ** ** | **2006-2008** | ** ** | **2009-2010** | ** ** | **Total** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------|------------|---------------|------------|-----------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Operating leases               |       | $                       | 296        |          |       | $             | 375        |      |       |   | $ | 86 |   |   | $ | 757 |   |
| Purchase  commitments          |       | 3,000                   |       |          | —     |          |       |      | —     |   |   | 3,000 |   |
| Total contractual  obligations |       | $                       | 3,296      |          |       | $             | 375        |      |       |   | $ | 86 |   |   | $ | 3,757 |   |

 

Purchase commitments represent obligations underagreements, which are not unilaterally cancelable by us, are legallyenforceable, and specify fixed or minimum amounts of goods or services at fixedor minimum prizes.

The Company is subject toa variety of claims and suits that arise from time to time in the ordinarycourse of its business. Currently, the Company is the defendant in twoemployment related suits filed during the fourth quarter of 2004, which we denythe allegations and are vigorously defending. As of December 31, 2004 the Companyhas accrued approximately $160 thousand related to potential damages the Companymay incur as a result of these suits. While management currently believes, thatresolving these suits, individually or in the aggregate, will not have amaterial adverse impact on our financial position or our results of operations,the claims and litigation noted above are subject to inherent uncertainties andmanagement’s view of these matters may change in the future.

**12. Preferred Stock**

The Company has authorized2,000,000 shares of undesignated Preferred Stock. Each series of PreferredStock shall have such rights, preferences, privileges and restrictions,including voting rights, dividend rights, conversion rights, redemptionprivileges and liquidation preferences as determined by the Board of Directors.

**13. BenefitPlans**

**Stock option plans**

The Company’s Amended andRestated 1991 Stock Incentive Plan (the “1991 Plan”) provided for the sale oraward of common stock, or the grant of incentive stock options or nonqualifiedstock options for the purchase of common stock, for up to 6,090,541 shares toofficers, employees and consultants. The 1991 Plan terminated on March 31,2001, and no further options have been granted under the 1991 Plan subsequentto that date. At December 31, 2004, there were 766,252 shares reserved forissuance under the 1991 Plan.

The 2001 Stock IncentivePlan was approved and adopted by the Board of Directors on April 11, 2001.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, 

39

----

**13. Benefit Plans (Continued)**

employees and consultantsof the Company. Vesting of options granted under the 2001 Stock Incentive Planaccelerate upon change of control or acquisition as defined in the 2001 StockIncentive Plan. The 2001 Stock Incentive Plan was terminated on December 31,2004 and no further options are permitted to be granted under the 2001 Plansubsequent to this date. At of December 31, 2004, there are 630,969 sharesof common stock reserved to be issued upon exercise of outstanding optionsgranted under the 2001 Stock Incentive Plan.

The 2004 Stock IncentivePlan was approved and adopted by the Board of Directors on December 31,2004. The 2004 Stock Incentive Plan provides for the sale or award of commonstock or the grant of non-qualified stock options 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 accelerate upon change of control or acquisition asdefined in the 2004 Stock Incentive Plan. As of December 31, 2004, theCompany has reserved 7,500,000 shares of common stock for issuance under the2004 Stock Incentive Plan, and no options had been granted. The 2004 StockIncentive Plan will terminate December 31, 2014.

**1994 Non-employeedirector stock option plan**

In April 1995, the Board ofDirectors and shareholders approved the Director Plan, which was most recentlyamended by the Board of Directors on June 5, 2002. The Director Planprovides that the Board of Directors, at its discretion, is permitted to grantoptions to non-employee directors, subject to terms and conditions asdetermined by the Board of Directors. No options may be granted after the tenthanniversary of the date of adoption of the Director Plan and no person may begranted options under the Director Plan to purchase more than an aggregate of45,000 shares of Common Stock. Options are granted at a price equal to the fairmarket value on the date of grant. Unless otherwise specified by the Board ofDirectors at the time of grant, options granted under the Director Plan becomeexercisable over a four-year period, and the term of the options is ten yearsfrom the date of grant. The Director Plan terminated on November 9,2004, and no further options are to be granted under the Director Plansubsequent to that date. At December 31, 2004, there were 70,000 sharesreserved for issuance under the Director Plan.

A summary of optionactivity under the 2004 Stock Incentive Plan, 2001 Stock Incentive Plan, the1991 Plan and the Director Plan is as follows:
| ** **                             | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at  December 31, 2001 |       | 2,638,012  |       |                                   | $          | 5.74 |   |   |
| Granted                                |       | 1,259,475  |       |                                   | .23        |   |   |
| Terminated                             |       | (1,811,410 | )          |                                   | 3.17       |   |   |
| Exercised                              |       | (1,750     | )          |                                   | .29        |   |   |
| Outstanding at  December 31, 2002 |       | 2,084,327  |       |                                   | $          | 4.66 |   |   |
| Granted                                |       | 770,250    |       |                                   | .19        |   |   |
| Terminated                             |       | (981,125   | )          |                                   | 3.76       |   |   |
| Exercised                              |       | (66,750    | )          |                                   | .15        |   |   |
| Outstanding at  December 31, 2003 |       | 1,806,702  |       |                                   | $          | 3.29 |   |   |
| Granted                                |       | 337,750    |       |                                   | .53        |   |   |
| Terminated                             |       | (220,450   | )          |                                   | 1.07       |   |   |
| Exercised                              |       | (485,781   | )          |                                   | .22        |   |   |
| Outstanding at December 31, 2004  |       | 1,438,221  |       |                                   | $          | 4.02 |   |   |

 

40

----

**13.Benefit Plans (Continued)**

Related information foroptions outstanding and exercisable as of December 31, 2004 under theseoption 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** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| $.11 - $.90                                 |       | 654,469    |       |                     | 8.38       |                                                        |       |                                           | $          | .18                      |       |                                           | 307,502    |   |   | $ | .19 |   |   |
| 1.25 - 3.00                                 |       | 136,000    |       |                     | 6.58       |                                                        |       |                                           | 1.55       |                     |       | 111,095                                        |       |   | 1.77 |   |   |
| 3.63 - 7.88                                 |       | 397,752    |       |                     | 3.96       |                                                        |       |                                           | 7.71       |                     |       | 397,752                                        |       |   | 7.71 |   |   |
|   9.13                            |       | 250,000    |       |                     | 5.14       |                                                        |       |                                           | 9.13       |                     |       | 250,000                                        |       |   | 9.13 |   |   |
|                                        |       | 1,438,221  |       |                     | 6.42       |                                                        |       |                                           | $          | 3.94                     |       |                                           | 1,066,349  |   |   | 5.25 |   |   |

 

**Employee stock purchase plan**

The Company’s 1995Employee Stock Purchase Plan (the “ 1995 Employee Stock Purchase Plan”)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 forissuance under the 1995 Employee Stock Purchase Plan. No shares were issuedunder the 1995 Employee Stock Purchase Plan during fiscal year 2004, 2003, and2002. As of December 31, 2004, 555,081 shares have been issued pursuant tothe 1995 Employee Stock Purchase Plan.

**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 tothe 401(k) plan through payroll deductions within statutory and planlimits. Contributions from the Company are made at the discretion of the Boardof Directors and approximated $18,000 in 2004, $30,000 in 2003 and $85,000 in2002.

**14. Quarterlyfinancial information (unaudited)**
| ** **                     | ** ** | **Quarter ended** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2004                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                        |       | $                      | 2,625      |   | $ | 2,486 |   |   | $ | 2,498 |   |   |   | $ | 2,782 |   |   |
| Gross profit                   |       | 1,578                  |       | 1,606 |   |   | 1,622 |   |   |   | 2,004 |   |   |
| Income (loss) from  operations |       | 406                    |       | 387 |   |   | 422 |   |   |   | 592 |   |   |
| Net income (loss)              |       | 409                    |       | 1,103 |   |   | 427 |   |   |   | 1,245 |   |   |
| Net income (loss) per share:   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic                          |       | .03                    |       | .08 |   |   | .03 |   |   |   | .09 |   |   |
| Diluted                        |       | .03                    |       | .08 |   |   | .03 |   |   |   | .08 |   |   |
| 2003                           |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Revenue                        |       | $                      | 2,400      |   | $ | 2,065 |   |   | $ | 1,602 |   |   |   | $ | 2,150 |   |   |
| Gross profit                   |       | 1,548                  |       | 913 |   |   | 598 |   |   |   | 1,430 |   |   |
| Income (loss) from  operations |       | (125                   | )          | (647 | ) |   | (619 | ) |   |   | 274 |   |   |
| Net income (loss)              | ** ** | (122                   | )          | (644 | ) |   | (619 | ) |   |   | 557 |   |   |
| Net income (loss) per share:   |       |                   |       |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted              | ** ** | (.01                   | )          | (.05 | ) |   | (.05 | ) |   |   | .04 |   |   |

 

41

----

**15. Subsequent events**

On March 15, 2005, theCompany entered into a five year operating lease to move its primary facilitylocated in Burlington, Massachusetts to a new facility located in Nashua, NewHampshire. Also with this move, the Company will lower its overall facilitycosts for its primary facility.

**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

The Company’s management, including the personcurrently acting as both the chief executive officer and the chief financialofficer, carried out an evaluation of the effectiveness of the Company’sdisclosure controls and procedures, as of the end of the period covered by thisreport. Based on this evaluation, the Company’s chief executive officer andchief financial officer concluded that the Company’s disclosure controls andprocedures were effective to provide a reasonable level of assurance that theinformation required to be disclosed on the reports filed or submitted by theCompany under the Securities Exchange Act of 1934 was recorded, processed,summarized, and reported within the requisite time periods, including ensuringthat such material information is accumulated and communicated to the Company’smanagement to allow timely decisions regarding required disclosure. There wereno changes in the Company’s internal control over financial reporting thatoccurred during the quarter ended December 31, 2004 that materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The design of any systemof controls also is based in part upon certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving it stated goals under all potential future conditions; over time,control may become inadequate because of changes in conditions, or the degreeof compliance with the policies or procedures may deteriorate. Because of theinherent limitations in a cost-effective control system, misstatements due toerror or fraud may occur and not be detected.

 

42

----

**PART III**

**ITEM 10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

Information with respect to Directors and compliancewith Section 16(a) of the Securities Exchange Act may be found in thesections captioned, “Proposal No. 1—Election of Directors” and “Section 16(a)—BeneficialOwnership Reporting Compliance” appearing in the definitive Proxy Statement tobe delivered to shareholders in connection with the Annual Meeting ofShareholders to be held on May 25, 2005. Such information is incorporatedherein by reference. Information with respect to Executive Officers may befound under the section captioned, “Executive Officers of the Registrant” in Part I.

The Company has adopted,ratified and approved a Code of Business Conduct and Ethics (the “Code”) that appliesto all of the Company’s employees, including its executive officer, anddirectors. The Company shall also provide to any person without charge, uponrequest, a copy of the Code. Any such request must be made in writing to theCompany, c/o Investor Relations, Northwest Park, 154 Middlesex Turnpike,Burlington, Massachusetts 01803.

**ITEM 11.**         EXECUTIVE COMPENSATION

The information requiredwith respect to this item may be found in the sections captioned “ExecutiveCompensation and Other Information Concerning Directors and Executive Officers”appearing in the definitive Proxy Statement to be delivered to shareholders inconnection with the Annual Meeting of Shareholders to be held on May 25,2005. Such information is incorporated herein by reference.

**ITEM 12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information found inthe section captioned, “Security Ownership of Certain Beneficial Owners andManagement” appearing in the definitive Proxy Statement to be delivered toshareholders in connection with the Annual Meeting of Shareholders to be heldon May 25, 2004 is incorporated herein by reference.

**EquityCompensation Plan Information**

Thefollowing table sets forth information as of December 31, 2004 about theCompany’s equity compensation plans under which shares of its common stock areauthorized for issuance.
| **Plan Category**                                      | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                              | ** ** | **(c)**                                                                                                     | ** ** |
| Equity  compensation plans approved by security holders     |       |       | 807,252    | (1)                                                                                                                                                  |       |                                                                                                        | $          | 6.92                                                                                                                                                                                                                 |       |   |   | 344,919 | (2) |   |
| Equity  compensation plans not approved by security holders |       |       | 630,969    | (3)                                                                                                                                                  |       |                                                                                                        | $          | 0.33                                                                                                                                                                                                                 |       |   |   | 7,500,000 | (4) |   |
| Total                                                       |       |       | 1,438,221  |                                                                                                                                                 |       |                                                                                                        | $          | 3.94                                                                                                                                                                                                                 |       |   |   | 7,844,919 |   |   |

----

(1)          Includes 766,252 sharesof common stock to be issued upon exercise of outstanding options under theAmended and Restated 1991 Stock Incentive Plan and 41,000 shares of commonstock to be issued upon exercise of outstanding options under the 1994Non-Employee Director Option Plan.

(2)          Includes 344,919 sharesof common stock remaining available for future issuance under the 1995 EmployeeStock Purchase Plan. The Amended and Restated 1991 Stock Incentive Planterminated on 

43

----

March 31, 2001, andthe Non Employee Director Option Plan terminated on November 9, 2004, andno additional options may be granted under these plans.

(3)          Represents shares ofcommon stock to be issued upon exercise of outstanding options under the 2001Stock Incentive Plan.

(4)          Represents shares ofcommon stock remaining available for future issuance under the 2004 StockIncentive Plan.

A description of the StockIncentive Plans is included in Note 13 to the Company’s Consolidated FinancialStatements set forth herein.

**ITEM 13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

The information requiredwith respect to this item may be found in the section captioned, “CertainTransactions” appearing in the definitive Proxy Statement to be delivered toshareholders in connection with the Annual Meeting of Shareholders to be heldon May 25, 2004. Such information is incorporated herein by reference.

**ITEM 14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES

**AuditFees**

The aggregate fees billedfor professional services rendered by Brown & Brown LLP and Ernst &Young LLP for the audit of the Company’s annual financial statements for thefiscal year ended December 31, 2004 and 2003 totaled approximately $92,000and $54,000 respectively.

**Audit-Related Fees**

The aggregate fees billedfor professional services rendered by Brown & Brown, LLP for assuranceand related services that are reasonably related to the performance of theaudit or review of the Company’s annual financial statements for the fiscalyears ended December 31, 2004 and 2003 totaled approximately $30,000 and$10,500 respectively. Such services consisted of a review of the Company’s 2004and 2003 quarterly reports filed on Form 10-Q.

**TaxFees**

The aggregate fees billedfor professional services rendered by Brown & Brown, LLP and Gray,Gray and Gray, LLP for tax compliance, tax advice and tax planning services forthe fiscal years ended December 31, 2004 and 2003 totaled approximately$10,000 and $26,500 respectively. Such services consisted of the preparationand filing of the federal and state tax returns for year ended December 31,2003, 2002 and 2001.

**All Other Fees**

The aggregate fees billedfor all other services rendered by Gray, Gray and Gray, LLP and Ernst &Young LLP for fiscal years ended December 31, 2004 and 2003 totaledapproximately $31,000 and $40,750 respectively. Such services consisted ofaudits of the Company’s 401K plan, GAAP related research, business operationadvisory services, and various matters relating to SEC compliance.

44

----

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

**(a)   Documents Filed as Part of Form 10-K**

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

The followingconsolidated financial statements and supplementary data are included in Part II-Item 8filed as part of this report:

·       Reportsof Independent Auditors

·       ConsolidatedBalance Sheets as of December 31, 2004 and 2003

·       ConsolidatedStatements of Operations for the years ended December 31, 2004, 2003 and2002

·       ConsolidatedStatements of Stockholders’ Equity for the years ended December 31, 2004,2003 and 2002

·       ConsolidatedStatements of Cash Flows for the years ended December 31, 2004, 2003 and2002

·       Notesto Consolidated Financial Statements

·       QuarterlyFinancial Information (unaudited)

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

·       ScheduleII—Valuation and Qualifying Accounts

Schedules notlisted above have been omitted because they are not applicable, not required orthe information required is shown in the consolidated financial statements orthe notes thereto.

**3.****                 Listof Exhibits.**
| Exhibit   Number | ** ** | ** **                                                                                                                                                                               | ** ** | **Description of Exhibit** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 3.1*             |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                                                    |
| 3.2*             |       | Amended and Restated By-Laws of the Registrant.                                                                                                                                          |
| 4.1*             |       | Specimen Stock Certificate.                                                                                                                                                              |
| 10.1*+           |       | Amended and Restated 1991 Stock Incentive Plan of  the Registrant.                                                                                                                       |
| 10.2*            |       | Amended and Restated 1994 Non-Employee Director  Option Plan of the Registrant.                                                                                                          |
| 10.3*+           |       | 1995 Employee Stock Purchase Plan of the Registrant.                                                                                                                                     |
| 10.4             |       | 2004 Stock Incentive Plan                                                                                                                                                                |
| 10.15*           |       | License Agreement dated January 2, 1995 between  the Registrant and Datapoint Corporation.                                                                                          |
| 10.16*           |       | Letter Agreement dated December 31, 1994  between the Registrant and Fleet Bank of Massachusetts, N.A.                                                                              |
| 10.17********    |       | Lease for 154 Middlesex Turnpike, Burlington, MA  dated as of June 26, 2002 between the Registrant and Peter C. Nordblom and John Macomber, as  Trustees of N.W. Building 24 Trust. |
| 10.19***+        |       | Employment Agreement dated January 22, 1998  between the Registrant and Khoa D. Nguyen.                                                                                             |
| 10.20****        |       | Asset Purchase Agreement dated as of  December 28, 2000 between the Registrant and General Dynamics Government  Systems Corporation, as amended.                                    |
| 10.21(a)*****    |       | Put Agreement dated as of March 27, 2001 (as  amended to date) by and between the Registrant and General Dynamics  Government Systems Corporation.                                  |

45

----

 
| 10.21(b)******** |   | Agreement and Release dated as of December 31,  2002 by and between the Registrant and General Dynamics Government Systems  Corporation.                                                                 |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22******+     |   | 2001 Stock Incentive Plan of the Registrant.                                                                                                                                                                  |
| 10.23*******     |   | Asset Purchase Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                                                     |
| 10.24*******     |   | License Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                                                            |
| 10.25*******     |   | Promissory Note dated as of August 1, 2002 made  by the Registrant in favor of Tandberg Telecom AS.                                                                                                      |
| 10.26*******     |   | Security Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                                                           |
| 10.27*******     |   | Ezenia! License Agreement dated as of  October 30, 2002 between the Registrant and Tandberg Telecom AS.                                                                                                  |
| 21.1             |   | Subsidiaries of the Registrant.                                                                                                                                                                               |
| 23.1             |   | Consent of Ernst & Young, LLP to be filed  by amendment.                                                                                                                                             |
| 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. |

 

Copies of any of these exhibits are available withoutcharge upon written request to Investor Relations, Ezenia! Inc., NorthwestPark, 154 Middlesex Turnpike, Burlington, MA 01803.

(Note: The Companyagrees to furnish to the Securities and Exchange Commission upon request a copyof any instrument with respect to long-term debt of the Company or any of itssubsidiaries which is not filed herewith or listed herein since it relates tooutstanding debt in an amount not greater than 10% of the total assets of theCompany and its subsidiaries on a consolidated basis.)

----

 
| +        |   | Management contract for compensatory plan or  arrangement required to be filed as an exhibit to this report pursuant to  Item 15(c) of this report.                 |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *        |   | Incorporated by reference from the Company’s  Registration Statement on Form S-1.                                                                              |
| **       |   | Incorporated by reference from the Company’s  Form 10-K filed with the Securities and Exchange Commission for  the year ended December 31, 1995.          |
| ***      |   | Incorporated by reference from the Company’s  Form 10-K filed with the Securities and Exchange Commission for  the year ended December 31, 1998.          |
| ****     |   | Incorporated by reference from the Company’s  Form 10-K filed with the Securities and Exchange Commission for  the year ended December 31, 2000.          |
| *****    |   | Incorporated by reference from the Company’s  Form 10-Q for the quarter ended September 30, 2001.                                                         |
| ******   |   | Incorporated by reference from the Company’s  Registration Statement on Form S-8 filed with the Securities and  Exchange Commission on December 21, 2001. |
| *******  |   | Incorporated by reference from the Company’s  Form 10-Q for the quarter ended September 30, 2002.                                                         |
| ******** |   | Incorporated by reference from the Company’s  Form 10-K filed with the Securities and Exchange Commission for  the year ended December 31, 2002.          |

 

46

----

 

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|            | EZENIA! INC. |
|------------|--------------|
| ** ** | By:          | /s/  KHOA D. NGUYEN |
|       |         | Khoa D. Nguyen |
|       | * *     | *Chairman,  Chief Executive Officer, President and* |
|       | * *     | *Chief  Financial Officer* |
|       | * *     | *(Principal  Financial and Accounting Officer,* |
|       | * *     | *Authorized  Officer)* |
| ** ** | * *     | *Date: March 31, 2005* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on its behalf of the Registrant andin the capacities and on the dates indicated.
|                        | **Signature** | ** **                                                         | ** **          | ** ** | **Title** | ** ** | ** ** | **Date** | ** ** |
|------------------------|---------------|--------------------------------------------------------------------|---------------------|------------|-----------|------------|------------|----------|------------|
| /s/ KHOA D.  NGUYEN    |          | Chairman, Chief  Executive Officer,                                | March 31, 2005 |
| Khoa  D. Nguyen        |          | President and Chief Financial Officer                              |                |
|                   |          | (Principal  Financial and Accounting Officer,  Authorized Officer) |                |
| /s/ RONALD L.  BRELAND |          | Director                                                           | March 31, 2005 |
| Ronald  L. Breland     |          |                                                               |                |
| /s/ GERALD P.  CARMEN  |          | Director                                                           | March 31, 2005 |
| Gerald P. Carmen       |          |                                                               |                |

 

47

----

**EZENIA! INC.SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**
| **Column A—Description**           | ** ** | ** ** | ** ** | **Column B**                              | ** ** | **Column C—Additions**                          | ** ** | **Column D**                    | ** ** | **Column E**                                          | ** ** |
|----------------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------|------------|
| **Accounts Receivable Allowances** | ** ** | ** ** | ** ** | **Balance At  Beginning Of  Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions—  Uncollectible  Accounts  Written-off** | ** ** | **Balance at  End of  Period** | ** ** |
| Year Ended  December 31, 2004           |       | $          | 1,068,262  |                                           |       | (110,000                                                  | )          |                                 |       | —                                                     |       |   |   | (587,566 | ) |   | $ | 370,696 |   |
| Year Ended  December 31, 2003           |       | $          | 1,096,009  |                                           |       | (50,000                                                   | )          |                                 |       | 276,589                                                    |       |   |   | (254,336 | ) |   | $ | 1,068,262 |   |
| Year Ended  December 31, 2002           |       | $          | 914,018    |                                           |       | 250,000                                                   |       |                                 |       | —                                                     |       |   |   | (68,009 | ) |   | $ | 1,096,009 |   |
|                                              |            |            |            |                                                |            |                                                           |            |                                      |            |                                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

48

----

**Exhibit Index**
| Exhibit  Number  | ** ** | ** **                                                                                                                                                                                                    | ** ** | **Description of Exhibit** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|
| 3.1*             |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                                                                                         |
| 3.2*             |       | Amended and Restated By-Laws of the Registrant.                                                                                                                                                               |
| 4.1*             |       | Specimen Stock Certificate.                                                                                                                                                                                   |
| 10.1*+           |       | Amended and Restated 1991 Stock Incentive Plan of  the Registrant.                                                                                                                                            |
| 10.2*            |       | Amended and Restated 1994 Non-Employee Director  Option Plan of the Registrant.                                                                                                                               |
| 10.3*+           |       | 1995 Employee Stock Purchase Plan of the Registrant.                                                                                                                                                          |
| 10.4             |       | 2004 Stock Incentive Plan                                                                                                                                                                                     |
| 10.15*           |       | License Agreement dated January 2, 1995 between  the Registrant and Datapoint Corporation.                                                                                                               |
| 10.16*           |       | Letter Agreement dated December 31, 1994  between the Registrant and Fleet Bank of Massachusetts, N.A.                                                                                                   |
| 10.17********    |       | Lease for 154 Middlesex Turnpike, Burlington, MA  dated as of June 26, 2002 between the Registrant and Peter C. Nordblom and John Macomber, as  Trustees of N.W. Building 24 Trust.                      |
| 10.19***+        |       | Employment Agreement dated January 22, 1998  between the Registrant and Khoa D. Nguyen.                                                                                                                  |
| 10.20****        |       | Asset Purchase Agreement dated as of  December 28, 2000 between the Registrant and General Dynamics Government  Systems Corporation, as amended.                                                         |
| 10.21(a)*****    |       | Put Agreement dated as of March 27, 2001 (as  amended to date) by and between the Registrant and General Dynamics  Government Systems Corporation.                                                       |
| 10.21(b)******** |       | Agreement and Release dated as of December 31,  2002 by and between the Registrant and General Dynamics Government Systems  Corporation. 2001 Stock Incentive Plan of the Registrant.                    |
| 10.22******+     |       |                                                                                                                                                                                                          |
| 10.23*******     |       | Asset Purchase Agreement dated as of August 1,  2002 between the Registrant and Tandberg Telecom AS.                                                                                                     |
| 10.24*******     |       | License Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                                                            |
| 10.25*******     |       | Promissory Note dated as of August 1, 2002 made  by the Registrant in favor of Tandberg Telecom AS.                                                                                                      |
| 10.26*******     |       | Security Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                                                           |
| 10.27*******     |       | Ezenia! License Agreement dated as of  October 30, 2002 between the Registrant and Tandberg Telecom AS.                                                                                                  |
| 21.1             |       | Subsidiaries of the Registrant.                                                                                                                                                                               |
| 23.1             |       | Consent of Ernst & Young, LLP to be filed  as an amendment                                                                                                                                           |
| 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. |

----

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

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

49

----

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

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

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

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

******                         Incorporatedby reference from the Company’s Registration Statement on Form S-8 filedwith the Securities and Exchange Commission on December 21, 2001.

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

********           Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2002.

50

----