# **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

# **FORM 10-Q**

# ** **

**(Mark one)**
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|------------|------------|----------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2005**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**For thetransition period from                   to                   .**

 

**CommissionFile No.: 000-20698**

 

**BROOKTROUT, INC.**

(Exact Name of Registrant asSpecified in Its Charter)

 
| **MASSACHUSETTS**                                                | ** ** | **04-2814792**                         |
|------------------------------------------------------------------|------------|----------------------------------------|
| (State or  Other Jurisdiction  of Incorporation or Organization) |       | (I.R.S.  Employer  Identification No.) |

 

**250 FIRSTAVENUE, NEEDHAM, MASSACHUSETTS 02494**

(Address of Principal ExecutiveOffices) (Zip Code)

 

Registrant’s telephone number,including area code: **(781) 449-4100**

 

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

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý       No o

 

As of April 28, 2005, 12,693,812 sharesof common stock, $0.01 par value per share, were outstanding.

 

 

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**BROOKTROUT, INC.FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2005**

 

**TABLE OFCONTENTS**

 
| ** **                              | **Page** |
|-----------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION** |     |
| Item 1.                                 |     | Unaudited Condensed Consolidated Financial  Statements | 1 |
|                                    |     | Unaudited Condensed Consolidated Balance  Sheets as of March 31, 2005 and December 31, 2004 | 1 |
|                                    |     | Unaudited Condensed Consolidated Statements  of Operations for the Three Months Ended March 31, 2005 and March 31,  2004 | 2 |
|                                    |     | Unaudited Condensed Consolidated Statements  of Comprehensive (Loss) Income for the Three Months Ended March 31, 2005  and March 31, 2004 | 3 |
|                                    |     | Unaudited Condensed Consolidated Statements  of Cash Flows for the Three Months Ended March 31, 2005 and March 31,  2004 | 4 |
|                                    |     | Notes to Unaudited Condensed Consolidated  Financial Statements | 5 |
| Item 2.                                 |     | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 11 |
|                                    |     | Overview | 11 |
|                                    |     | Application of Critical Accounting Policies | 11 |
|                                    |     | Results of Operations | 12 |
|                                    |     | Liquidity and Capital Resources | 14 |
|                                    |     | Recent Accounting  Pronouncement | 16 |
|                                    |     | Factors That May Affect Future Results | 16 |
| Item 3.                                 |     | Quantitative and Qualitative Disclosures  About Market Risk | 24 |
| Item 4.                                 |     | Controls and Procedures | 25 |
|                                    |     |   |   |
| **PART II – OTHER INFORMATION**    |     |
| Item 2.                                 |     | Unregistered Sales of Equity Securities and  Use of Proceeds | 26 |
| Item 6.                                 |     | Exhibits | 26 |
|                                    |     | Signatures | 27 |
|                                    |     | Exhibit  Index | 28 |

 

“BROOKTROUT” and the “NEW NETWORK” are trademarks or registeredtrademarks of Brooktrout, Inc.

 

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**PART I –FINANCIAL INFORMATION**

 

**Item 1. Unaudited Condensed Consolidated Financial Statements**

 

**BROOKTROUT, INC.UNAUDITED CONDENSEDCONSOLIDATED BALANCE SHEETS***(in thousands, exceptshare and per share data)*

 
| ** **                                                                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                           | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| **Assets**                                                                                                                                           |       |               |       |                  |       |
| Current  assets:                                                                                                                                     |       |               |       |                  |       |
| Cash and  cash equivalents                                                                                                                           |       | $                  | 12,642     |                  | $          | 18,452 |   |
| Marketable  debt securities                                                                                                                          |       | 38,163             |       | 34,250                |       |
| Accounts  receivable, less allowances for doubtful accounts and sales returns of $1,037  at March 31, 2005 and $1,048 at December 31, 2004 |       | 7,757              |       | 10,346                |       |
| Inventory                                                                                                                                            |       | 4,434              |       | 4,118                 |       |
| Income tax  receivable                                                                                                                               |       | 826                |       | 810                   |       |
| Deferred tax  assets                                                                                                                                 |       | 3,317              |       | 3,286                 |       |
| Prepaid  expenses and other current assets                                                                                                           |       | 1,966              |       | 2,096                 |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total  current assets                                                                                                                                |       | 69,105             |       | 73,358                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Equipment  and furniture, less accumulated depreciation and amortization of $17,113 at March 31,  2005 and $16,799 at December 31, 2004    |       | 2,646              |       | 2,477                 |       |
| Deferred tax  assets                                                                                                                                 |       | 16,022             |       | 15,492                |       |
| Intangible  assets, less accumulated amortization of $10,325 at March 31, 2005 and  $9,986 at December 31, 2004                            |       | 5,319              |       | 5,658                 |       |
| Other  assets, less accumulated amortization of $2,772 at March 31, 2005 and  $2,622 at December 31, 2004                                  |       | 2,042              |       | 2,092                 |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total assets                                                                                                                                         |       | $                  | 95,134     |                  | $          | 99,077 |   |
|                                                                                                                                                 |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                       |       |               |       |                  |       |
| Current  liabilities:                                                                                                                                |       |               |       |                  |       |
| Accounts  payable                                                                                                                                    |       | $                  | 5,438      |                  | $          | 5,776 |   |
| Accrued  expenses                                                                                                                                    |       | 5,726              |       | 6,369                 |       |
| Accrued  compensation and commissions                                                                                                                |       | 2,417              |       | 3,093                 |       |
| Accrued  warranty costs                                                                                                                              |       | 1,252              |       | 1,248                 |       |
| Customer  deposits                                                                                                                                   |       | 828                |       | 709                   |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total  current liabilities                                                                                                                           |       | 15,661             |       | 17,195                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Long-term  liabilities                                                                                                                               |       | 169                |       | 192                   |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total  liabilities                                                                                                                                   |       | 15,830             |       | 17,387                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Commitments  and contingencies (Note 8)                                                                                                              |       |               |       |                  |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                                          |       |               |       |                  |       |
| Preferred  stock, $1.00 par value; authorized 100,000 shares; issued and outstanding,  none                                                          |       | —             |       | —                |       |
| Common  stock, $0.01 par value; authorized 80,000,000 shares; issued 12,691,949 at March 31,  2005 and 12,786,604 at December 31, 2004     |       | 127                |       | 128                   |       |
| Additional  paid-in capital                                                                                                                          |       | 64,266             |       | 66,065                |       |
| Accumulated  other comprehensive loss                                                                                                                |       | (241               | )          | (143                  | )          |
| Notes  receivable — officers                                                                                                                    |       | (9,845             | )          | (9,845                | )          |
| Retained  earnings                                                                                                                                   |       | 24,997             |       | 25,485                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total  stockholders’ equity                                                                                                                     |       | 79,304             |       | 81,690                |       |
|                                                                                                                                                 |       |               |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                                     |       | $                  | 95,134     |                  | $          | 99,077 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

1

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**BROOKTROUT, INC.UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS***(in thousands, except pershare data)*

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                   |       |                                   |       |   |   |
| Revenue                                                |       | $                                      | 17,850     |   | $ | 18,693 |   |
| Costs and  expenses:                                   |       |                                   |       |   |   |
| Cost of  product sold                                  |       | 5,483                                  |       | 5,968 |   |
| Research and  development                              |       | 4,864                                  |       | 4,485 |   |
| Selling,  general and administrative                   |       | 8,509                                  |       | 8,118 |   |
| Total costs  and expenses                              |       | 18,856                                 |       | 18,571 |   |
|                                                   |       |                                   |       |   |   |
| Operating  (loss) income                               |       | (1,006                                 | )          | 122 |   |
| Other  income, net                                     |       | 320                                    |       | 182 |   |
|                                                   |       |                                   |       |   |   |
| (Loss)  income before income taxes                     |       | (686                                   | )          | 304 |   |
| Income tax  (benefit) provision                        |       | (198                                   | )          | 122 |   |
|                                                   |       |                                   |       |   |   |
| Net (loss)  income                                     |       | $                                      | (488       | ) | $ | 182 |   |
|                                                   |       |                                   |       |   |   |
| Net (loss)  income per common share, basic and diluted |       | $                                      | (0.04      | ) | $ | 0.01 |   |
| Weighted  average shares outstanding, basic            |       | 12,766                                 |       | 12,854 |   |
| Weighted  average shares outstanding, diluted          |       | 12,766                                 |       | 14,305 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

2

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**BROOKTROUT, INC.UNAUDITED CONDENSEDCONSOLIDATED STATEMENTS OFCOMPREHENSIVE (LOSS) INCOME***(in thousands)*

 
| ** **                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                      |       |                                   |       |   |   |
| Net (loss)  income                                                        |       | $                                      | (488       | ) | $ | 182 |   |
| Other  comprehensive (loss) income:                                       |       |                                   |       |   |   |
| Unrealized  losses on marketable debt securities, net of applicable taxes |       | (54                                    | )          | (3 | ) |
| Foreign  currency translation adjustments                                 |       | (44                                    | )          | 4 |   |
|                                                                      |       |                                   |       |   |   |
| Total other  comprehensive (loss) income                                  |       | (98                                    | )          | 1 |   |
|                                                                      |       |                                   |       |   |   |
| Comprehensive  (loss) income                                              |       | $                                      | (586       | ) | $ | 183 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

3

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**BROOKTROUT, INC.UNAUDITED CONDENSEDCONSOLIDATED STATEMENTSOF CASH FLOWS***(in thousands)*

 
| ** **                                                                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                           |       |                                   |       |   |   |
| Net (loss)  income                                                                   |       | $                                      | (488       | ) | $ | 182 |   |
| Adjustments  to reconcile net (loss) income to cash flows from operating activities: |       |                                   |       |   |   |
| Depreciation  and amortization                                                       |       | 672                                    |       | 612 |   |
| Amortization  of acquired and licensed software                                      |       | 150                                    |       | 162 |   |
| Provision  for doubtful accounts and sales returns                                   |       | 290                                    |       | 62 |   |
| Inventory  obsolescence expense                                                      |       | 64                                     |       | 89 |   |
| Deferred  income taxes                                                               |       | (204                                   | )          | 174 |   |
| Tax benefit  from stock option activity                                              |       | 336                                    |       | — |   |
| Increase  (decrease) in cash from changes in:                                        |       |                                   |       |   |   |
| Accounts  receivable                                                                 |       | 2,299                                  |       | 296 |   |
| Inventory                                                                            |       | (380                                   | )          | (665 | ) |
| Prepaid  expenses and other assets                                                   |       | (137                                   | )          | 607 |   |
| Current and  long-term liabilities                                                   |       | (1,557                                 | )          | (781 | ) |
|                                                                                 |       |                                   |       |   |   |
| Cash flows  from operating activities                                                |       | 1,045                                  |       | 738 |   |
|                                                                                 |       |                                   |       |   |   |
| **Cash  flows from investing activities:**                                           |       |                                   |       |   |   |
| Maturities  of marketable debt securities                                            |       | 6,229                                  |       | 3,511 |   |
| Sales of  marketable debt securities                                                 |       | 1,499                                  |       | 6,811 |   |
| Purchases of  marketable debt securities                                             |       | (11,729                                | )          | (12,173 | ) |
| Expenditures  for equipment and furniture                                            |       | (502                                   | )          | (330 | ) |
| Expenditures  for purchased and licensed software                                    |       | (216                                   | )          | (590 | ) |
|                                                                                 |       |                                   |       |   |   |
| Cash flows  from investing activities                                                |       | (4,719                                 | )          | (2,771 | ) |
|                                                                                 |       |                                   |       |   |   |
| **Cash  flows from financing activities:**                                           |       |                                   |       |   |   |
| Exercises of  stock options, net of common stock received                            |       | 566                                    |       | 2,676 |   |
| Repurchase  of the Company’s common stock                                       |       | (2,702                                 | )          | — |   |
|                                                                                 |       |                                   |       |   |   |
| Cash flows  from financing activities                                                |       | (2,136                                 | )          | 2,676 |   |
|                                                                                 |       |                                   |       |   |   |
| (Decrease)  increase in cash and cash equivalents                                    |       | (5,810                                 | )          | 643 |   |
| Cash and  cash equivalents, beginning of year                                        |       | 18,452                                 |       | 28,081 |   |
|                                                                                 |       |                                   |       |   |   |
| Cash and  cash equivalents, end of year                                              |       | $                                      | 12,642     |   | $ | 28,724 |   |
|                                                                                 |       |                                   |       |   |   |
| **Supplemental  schedule of cash flow information:**                            |       |                                   |       |   |   |
| Tax payments                                                                         |       | $                                      | 37         |   | $ | 31 |   |
| Tax refunds  received                                                                |       | $                                      | —     |   | $ | 323 |   |
|                                                                                 |       |                                   |       |   |   |
| **Non-cash  activities:**                                                            |       |                                   |       |   |   |
| Common stock  received for exercise of stock options                                 |       | $                                      | —     |   | $ | 4 |   |

 

See notes to unauditedcondensed consolidated financial statements.

 

4

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**BROOKTROUT, INC.**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1. Description of Business and Summary of SignificantAccounting Policies and Practices**

 

***(a) Description of Business***

 

Brooktrout, Inc. (the “Company” or “Brooktrout”) develops,manufactures and sells software and hardware products that enable thedevelopment of communications systems and services. The Company sells itsproducts to system vendors, service providers, enterprise customers, originalequipment manufacturers, and value-added resellers, both domestically andinternationally, through a direct sales force and a two-tiered distributionsystem.

 

***(b) Use of Estimates***

 

Accounting policies, methods and estimates are an integral part of theunaudited condensed consolidated financial statements and are based uponmanagement’s current judgments. These policies, methods, and estimates affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting periods. The judgmentsmade by management are based on knowledge and experience with regard to pastand current events and assumptions about future events that are believed to bereasonable under the circumstances. The Company’s management evaluates theseestimates and assumptions and adjusts them if expectations concerning events,including future events, affecting them differ markedly from management’scurrent judgments.

 

***(c) Principles of Consolidation***

 

The Company has prepared the accompanying unaudited condensedconsolidated financial statements pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”) regarding interim financialreporting. These unaudited condensed consolidated financial statements shouldbe read in conjunction with the audited consolidated financial statements includedin the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2004.

 

The accompanying unaudited condensed consolidated financial statementshave been prepared on the same basis as the audited consolidated financialstatements and include all adjustments, consisting only of normal recurringadjustments, necessary for the fair presentation of interim periods presented.The unaudited condensed consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated in consolidation. The operatingresults for the interim periods presented are not necessarily indicative of theresults that could be expected for the full year. 

 

***(d) Revenue Recognition***

 

Revenue from product sales is recognized when the risk of loss andtitle pass to the customer, generally at the time of shipment, provided thatpersuasive evidence of an arrangement exists, the fee is fixed or determinable,and collection is reasonably assured. To the extent that one or more of theseconditions are not met, which has occurred from time-to-time, revenue isdeferred until such time as all four criteria are met. Revenue from sales tocertain distributors is recognized on a “sell-through” basis, that is, when thedistributors report to the Company that resale of the product to the ultimatecustomer of the distributor has occurred. If the Company receives a paymentfrom a customer prior to meeting all of the revenue recognition criteria, thepayment is recorded as a customer deposit or deferred revenue. In addition,customers are offered the option to enter into maintenance contracts onselected products that are renewable. Prepaid maintenance fees on thesecontracts are deferred and recognized evenly over the term of the maintenancecontract.  

 

The Company records a provision for estimated sales returns andallowances as a deduction from sales in the same period that the relatedrevenue is recorded. These estimates are based on historical sales returns,analysis of credit memo data and other known factors. In addition, the Companyperiodically offers rebate programs to customers that require the Company toestimate the cost of the program. The Company records a provision for theestimated cost of the program as a deduction from sales based on or upon theresults of previous rebate programs and other known factors. 

 

***(e) Concentration of Credit Risk***

 

The Company holds its temporary cash, cashequivalents, and marketable debt securities in highly rated financialinstruments and with highly rated financial institutions. In addition, theCompany’s investment policy limits its exposure to concentrations of creditrisk.  

 

5

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The Company sells its products to variouscustomers in the high technology industry. The Company generally requires nocollateral. To reduce credit risk, the Company performs credit evaluations ofits customers. The Company maintains allowances for doubtful accounts forestimated losses resulting from its customers’ inability to make requiredpayments. At both March 31, 2005 and December 31, 2004, 19% of theCompany’s accounts receivable were due from one customer. Accounts receivablefrom a second customer represented 15% and 9% of the Company’s accountsreceivable as of March 31, 2005 and December 31, 2004,respectively.  Accounts receivable from athird customer represented 11% and 7% of the Company’s accounts receivable asof March 31, 2005 and December 31, 2004, respectively.

 

The Company has one customer that generatesmore than 10% of total revenue. This customer accounted for approximately 17%and 16% of revenue for the quarters ended March 31, 2005 and 2004,respectively.

 

***(f) Stock-Based Compensation***

 

The Company uses the intrinsic value method to measure compensationexpense associated with the grants of stock options or awards to employees. TheCompany accounts for stock options and awards to non-employees using the fairvalue method.

 

Under the intrinsic value method, compensation associated with stockawards to employees is determined as the excess, if any, of the current fairvalue of the underlying common stock on the date compensation is measured overthe price an employee must pay to exercise the award. The measurement date foremployee awards is generally the date of grant. Under the fair value method,compensation associated with stock awards to non-employees is determined basedon the estimated fair value of the award itself, measured using either currentmarket data or an established option pricing model. The measurement date fornon-employee awards is generally the date that performance of certain servicesis complete.     

 

Had the Company used the fair value method to measure compensationrelated to stock awards to employees, reported net income (loss) and net income(loss) per common share would have been as follows:

 
| ** **                                                         | ** ** | **Three Months Ended  March 31,**     | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                   | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(in thousands, except  per share data)** | ** ** |
|                                                               |       |                                       |       |   |   |
| Net (loss)  income, as reported                                    |       | $                                          | (488       | ) | $ | 182 |   |
| Stock-based  compensation recorded                                 |       | —                                     |       | — |   |
| Pro forma  stock-based compensation, net of tax                    |       | (1,005                                     | )          | (1,387 | ) |
|                                                               |       |                                       |       |   |   |
| Net loss,  pro forma                                               |       | $                                          | (1,493     | ) | $ | (1,205 | ) |
|                                                               |       |                                       |       |   |   |
| Net loss per  common share, basic and diluted pro forma            |       | $                                          | (0.12      | ) | $ | (0.09 | ) |
|                                                               |       |                                       |       |   |   |
| Net (loss)  income per common share, basic and diluted as reported |       | $                                          | (0.04      | ) | $ | 0.01 |   |

 

Basic weighted average shares outstanding were usedin calculating the pro forma net loss per common share in each of the periodspresented since the use of diluted weighted average shares outstanding wouldhave had an anti-dilutive effect.

 

For purposes of determining the disclosures providedabove, the fair value of options on their grant date was measured using theBlack-Scholes option-pricing model. Key assumptions used to apply this pricingmodel were as follows:

 
| ** **                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| ** **                               | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                     |       |                                   |       |   |   |
| Risk-free  interest rate                 |       | 4.3                                    | %          | 3.2 | % |
| Expected  life of option grants (years)  |       | 5.9                                    |       | 5.6 |   |
| Expected  volatility of underlying stock |       | 83                                     | %          | 85 | % |
| Dividend  yield                          |       | 0                                      | %          | 0 | % |

 

6

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The estimated weighted average fair value of option grants made duringthe three months ended March 31, 2005 and 2004 was $8.88 and $12.16,respectively, per option. There were no grants made under the Company’sEmployee Stock Purchase Plan during the three months ended March 31, 2005and 2004, respectively.

 

***(g) Earnings Per Share***

 

Basic earnings per common share is computed using the weighted averagenumber of common shares outstanding during each period. Diluted earnings percommon share is calculated by dividing the net income (loss) by the sum of theweighted average number of common shares outstanding and all additional commonshares that would have been outstanding if potentially dilutive securities hadbeen issued, using the treasury method, if such shares have a dilutive effect.

 

A reconciliation of weighted average shares used for the basic anddiluted computations is as follows:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                 |       |                                   |       |   |   |
| Weighted  average shares for basic   |       | 12,766,000                             |       | 12,854,000 |   |
| Dilutive  effect of stock options    |       | —                                 |       | 1,451,000 |   |
|                                 |       |                                   |       |   |   |
| Weighted  average shares for diluted |       | 12,766,000                             |       | 14,305,000 |   |

 

Stock options to purchase 4,076,675 shares and 739,388 shares wereexcluded from the computation of diluted earnings per share in the three monthsended March 31, 2005 and 2004, respectively. As a result of the net lossfor the three months ended March 31, 2005, all outstanding stock optionswere excluded because of their anti-dilutive effect. For the three months endedMarch 31, 2004, certain stock options were excluded because the exerciseprice of the stock options exceeded the average market price of the Company’scommon stock and, as a result, would have had an anti-dilutive effect. 

 

***(h) New Accounting Standards***

 

In December 2004, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”)No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), whichrevises SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related interpretations. In April 2005, the SECannounced the adoption of a rule that defers the effective date of SFAS No.123(R) to fiscal years beginning after June 15, 2005. The Company expectsto adopt SFAS No. 123(R) using the modified prospective application method.Adoption of SFAS No. 123(R) will increase stock compensation expense. Theactual impact on future years will be dependant on a number of factors,including the Company’s stock price and the level of future grants and awardsmade from the Company’s stock-based compensation plans. The pro forma effect onthe Company’s financial results using a fair value based approach is disclosedin Note 1(f), “Stock-Based Compensation.” The pro forma effects disclosed arenot necessarily representative of the effects on the results of operations inthe future for the reasons provided above.

 

**2. Acquisition**

 

On April 5, 2004, the Company acquired theoutstanding capital stock of SnowShore Networks, Inc. (“SnowShore”) pursuant tothe terms of an Agreement and Plan of Merger entered into on March 25,2004. SnowShore, now a wholly owned subsidiary, is a provider of voice over IPcommunication infrastructure products for the media server market. The purchaseprice for the outstanding capital stock of SnowShore was $9.0 million, paid incash, plus $0.2 million of transaction costs. Under the Agreement and Plan ofMerger, $1.0 million of the purchase price was paid into an escrow account pendingthe resolution of representation and warranty provisions contained in the Agreement and Plan of Merger. In April 2005,the Company finalized the purchase price. The final resolution of the representationand warranty provisions did not result in significant adjustments to thepurchase price allocation previously disclosed by the Company. 

 

7

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The Company recorded a charge of$2.5 million in the second quarter of 2004 for purchased in-processtechnology related to SnowShore development projects that have not reachedtechnological feasibility, have no alternative future use, and for which successfuldevelopment was uncertain. The value of the purchased in-process research anddevelopment was computed by determining the present value of the project’sfuture economic benefits from future revenues net of anticipated costs andexpenses. A discount rate of 25% was used in this calculation and was derivedbased on the estimated weighted average cost of capital as adjusted to reflectthe additional risk inherent in product development. As of March 31, 2005,the Company estimates that these projects were approximately 80% complete. TheCompany estimates that the projects will reach completion in 2005 and willrequire additional spending of approximately $0.6 million. Some of therisks and uncertainties inherent in the estimated costs to complete, and the attainmentof completion, include the difficulty of predicting the duration of productdevelopment and the risk that changes in product requirements could result inunexpected redesign activity.

 

**3. Marketable Debt Securities**

 

Marketable debt securities consisted of the following:

 
| ** **                       | ** ** | **Amortized  Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Market  Value** | ** ** |
|----------------------------------|------------|---------------------|------------|-----------------------|------------|------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **(in thousands)**  | ** ** |
| March 31,  2005:            |       |                |       |                  |       |                   |       |              |       |
| U.S.  government notes and bonds |       | $                   | 10,799     |                  | $          | 1                      |       | $                 | (96        | ) | $ | 10,704 |   |
| Corporate  debt securities       |       | 27,604              |       | —                |       | (145                   | )          | 27,459            |       |
| Foreign  investments             |       | —              |       | —                |       | —                 |       | —            |       |
|                             |       |                |       |                  |       |                   |       |              |       |
| Total                            |       | $                   | 38,403     |                  | $          | 1                      |       | $                 | (241       | ) | $ | 38,163 |   |
|                             |       |                |       |                  |       |                   |       |              |       |
| December 31,  2004:         |       |                |       |                  |       |                   |       |              |       |
| U.S.  government notes and bonds |       | $                   | 12,864     |                  | $          | —                 |       | $                 | (61        | ) | $ | 12,803 |   |
| Corporate  debt securities       |       | 20,783              |       | —                |       | (90                    | )          | 20,693            |       |
| Foreign  investments             |       | 755                 |       | —                |       | (1                     | )          | 754               |       |
|                             |       |                |       |                  |       |                   |       |              |       |
| Total                            |       | $                   | 34,402     |                  | $          | —                 |       | $                 | (152       | ) | $ | 34,250 |   |

 

The unrealized losses related to these securities at March 31,2005 are not material to the Company’s financial position or results fromoperations.

 

The amortized cost and estimated fair valueof marketable debt securities at March 31, 2005, by contractual maturityare shown below. Actual maturities may differ from the contractual maturitiesbecause the issuers of the securities may have the right to repay theobligations without prepayment penalties.

 
| ** **                             | ** ** | **Amortized  Cost** | ** ** | **Market  Value** | ** ** |
|----------------------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                             | ** ** | **(in thousands)**  | ** ** |
| Marketable  debt securities:           |       |                |       |              |       |
| Due in one  year or less               |       | $                   | 25,591     |              | $          | 25,454 |   |
| Due after  one year through five years |       | 12,812              |       | 12,709            |       |
|                                   |       |                |       |              |       |
| Total                                  |       | $                   | 38,403     |              | $          | 38,163 |   |

 

Realized gains and losses from the sale ofmarketable debt securities were not material to the Company’s results fromoperations in any of the periods presented.

 

8

----

 

**4. Inventory**

 

The components of inventory, net of reserves, are as follows:

 
| ** **       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2005**           | ** ** | **2004**              | ** ** |
| ** **       | ** ** | **(in thousands)** | ** ** |
|             |       |               |       |                  |       |
| Raw  materials   |       | $                  | 906        |                  | $          | 724 |   |
| Work in  process |       | 465                |       | 537                   |       |
| Finished  goods  |       | 3,063              |       | 2,857                 |       |
|             |       |               |       |                  |       |
| Total            |       | $                  | 4,434      |                  | $          | 4,118 |   |

 

Thefollowing is a rollforward of reserves provided for inventory obsolescence:

 
| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(in thousands)**                     | ** ** |
|                          |       |                                   |       |   |   |
| Balance,  beginning of period |       | $                                      | 2,943      |   | $ | 4,379 |   |
| Provisions                    |       | 64                                     |       | 89 |   |
| Write offs                    |       | (328                                   | )          | (398 | ) |
|                          |       |                                   |       |   |   |
| Balance, end  of period       |       | $                                      | 2,679      |   | $ | 4,070 |   |

 

**5. Valuation and Qualifying Accounts**

 

*Allowances for doubtful accounts and sales returns:*

 

The following is a rollforward of allowances provided for doubtful accountsand sales returns:

 
| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(in thousands)**                     | ** ** |
|                          |       |                                   |       |   |   |
| Balance,  beginning of period |       | $                                      | 1,048      |   | $ | 843 |   |
| Provisions                    |       | 290                                    |       | 26 |   |
| Write-offs                    |       | (1                                     | )          | — |   |
| Recoveries                    |       | 2                                      |       | 36 |   |
| Rebate  payments to customers |       | (302                                   | )          | (8 | ) |
|                          |       |                                   |       |   |   |
| Balance, end  of period       |       | $                                      | 1,037      |   | $ | 897 |   |

 

9

----

 

*Accrued warranty costs:*

 

The following is a rollforward of accrued warranty costs:

 
| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                    | ** ** | **(in thousands)**                     | ** ** |
|                          |       |                                   |       |   |   |
| Balance,  beginning of period |       | $                                      | 1,248      |   | $ | 1,138 |   |
| Provisions  for claims        |       | 124                                    |       | 76 |   |
| Claims  incurred              |       | (120                                   | )          | (53 | ) |
|                          |       |                                   |       |   |   |
| Balance, end  of period       |       | $                                      | 1,252      |   | $ | 1,161 |   |

 

**6. Stockholders’ Equity**

 

On October 20, 2004, the Company’s Board of Directorsauthorized a program for the repurchase of up to 1,000,000 shares of theCompany’s common stock. Under this program, shares may be repurchased prior to October 19,2005 and in such amounts as market conditions warrant, and subject toregulatory and other considerations. The Company plans to use the sharesrepurchased under these programs for general corporate purposes, including the Company’s stock option plans,employee stock purchase plan and other stock benefit plans. The Companyrepurchased 211,530 shares for approximately $2.7 million under these programsduring the quarter ended March 31, 2005.

 

**7. Segment Reporting**

 

The Company develops, manufactures and sells softwareand hardware products that enable the development of communications systems andservices. The Company sells its products to system vendors, service providers,enterprise customers, original equipment manufacturers, and value-addedresellers, both domestically and internationally, through a direct sales forceand a two-tiered distribution system. The Company has one operating segment.The Company’s products, while designed for different customers and differentprincipal markets, otherwise have similar economic characteristics.

 

*Geographic Information*– Revenues are derived from the following geographic areas; international salesare principally exports from the United States:

 
| ** **     | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------|------------|----------------------------------------|------------|
| ** **     | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|           |       |                                   |       |   |   |
| United  States |       | 77                                     | %          | 77 | % |
| International  |       | 23                                     |       | 23 |   |
|           |       |                                   |       |   |   |
|           |       | 100                                    | %          | 100 | % |

 

Substantially all of our assets are located within the United States.

 

**8. Commitments and Contingencies**

 

From time-to-time, the Company is a party to legaland other actions, which may include allegations of patent infringement madeagainst us and/or our customers, which arise in the normal course of business.The Company, taking into account advice of counsel, does not currently believethe eventual outcome of any such pending or potential matters, includingmatters in which we may have an obligation on behalf of our customers, willhave a material effect on the Company’s consolidated financial condition orresults of operations.

 

10

----

 

**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*The following discussion should be read in conjunctionwith the condensed consolidated financial statements and related notesappearing elsewhere in this quarterly report and in our Annual Report on Form10-K for the year ended December 31, 2004. The discussion containsforward-looking statements that involve known and unknown risks anduncertainties, including those set forth below under “Factors That May AffectFuture Results.”*

 

**Overview**

 

We develop software and hardware platforms that original equipmentmanufacturers, developers, network operators and corporate informationtechnology managers build into their communications systems. Customersincorporate our products into applications, systems and services that allowvoice, fax and data to be distributed over both IP packet-based networks, whichwe refer to as the New Network, and the traditional circuit-switched telephonenetwork. We supply products for media processing, network interface, callcontrol and signal processing, including protocols that allow Internet andtraditional telephony systems to communicate. Our strategy is to partner withour customers and collaborate closely with them to accelerate their delivery ofnew applications and services to end-users, help increase their existingbusiness, and expand into new markets. In April 2004, we completed ouracquisition of all of the outstanding capital stock of SnowShore Networks,Inc., or SnowShore, a provider of voice over IP, or VOIP, communicationsinfrastructure products for the media server market.

 

We measure our operating success using both financial and marketmetrics. The financial metrics include revenue, gross profit, operatingexpenses, operating income and net income, as well as working capital and cashflows from operating activities. Key market metrics include the total number ofcustomers, customers whose purchases exceed $100,000, and the portion of ourrevenue that is generated by the sales of products to enterprise and serviceprovider customers. Our long-term business model stresses our commitment toestablishing and maintaining close customer relationships, increasingpenetration of the telecommunications markets that we serve and continuing todevelop innovative products.

 

The most significant trend that has impacted our business during thepast few years has been the unfavorable economic conditions affecting thecommunications sector. During the past few years we continued to invest indeveloping products that we believe our customers will need when the economyrecovers. We are now seeing signs that the economic conditions in our industrymay be improving with modest revenue growth from 2002 to 2003 and furthergrowth from 2003 to 2004. Many companies that had reduced their capitalexpenditures during the recent economic downturn have begun to invest again intheir communications networks. The evolution and acceptance of the New Networkis contributing to these infrastructure investments as enterprises and serviceproviders begin to use the IP networks for fax and VOIP transmissions. The signsthat the economic conditions in our industry are improving lead us to expectthat revenue for each remaining quarter of 2005 will exceed the revenue foreach corresponding quarter of 2004.

 

**Application of Critical Accounting Policies**

 

Management’s discussion and analysis of financial condition and resultsof operations is based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. We make estimates and assumptions in thepreparation of the consolidated financial statements that affect the reportedamounts of assets and liabilities, revenue and expenses, and the relateddisclosures of contingent assets and liabilities. These estimates form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. We base our estimates andjudgments on historical experience and on various other assumptions that webelieve are reasonable under the circumstances. However, actual results maydiffer from these estimates under different assumptions or conditions.

 

We consider the following to be the critical accounting policies andareas where significant judgment is applied, which we believe an investorshould understand when assessing our financial reporting and performance:

 

•                  Revenuerecognition; 

 

•                  Allowances fordoubtful accounts; 

 

•                  Inventoryallowances;

 

•                  Intangibleassets;

 

•                  Income taxes;and 

 

•                  Accrued warrantycosts.

 

11

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This listing is not intended to be a comprehensive list of all of oursignificant accounting policies. For further information on our criticalaccounting policies, and on our significant accounting policies in general, werefer the reader to the discussion on those policies in our Annual Report onForm 10-K for the year ended December 31, 2004, and to Note 1 to theunaudited condensed consolidated financial statements in Part 1, Item I of thisreport.

 

**Results ofOperations**

 

The following discussion focuses on our results of operations. The tablebelow sets forth certain unaudited condensed consolidated statements ofoperations data as percentages of total revenue for the periods presented.

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                 |       |                                   |       |   |   |
| Revenue                              |       | 100                                    | %          | 100 | % |
|                                 |       |                                   |       |   |   |
| Cost of  product sold                |       | 31                                     |       | 32 |   |
| Gross profit                         |       | 69                                     |       | 68 |   |
|                                 |       |                                   |       |   |   |
| Operating  expenses:                 |       |                                   |       |   |   |
| Research and  development            |       | 27                                     |       | 24 |   |
| Selling,  general and administrative |       | 48                                     |       | 43 |   |
| Total  operating expenses            |       | 75                                     |       | 67 |   |
|                                 |       |                                   |       |   |   |
| Operating  (loss) income             |       | (6                                     | )          | 1 |   |
| Other  income, net                   |       | 2                                      |       | 1 |   |
|                                 |       |                                   |       |   |   |
| (Loss)  income before income taxes   |       | (4                                     | )          | 2 |   |
| Income tax  (benefit) provision      |       | (1                                     | )          | 1 |   |
|                                 |       |                                   |       |   |   |
| Net (loss)  income                   |       | (3                                     | )%         | 1 | % |

 

***Revenue***

 

The following table presents our domestic and international revenue:

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)**            | ** ** |
|                                |       |                                  |       |   |   |   |   |   |   |
| United  States                      |       | $                                     | 13,833     |   | 77 | % | $ | 14,335 |   | 77 | % |
| International,  principally exports |       | 4,017                                 |       | 23 |   | 4,358 |   | 23 |   |
|                                |       |                                  |       |   |   |   |   |   |   |
| Total  revenue                      |       | $                                     | 17,850     |   | 100 | % | $ | 18,693 |   | 100 | % |

 

Revenue in the three months ended March 31, 2005 was$17.9 million compared to $18.7 million in the corresponding periodof 2004, a decrease of approximately 5%. This decrease was primarily the resultof weakness in our TDM, or circuit-switched, voice and data products that webelieve was caused, in part, by merger and acquisition activity at two of ourcustomers. In comparison to the three months ended March 31, 2004,international revenue in the corresponding period of 2005 decreased by$0.3 million due primarily to lower sales to European customers of $0.4million and Japanese customers of $0.3 million. The decreases in internationalrevenues were offset, in part, by a $0.3 million increase in sales tonon-Japanese Pacific Rim customers. During the three months ended March 31,2005, revenue from enterprise customersaccounted for approximately 87% of total revenue, as compared to approximately85% of total revenue for the three months ended March 31, 2004. Theremaining revenue was attributable to sales to service provider customers.

 

Revenue from Captaris, Inc. accounted for 17% of total revenue in thethree months ended March 31, 2005 compared to 16% in the correspondingperiod of 2004. We expect that revenue from Captaris, Inc. will continue to begreater than 10% of total revenue throughout 2005. In the three months ended March 31,2005, 23 of our customers each purchased over $100,000 of products, inaggregate representing 74% of the total for the quarter. In the three monthsended March 31, 2004, 27 of our customers each purchased over $100,000 ofproducts, in aggregate representing 74% of the total for the quarter. Totalcustomers in the first quarter of 2005 decreased to approximately 320 fromapproximately 340 in the corresponding period of 2004.

 

12

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***Cost of Product Soldand Gross Profit***

 

The following table presents cost of product sold and gross profitinformation:

 
| ** **                                     | ** ** | **Three Months Ended  March 31,** | *** *** |
|------------------------------------------------|------------|----------------------------------------|--------------|
| ** **                                     | ** ** | **2005**                               | ** **   | **2004** | ** ** |
| ** **                                     | ** ** | **(dollars in thousands)**             | ** **   |
|                                           |       |                                   |         |   |   |
| Cost of  product sold                          |       | $                                      | 5,483        |   | $ | 5,968 |   |
| Gross profit                                   |       | $                                      | 12,367       |   | $ | 12,725 |   |
| Gross profit  as a percentage of total revenue |       | 69                                     | %            | 68 | % |

 

The decrease in cost of product sold in the three months ended March 31,2005, compared with the corresponding period of 2004 was the result of lowersales of our TDM voice and data products described above and reduced inventoryfreight expenses. The increase in gross profit as a percentage of revenue forthe three months ended March 31, 2005 compared with the correspondingperiod of 2004 is a result of changes in product mix. Gross profit as apercentage of total revenue for the second quarter of 2005 is expected to beapproximately 68% to 70%.

 

***Operating Expenses***

 

The following table presents our operating expenses:

 
| ** **                           | ** ** | **Three Months Ended  March 31,** | *** *** |
|--------------------------------------|------------|----------------------------------------|--------------|
| ** **                           | ** ** | **2005**                               | ** **   | **2004** | ** ** |
| ** **                           | ** ** | **(in thousands)**                     | ** **   |
|                                 |       |                                   |         |   |   |
| Research and  development            |       | $                                      | 4,864        |   | $ | 4,485 |   |
| Selling,  general and administrative |       | 8,509                                  |         | 8,118 |   |
|                                 |       |                                   |         |   |   |
| Total  operating expenses            |       | $                                      | 13,373       |   | $ | 12,603 |   |

 

**Research and development expense**

 

Research and development expense represented 27% of revenue in the firstquarter of 2005, compared with 24% of revenue in the first quarter of 2004. The$0.4 million increase in research and development expenses in the firstquarter of 2005 was primarily the result of increased consulting expenses of$0.7 million, offset by reduced salary related expenses of $0.2 million andreduced spending on product prototypes and equipment of $0.1 million. Ourcontinuing development efforts are focused on hardware and software fortraditional telephone networks and IP media processing products (voice, video,fax and data), network interface products, call control products and signalprocessing products. Research and development expense for the second quarter of2005 is expected to be approximately 22% to 25% of revenue. 

 

**Selling, general and administrative expense**

 

Selling, general and administrative expense represented 48% of revenuein the first quarter of 2005, compared with 43% of revenue in the first quarterof 2004. The $0.4 million increase in selling, general and administrativeexpense in the first quarter of 2005 was primarily the result of increases inlegal, audit, and other professional fees of $0.3 million, increases inbusiness travel of $0.2 million and increases in salary related expenses of$0.1 million offset, in part, by decreased consulting fees of $0.2 million.Selling, general and administrative expense for the second quarter of 2005 isexpected to be approximately 40% to 42% of revenue.

 

13

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***Other income, net***

 

The following table presents our other income,net:

 
| ** **         | ** ** | **Three Months Ended  March 31,** | *** *** |
|--------------------|------------|----------------------------------------|--------------|
| ** **         | ** ** | **2005**                               | ** **   | **2004** | ** ** |
| ** **         | ** ** | **(in thousands)**                     | ** **   |
|               |       |                                   |         |   |   |
| Other  income, net |       | $                                      | 320          |   | $ | 182 |   |
|                    |            |                                        |              |  |  |  |  |

 

The change in other income, net from the threemonths ended March 31, 2004 to the three months ended March 31, 2005,was due primarily to an increase in interest income. The increase in interestincome relates to higher average interest rates on our marketable debtsecurities offset, in part, by lower average cash, cash equivalents andmarketable debt securities balances. 

 

***Income tax (benefit) provision***

 

The following table presents our income tax (benefit) provision andeffective tax rate:

 
| ** **                      | ** ** | **Three Months Ended  March 31,** | *** *** |
|---------------------------------|------------|----------------------------------------|--------------|
| ** **                      | ** ** | **2005**                               | ** **   | **2004** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**             | ** **   |
|                            |       |                                   |         |   |   |
| Income tax  (benefit) provision |       | $                                      | (198         | ) | $ | 122 |   |
| Effective  tax rate             |       | 29                                     | %            | 40 | % |
|                                 |            |                                        |              |  |  |  |  |

 

We recorded an income tax benefit of $0.2 million, or 29% of our netloss before taxes in the three months ended March 31, 2005. The effectivetax rate differs from the anticipated effective rate of 42% as a result ofadditional tax expense resulting from the filing of amended tax returnsassociated with prior periods. The annual effective tax rate for the secondquarter of 2005 is anticipated to be approximately 41% to 43%. We recorded aprovision for income taxes of $0.1 million, or 40% of income before taxes inthe three months ended March 31, 2004.

 

**Liquidityand Capital Resources**

 

***Cash flows for the three months endedMarch 31, 2005 and 2004***

 

Cash flows from operating activities were $1.0 million in the threemonths ended March 31, 2005. This resulted primarily from reductions inaccounts receivable and our net loss adjusted for non-cash expenses, such asdepreciation and amortization, that do not require current expenditures forcash offset, in part, by a decrease in current and long-term liabilities and anincrease in inventory. Cash flows from operating activities were $0.7 millionin the three months ended March 31, 2004. This resulted primarily from ournet income adjusted for non-cash expenses and reductions in accounts receivableoffset, in part, by an increase in inventory and a decrease in accounts payableand accrued expenses.  

 

Cash flows used in investing activities were $4.7 million in the threemonths ended March 31, 2005. This resulted primarily from net purchases ofmarketable debt securities of $4.0 million and capital expenditures forequipment and furniture of $0.5 million. Cash flows used in investingactivities were $2.8 million in the three months ended March 31, 2004.This resulted primarily from net purchases of marketable debt securities of$1.9 million, purchases and licenses of software to be used in the developmentand modification of new and existing products of $0.6 million, and capitalexpenditures for equipment and furniture of $0.3 million. 

 

Cash flows used in financing activities were $2.1 million in the threemonths ended March 31, 2005. This resulted primarily from the $2.7 millionused to repurchase shares of our common stock offset, in part, by $0.6 millionof proceeds from the sale of common stock to our employees under our stockoption plans. Cash flows from financing activities were $2.7 million in thethree months ended March 31, 2004, as a result of proceeds from the saleof common stock to our employees under our stock option plans.

 

14

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***Cash and Cash Liquidity Position***

 

The following table presents our cash and liquidity position as of March 31,2005 and December 31, 2004:

 
| ** **                        | ** ** | **March 31,**         | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2005**                   | ** ** | **2004**              | ** ** |
| ** **                        | ** ** | **(dollars in thousands)** | ** ** |
|                              |       |                       |       |                  |       |
| Cash and  cash equivalents        |       | $                          | 12,642     |                  | $          | 18,452 |   |
| Marketable  debt securities       |       | 38,163                     |       | 34,250                |       |
|                              |       |                       |       |                  |       |
| Total                             |       | $                          | 50,805     |                  | $          | 52,702 |   |
|                              |       |                       |       |                  |       |
| Working  capital                  |       | $                          | 53,444     |                  | $          | 56,163 |   |
| Quick ratio                       |       | 3.7                        |       | 3.7                   |       |
| Maximum  available line of credit |       | $                          | 5,000      |                  | $          | 5,000 |   |

 

Cash, cash equivalents and marketable debt securities decreased to$50.8 million as of March 31, 2005 from $52.7 million as of December 31,2004, primarily due to repurchases of our common stock that totaled $2.7million. Working capital decreased by $2.7 million from December 31, 2004to March 31, 2005 for the same reason.

 

Our quick ratio was 3.7 at both March 31, 2005 and December 31,2004. Quick ratio consists of the total cash and cash equivalents, marketabledebt securities, and accounts receivable divided by current liabilities, and iscommonly used an indicator of a company’s ability to meet short-term financialobligations.

 

We have a $5.0 million working capital line of credit availablefrom a commercial bank. There were no borrowings outstanding under the line ofcredit at May 5, 2005, March 31, 2005 or at December 31, 2004. Theline of credit expires on July 29, 2005. We anticipate that the line ofcredit will be renewed with substantially the same terms as the existing lineof credit. Any borrowings under the line of credit would bear interest at thelender’s prime rate. We pay the lender a commitment fee on unused commitments.The line of credit is secured by a pledge of substantially all of our assetsand the availability of funds under this line of credit is subject to compliancewith certain financial covenants relating to our quick ratio, minimum tangiblenet worth, and other standard reporting requirements. As of March 31,2005, letters of credit issued against the working capital line of credittotaled $1.0 million, representing the collateral required for certainlease obligations. In addition, as of March 31, 2005, approximately $0.1million of the working capital line of credit was pledged as security forcertain foreign currency forward contracts.

 

On October 20, 2004, our board of directors authorized a programfor the repurchase of up to 1,000,000 shares of our common stock. Under thisprogram, shares may be repurchased prior to October 19, 2005 and in suchamounts as market conditions warrant, subject to regulatory and otherconsiderations. We plan to use the shares repurchased under this program forgeneral corporate purposes, including our stock option plans, employee stockpurchase plan and other stock benefit plans. We repurchased 211,530 shares forapproximately $2.7 million under this program during the first quarter of 2005.We repurchased 368,100 shares for approximately $3.4 million under stockrepurchase programs during the year ended December 31, 2004.

 

We expect that our cash and cash equivalents and marketable debtsecurities will meet our needs for at least the next twelve months; however, weare always looking for opportunities to expand our business, which couldinclude acquisitions or organic expansion into new markets. If we find that ourcash and cash equivalents, marketable debt securities and funds available fromour bank line of credit are not sufficient, we may choose to utilize or to seekother sources of financing. If we were to seek future equity financings, theterms may be dilutive to our stockholders and may contain restrictivecovenants, which could limit our ability to pursue certain courses of action.It is possible that, should the need arise, we will not be able to obtainadditional financing, or that the financing made available to us will not be onacceptable terms.

 

***Contractual Obligations and CapitalExpenditures***

 

The following table presents our future contractual obligations andcommercial commitments as of March 31, 2005:

 
| ** **        | ** ** | **Total**          | ** ** | **Remainder  of 2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
|-------------------|------------|--------------------|------------|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
|              |       |               |       |                   |       |     |       |     |       |     |       |     |       |           |       |
| Operating  leases |       | $                  | 4,270      |                   | $          | 1,989    |       | $        | 1,110      |     | $          | 389      |       | $              | 389        |   | $ | 275 |   | $ | 118 |   |
|                   |            |                    |            |                        |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |  |

 

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We have operating lease commitments for our primary office and manufacturingfacilities that expire in 2006. We have operating lease commitments for oursales and support functions that expire at various dates between 2006 and 2010.Some of these leases contain renewal options ranging from three to ten years.Certain lease agreements require us to pay all of the building’s taxes,insurance and maintenance costs.

 

We had no long-term debt as of March 31, 2005 or May 5, 2005.

 

We purchased $0.5 million of capital equipment in the three monthsended March 31, 2005, and $0.3 million in the corresponding period of2004. We expect to purchase approximately $0.7 million of capital equipment inthe remainder of 2005. In addition, our leases for certain properties inNeedham, Massachusetts will expire in March 2006, and we are currentlyassessing alternatives for leasing various available facilities, including ourcurrent facilities. Depending on the facility and arrangements that weultimately select, we may be required to expend funds for capital improvementsbeginning in the second half of 2005. We do not expect that our funding of anysuch capital improvements will have a material effect on our cash position.

 

We have certain inventory purchase commitments that are part of ourordinary course of business. The term of these inventory purchase commitmentstypically do not exceed six months. We do not expect these short-termcommitments to have a material impact on our financial results.

 

***Inflation***

 

The pricing of our products and the costs of our goods can besignificantly affected by current market conditions. Market conditions can beimpacted by inflation; however, we believe that inflation has not had asignificant effect on our operations to date.

 

**Recent Accounting Pronouncement**

 

In December 2004, the FinancialAccounting Standards Board issued Statement of Financial Accounting StandardNo. 123 (revised 2004), “Share-Based Payment,” or SFAS No. 123(R), whichrevises SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedesAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related interpretations. In April 2005, the SECannounced the adoption of a rule that defers the effective date of SFAS No.123(R) to fiscal years beginning after June 15, 2005. We expect to adoptSFAS No. 123(R) using the modified prospective application method. Adoption ofSFAS No. 123(R) will increase stock compensation expense. The actual impact onfuture years will depend on a number of factors, including our stock price andthe level of future grants and awards made from our stock-based compensationplans. We disclose the pro forma effect on our financial results using a fairvalue based approach in Note 1(f), “Stock-Based Compensation,” to our unauditedcondensed consolidated financial statements. The pro forma effects disclosedare not necessarily representative of the effects on the results of operationsin the future for the reasons provided above.

 

**Factors That May Affect Future Results**

 

The risks and uncertainties described below are those that we currentlybelieve may materially affect us. The trading price of our common stock coulddecline due to any of these factors. You should also refer to the otherinformation in this report, including the consolidated financial statements andrelated notes. Additional risks and uncertainties that we are unaware of, orthat we currently deem immaterial, also may become important factors thataffect us.

 

***Risks Related to OurBusiness***

 

***Downturns in the economy generally, and insectors of the telecommunications industry in particular, make it difficult toanticipate or expand sales.***

 

As a result of the uncertain economic conditions that have affectedmost technology sectors and the telecommunications sector in particular, overthe past few years many of our customers have aggressively sought to increaseefficiency in their supply chains and reduce their inventory levels.Additionally, the slowdown in the telecommunications industry and the resultingdecrease in spending by companies in our target markets have limited the rateof growth of data traffic and the use of the Internet, which are driving theconvergence of data and telephony that we expect will give rise to demand forNew Network applications. The economic downturn adversely affected our businessand operating results for the first two quarters of 2003, and even more so forthe years ended December 31, 2002 and 2001. While economic conditions haveimproved somewhat, if current economic conditions do not continue to improve orif they worsen, we may experience additional adverse effects on our revenue,net income and cash flow. For example, if the rate at which our customers orderproduct decreases, it becomes more likely that our current inventories would beexposed to technological obsolescence, which would require us to reduce thevalue of those inventories on our balance sheet.

 

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***If we fail to compete successfully in thehighly competitive telecommunications market, our revenue and profitabilitywill suffer.***

 

The market for telecommunications equipment is highly competitive. Ifwe are unable to differentiate our products from existing and future offeringsof our competitors, and thereby effectively compete in the market fortelecommunications equipment, our operating results could be materiallyadversely affected. Many of our current and potential competitors havesignificantly greater selling and marketing, technical, manufacturing,financial and other resources than we have. We expect our current competitorsto continue to improve the design and performance of their existing productsand to introduce new products and enhancements with improved price andperformance characteristics. New technologies, products or market trends maythreaten our product sales, and we may have to reduce the prices of ourproducts to stay competitive or we may not have the resources required torespond to the new technologies, products or market trends. In addition, newcompetitors may emerge in the markets we serve. An acquisition of, or by, oneof our competitors may result in a substantially strengthened competitor withgreater financial, engineering, manufacturing, marketing and customer serviceand support resources than we have. If our current or future competitors enterinto strategic relationships with leading manufacturers covering productssimilar to those sold or being developed by us, our ability to sell products tothose manufacturers may be adversely affected.

 

Capitalizing on our technology will require a continued high level ofinvestment in research and development, marketing and customer service andsupport. We may be unable, or otherwise fail, to allocate sufficient resourcesto achieve the technological advances necessary to compete successfully withexisting competitors or new entrants.

 

***Internal development efforts by our customersmay adversely affect demand for our products.***

 

Many of our customers and partners, including the large originalequipment manufacturers on which we focus a significant portion of oursales and marketing efforts, have the technical and financial ability to designand produce components replicating or improving on the functionality of most ofour products. These customers often consider in-house development oftechnologies and products as an alternative to doing business with us. Wecannot guarantee that our existing or potential customers will do business withus, rather than attempting to develop similar technology and productsinternally or obtaining technology or products through acquisitions. We cannotbe certain that we will be able to find customers to replace the revenue lostas a result of customers developing technologies or products in-house. Any suchoccurrence could have a material adverse effect on our business, financial conditionor operating results.

 

***If we fail to develop and sell new orenhanced products for the telecommunications hardware and software market, wewill not be able to compete effectively.***

 

The telecommunications hardware and software market is characterizedby:

 

*•**               *rapidtechnological advances;

 

*•**               *evolvingindustry standards;

 

*•**               *changes incustomer requirements;

 

*•**               *changes inproduct life cycles, including the shortening life cycle of products in themarket;

 

*•**               *frequent newproduct introductions or innovations;

 

*•**               *decliningprices;

 

*•**               *intensecompetition; and

 

*•**               *evolvingofferings by telecommunications service providers.

 

Our future success depends in large part on our ability to offerproducts that address the sophisticated and varied needs of our current andprospective customers and to respond to technological advances and evolvingindustry standards on a timely and cost-effective basis.

 

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The timely development of new or enhanced products is a complex anduncertain process. We intend to continue to invest significantly in product andtechnology development. We may experience design, manufacturing, marketing andother difficulties that could delay or prevent our development, introduction orcommercialization of any new and enhanced products. In particular, developmentof new products may require different engineering skills and experience, whichour current employees may not possess. We also may not be able to incorporatenew technologies on a cost-effective or timely basis, which may result inunexpected expenses. We may not anticipate technological or market trendsaccurately or manage long development cycles successfully. We may be requiredto collaborate with third parties to develop products and may not be able to doso on a timely and cost-effective basis, if at all.

 

The introduction of new or enhanced products also requires that wemanage the transition from older products so as to minimize the disruption tocustomers and ensure that adequate supplies of new products can be delivered tomeet anticipated customer demand. If we are unable to develop new products orenhancements on a timely and cost-effective basis, or if the new products orenhancements that we introduce fail to achieve market acceptance, our abilityto grow our business would be harmed and competitors could achieve greatermarket share.

 

***Our revenue could decline significantly if welose a major customer or if a major customer cancels, reduces or delays anorder.***

 

One customer accounted for 17% of our revenue in the first quarter of2005 and 18% of our revenue in fiscal 2004. We expect this customer to continue to account for more than 10% of ourtotal revenue. The loss of this or any other major customer or thecancellation, reduction or delay of significant orders from such customers,even if only temporary, could significantly reduce our revenue and cash flowand could harm our reputation in the industry.

 

***Our products typically have long salescycles, causing us to expend significant resources before recognizing revenue.***

 

The length of our sales cycle typically ranges from six to eighteenmonths and varies substantially from customer to customer. Prospectivecustomers generally must commit significant resources to test and evaluate our productsand integrate them into larger systems. This evaluation period is oftenprolonged due to delays associated with approval processes that typicallyaccompany the design and testing of new communications equipment by ourcustomers.

 

In addition, the rapidly emerging and evolving nature of the markets inwhich we and our customers compete may cause prospective customers to delaytheir purchase decisions as they evaluate new technologies and develop andimplement new systems. During the period in which our customers are evaluatingwhether to place an order with us, we often incur substantial sales andmarketing expenses, without any assurance of future orders or their timing.Even after a customer places an order, the timing of the development and introductionof the customer’s product, and in particular the timing of implementation ofour product into the customer’s product, are controlled by, and can varysignificantly with the needs of, the customer. In some circumstances, thecustomer will not require the product for several months. This continuinguncertainty can complicate our planning processes and reduce the predictabilityof our earnings and cash flows.

 

***Our business and operating results could beadversely affected by downturns in economic conditions in countries outside theUnited States and other risks associated with international operations.***

 

Sales of our products to customers outside the United States accountedfor 23% of our revenue in the first quarter of 2005 and 20% of our revenue infiscal 2004. We anticipate that international sales will continue to accountfor a significant portion of our revenue. We are subject to a number of risksas a result of our international sales, including:

 

*•**               *volatility incurrency exchange rates;

 

*•**               *political andeconomic instability in other countries;

 

*•**               *the impositionof trade restrictions, trade barriers, and tariff regulations by foreigngovernments;

 

*•**               *difficultiesin accounts receivable collections;

 

*•**               *extendedpayment terms beyond those customarily offered in the United States;

 

*•**               *compliancewith statutory requirements in many foreign countries;

 

*•**               *potentiallyadverse tax consequences;

 

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*•**               *difficultiesin managing and/or expanding operations across disparate geographic areas; and

 

*•**               *interruptionin the delivery of our products.

 

In addition, most countries require technical approvals from theirtelecommunications regulatory agencies for products that operate in conjunctionwith the local telephone system. Obtaining these approvals is generally aprerequisite for sales in a given jurisdiction. Obtaining requisite approvalstakes from two months to a year or more depending on the product and thejurisdiction. In addition, obtaining these requisite approvals may requiremodifications to our products. These or other factors may limit our ability tosell our products in other countries, which could have a material adverseeffect on our business, financial condition and operating results.

 

***Our future success will depend in part on thecontinued migration to IP-based networks.***

 

We develop core technology that connects the traditional telephonenetwork to the data network in the fax, enterprise voice and carrier enhancedservice markets. For example, we expect that demand for new fax systems will bedriven in part by the transition of many company voice networks to VOIP. Wealso anticipate that the migration to VOIP will generate the need for newenterprise voice application systems that connect to VOIP networks. Moreover,telecommunications carriers are now migrating their infrastructure towardIP-based technologies. As a result, our future success will depend on thetiming and extent of the continued migration of our target markets to VOIP andother IP-based networks. This migration is still in a relatively early stage,and the continued migration to VOIP and other IP-based networks depends onvarious factors that are outside of our control, including concerns ofenterprises and carriers regarding capital outlay requirements as well ascompetitive and regulatory issues. If the migration to IP-based networks doesnot occur for these or other reasons, or if it occurs more slowly than weexpect, our operating results will be harmed.

 

***Our dependence on sole and single sourcesuppliers and independent manufacturers could result in increased costs ordelays in the manufacture and delivery of our products.***

 

Although we generally use standard parts and components for ourproducts, some key components are purchased from sole or single source vendorsfor which alternative sources are not currently available or are difficult toobtain. Our inability to obtain sufficient quantities of these components mayresult in future delays or reductions in product shipments that could cause usto lose sales, incur additional costs and suffer harm to our reputation. Wecurrently purchase proprietary components from a number of suppliers for whichthere are no direct substitutes.

 

These components could be replaced with alternatives from other suppliers,but that might require redesign of our products. If such a redesign wererequired, we would incur considerable delay and expenses. We currently enterinto purchase orders with our suppliers for materials based on forecasts ofneed, but have no guaranteed supply arrangements with these suppliers.

 

In addition, we currently use independent manufacturers to manufactureprinted circuit boards, chassis and subassemblies in accordance with our designand specification. Our reliance on independent manufacturers involves a numberof risks, including the potential for inadequate capacity of, unavailabilityof, or interruptions in access to, process technologies and reduced controlover delivery schedules, manufacturing yields and costs. If our manufacturersare unable or unwilling to continue manufacturing our components in requiredquantities or to our quality expectations, we will have to transfermanufacturing to acceptable alternative manufacturers that we identify, whichcould result in significant delays in shipment of products to customers.Moreover, the manufacture of these components is extremely complex, and ourreliance on the suppliers of these components exposes us to potentialproduction difficulties and quality variations, which could negatively affectthe cost and timely delivery of our products. We currently enter into purchaseorders with independent manufacturers of materials based on forecasts of need,but have no guaranteed capacity arrangements with these manufacturers. Anysignificant interruption in the supply, or degradation in the quality, of anycomponent could cause us to lose sales, incur additional costs and suffer harmto our reputation.

 

***Defects in our products or problems arisingfrom the use of our products may seriously harm our business and reputation.***

 

Products as complex as ours may contain known and undetected errors,bugs, or other performance problems. Defects are frequently found during theperiod immediately following introduction and initial implementation of newproducts or enhancements to existing products. Although it is our objective toresolve all bugs that we believe would be considered serious by our customersbefore implementation, our products may not be bug-free. We also providewarranties against defects in materials and workmanship on our hardwareproducts for up to five years. Errors, bugs or performance problems couldresult in lost revenue or customer relationships and could be detrimental toour business and reputation generally. In addition, our customers generally useour products together with their own products and products from other vendors.As a result, when problems occur, it may be difficult to identify the source ofthe problem. These problems may cause us to incur significant warranty and repaircosts, divert the attention of our engineering personnel from our productdevelopment efforts and cause significant customer relations problems.

 

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***Changes to regulations affecting thetelecommunications or Internet industries could reduce demand for our productsor increase our costs.***

 

Laws and regulations governing telecommunications, electronic commerceand the Internet are emerging, but remain largely unsettled, even in the areaswhere there has been some legislative action. Regulation may focus on, amongother things, assessing access or settlement charges, or imposing tariffs orregulations based on the characteristics and quality of products, either ofwhich could restrict our business or increase our cost of doing business. Anychanges to existing laws or the adoption of new regulations by federal or stateregulatory authorities or any legal challenges to existing laws or regulationsrelating to the telecommunications industry could materially adversely affectthe market for our products. Moreover, our value-added resellers or othercustomers may require us, or we may otherwise deem it necessary or advisable,to alter our products to address actual or anticipated changes in theregulatory environment. Our inability to alter our products or address anyregulatory changes could have a material adverse effect on our business,financial condition or operating results.

 

***Changes in stock option accounting rules mayhave a significant adverse affect on our operating results.***

 

We have a history of using broad based employee stock option programsto hire, incentivize and retain our workforce in a competitive marketplace.Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting forStock-Based Compensation,” allows companies the choice of either using a fairvalue method of accounting for options that would result in expense recognitionfor all options granted, or using an intrinsic value method, as prescribed byAccounting Principles Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” or APB No. 25, with pro forma disclosure of the impact on netincome (loss) of using the fair value option exercise recognition method. Wehave previously elected to apply APB No. 25 and accordingly, we have notrecognized any compensation expense with respect to employee stock options aslong as such options are granted at exercise prices equal to the fair value ofour common stock on the grant date.

 

In December 2004, the Financial Accounting Standards Board issuedSFAS No. 123(R), which would require all companies to measure compensation costfor all share-based payments, including employee stock options, at fair value.This statement is effective for fiscal years beginning after June 15,2005. Adoption of SFAS No. 123(R) will increase stock compensation expense. Theactual impact on future years will depend on a number of factors, including ourstock price and the level of future grants and awards made from our stock-basedcompensation plans. If we had used the fair value method to measurecompensation related to stock awards to employees, we would have incurredadditional stock-based compensation expense, net of tax, of $5.4 million in2004. The pro forma effects for 2004 are not necessarily representative of theeffects on the results of operations in the future.

 

***Limitations on our ability to adequatelyprotect our proprietary rights may prevent us from retaining our competitiveadvantage and negatively affect our future operating results.***

 

Our success and ability to compete are dependent, in part, upon ourproprietary technology. Taken as a whole, we believe our intellectual propertyrights are significant and any failure to adequately protect the unauthorizeduse of our proprietary rights could result in our competitors offering similarproducts, potentially resulting in loss of a competitive advantage anddecreased revenue. We rely upon a combination of patents, trademark law, tradesecret protections, copyright law and confidentiality agreements withconsultants and third parties to protect our proprietary rights. In addition,we generally require each of our employees to execute a proprietary informationagreement designed to protect our trade secrets, our inventions created in thecourse of employment with us and other proprietary information of our company.Notwithstanding our efforts, third parties may infringe or misappropriate ourproprietary rights. Moreover, effective patent, trademark, copyright or tradesecret protections may not be available in every country in which we operate orintend to operate to the same extent as the laws of the United States. Also, itmay be possible for unauthorized third parties to copy or reverse engineeraspects of our products, develop similar technology independently or otherwiseobtain and use information that we regard as proprietary. Furthermore,detecting unauthorized use of our proprietary rights is difficult. Litigationmay be necessary to enforce our proprietary rights. Such litigation couldresult in the expenditure of significant financial and managerial resources andcould have a material adverse effect on our future operating results.

 

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***Intellectual property claims against us canbe costly and negatively affect our business.***

 

In the telecommunications business, there is frequent litigation basedon allegations of patent infringement. As the number of entrants in our marketincreases and the functionality of our products is enhanced and overlaps withthe products of other companies, we may become subject to claims ofinfringement or misappropriation of the intellectual property rights of others.As a result, from time-to-time, third parties may claim exclusive patent orother intellectual property rights to technologies that we use. Although webelieve that we do not face material liability related to infringement of theintellectual property of others, any claims asserting that our productsinfringe or may infringe proprietary rights of third parties, if determinedadversely to us, could have a material adverse effect on our business,financial condition or operating results. Any claims, with or without merit,could be time-consuming, result in costly litigation, divert the efforts of ourengineering and management personnel, cause delays in product shipments orrequire us to enter into royalty or licensing agreements, any of which couldhave a material adverse effect upon our operating results. In any legal actionclaiming patent infringement commenced against us, we cannot assure you that wewould prevail given the complex technical issues and inherent uncertainties inpatent litigation. In the event a claim against us was successful, and we couldnot obtain a license on acceptable terms or license a substitute technology orredesign to avoid infringement, we may be unable to market our affectedproducts. This could have a material adverse effect on our business, financialcondition and operating results.

 

***Certain of our products depend upon thecontinued availability of licensed technology from third parties.***

 

We currently license and will continue to license from third partiescertain technology integral to certain of our products. For example, we haveobtained licenses from third parties for software for certain of our voice andfax products. While we believe that much of this technology is available frommultiple sources, any difficulties in acquiring third-party technologylicenses, or integrating the related third-party technology into our products, couldresult in delays in product development or upgrades until equivalent technologycan be identified, licensed and integrated.

 

We may require new licenses in the future as our business grows andtechnology evolves. We cannot assure you that these licenses will continue tobe available to us on commercially reasonable terms, if at all, which couldhave a material adverse effect on our business, financial condition andoperating results.

 

***We may enter into acquisitions that may bedifficult to integrate, disrupt our business, dilute stockholder value ordivert management attention.***

 

We intend to pursue acquisitions of businesses, technologies andproducts that will complement our existing operations. We cannot assure youthat any acquisition we make in the future will provide us with the benefits weanticipated in entering into the transaction. Acquisitions are typicallyaccompanied by a number of risks, including:

 

*•*                difficulties in integrating theoperations and personnel of the acquired companies;

 

*•*                maintenance of acceptable standards,controls, procedures and policies;

 

*•*                potential disruption of ongoingbusiness and distraction of management;

 

*•*               impairment of relationships withemployees and customers as a result of any integration of new management or otherpersonnel;

 

*•*                inability to maintain relationshipswith customers of the acquired business;

 

*•*                difficulties in incorporating acquiredtechnology and rights into products and services;

 

*•*                failure to achieve the expectedbenefits of the acquisition;

 

*•*                unexpected expenses resulting from theacquisition;

 

*•*                potential unknown liabilitiesassociated with the acquired businesses; and

 

*•*                unanticipated expenses related toacquired technology and its integration into existing technology.

 

In addition, acquisitions may result in the incurrence of debt,restructuring charges and large one-time write-offs, such as write-offs foracquired in-process research and development costs. Acquisitions may alsoresult in goodwill and other intangible assets that are subject to impairmenttests, which could result in future impairment charges. Furthermore, if wefinance acquisitions by issuing convertible debt or equity securities, ourexisting stockholders may be diluted and earnings per share may decrease.

 

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From time-to-time, we may enter into negotiations for acquisitions thatare not ultimately consummated. Those negotiations could result in diversion ofmanagement time and significant out-of-pocket costs. If we fail to evaluate andexecute acquisitions properly, we may not be able to achieve our anticipatedlevel of growth and our business and operating results could be adverselyaffected.

 

***Recent compliance initiatives will cause usto incur significant increased costs and will require substantial time of ourmanagement.***

 

The Sarbanes-Oxley Act, as well as new rules subsequently implementedby the SEC and the Nasdaq National Market, have imposed various newrequirements on public companies, including requiring changes in corporategovernance practices. Our management and other personnel will need to continueto devote a substantial amount of time to these new compliance initiatives.Moreover, these rules and regulations are increasing our legal and financialcompliance costs and will make some activities more time-consuming and costly.

 

In addition, the Sarbanes-Oxley Act requires, among other things, thatwe maintain effective internal controls for financial reporting and disclosurecontrols and procedures. Our ongoing compliance with Section 404 of theSarbanes-Oxley Act will require that we incur substantial accounting expenseand expend significant management efforts. Moreover, if we are not able tocomply with the requirements of Section 404 in a timely manner, or if weor our independent registered public accounting firm identifies deficiencies inour internal controls over financial reporting that are deemed to be materialweaknesses, the market price of our stock could decline and we could be subjectto sanctions or investigations by the Nasdaq, SEC or other regulatoryauthorities, which would require additional financial resources and managementresources.

 

***If we are unable to attract or retain keypersonnel, we may be unable to operate our business successfully.***

 

Our success depends in large part upon the continued contributions ofour key management, sales, marketing and engineering personnel, many of whomperform important functions and would be difficult to replace. If we lose oneor more members of our senior management team our business and operatingresults would be harmed. We do not have employment contracts with our keypersonnel. There has been significant competition in our industry for qualifiedpersonnel, and, at times, we have experienced difficulty in recruitingqualified personnel. We may not be able to attract and retain the necessarypersonnel to accomplish our business objectives, and we may experienceconstraints that will adversely affect our ability to satisfy customer demandin a timely fashion or to support our customers and operations. Our inabilityto hire qualified personnel on a timely basis, or to retain our key personnel,could materially adversely affect our business, financial condition andoperating results.

 

***We are subject to environmental andoccupational health and safety regulations that can increase the costs ofoperations or limit our activities.***

 

We are subject to environmental and occupational health and safetyregulations relating to matters such as reductions in the use of harmful substances,comprehensive risk management in manufacturing activities and final products,the use of lead-free soldering, and the recycling of products and packagingmaterials. On February 13, 2003 the European Parliament and the Counsel ofthe European Union published directives on waste electrical and electronicequipment and on the restriction of the use of certain hazardous substances inelectrical and electronic equipment. These directives will generally requireelectronics producers after August 2005 to bear the cost of collection,treatment, recovery and safe disposal of past and future products fromend-users and to ensure after June 2006 that new electrical and electronicequipment does not contain specified hazardous substances. While the cost ofthese directives to us cannot be determined before regulations are adopted inindividual member states of the European Union, it may be substantial and maydivert resources, which could detract from our ability to develop new products.We may not be able to comply in all cases with applicable environmental andother regulations, and if we do not, we may incur remediation costs or we maynot be able to offer our products for sale in certain countries, which couldadversely affect our results.

 

***Risks Related to OurCommon Stock***

 

***Our operating results could fluctuatesignificantly and cause our stock price to be volatile, which may cause thevalue of your investment to decline.***

 

Our operating results could fluctuate in the future due to a variety offactors, many of which are outside of our control. If our operating results donot meet the expectations of securities analysts, the trading price of ourcommon stock could significantly decline. This may cause the value of yourinvestment in our company to decline. In addition, the value of your investmentcould be affected by investor perception of our industry or our prospectsgenerally, independent of our operating performance. Some of the factors thatcould affect our operating results or the market price of our common stockinclude:

 

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*•**               *our ability tocope with difficult conditions in the economy in general, and thetelecommunications market in particular;

 

*•**               *our ability toformulate and implement effective strategies to respond to changing marketrequirements and conditions;

 

*•**               *cancellationor rescheduling of orders for our products;

 

*•**              *ourability to collect accounts receivable from customers that have been adverselyaffected by the difficult economic conditions;

 

*•**               *our ability todevelop, manufacture, market and support our products and product enhancements;

 

*•**              *thetiming and number of orders for our products, which have historically beenweighted more heavily toward the last month of each quarter and the second andfourth quarters of each year;

 

*•**              *quarterlyfluctuations in our revenue, which typically is lower in the third quarter dueto customer summer vacation schedules, particularly in Europe, and to a lesserextent in the first quarter of each year;

 

*•**               *our ability tohire, train and retain key management, sales, marketing and engineeringpersonnel;

 

*•**               *announcementsor technological innovations by our competitors or in competing technologies;

 

*•**               *our ability toobtain sufficient supplies of sole or limited source components for ourproducts;

 

*•**               *a decrease inthe average selling prices of our products;

 

*•**               *changes incosts of components that we include in our products;

 

*•**               *the mix ofproducts that we sell; and

 

*•**               *anyinterruptions in the flow of our products through our resellers or ourtwo-tiered distribution system.

 

Because of quarterly fluctuations, we believe that quarter-to-quartercomparisons of our operating results are not necessarily meaningful. Moreover,our operating results may not meet our announced guidance or expectations ofequity research analysts or investors, in which case the price of our commonstock could decrease significantly.

 

In addition, our expense levels are based, in significant part, on ourexpectations as to future revenue and are largely fixed in the short term. As aresult, we may be unable to adjust spending in a timely manner to compensatefor any unexpected shortfall in revenue. Furthermore, we intend to increase ouroperating expenses as we expand our product development, sales and marketing,and administrative organizations. The timing of these increases and the rate atwhich new personnel become productive will affect our operating results, and,in particular, we may incur operating losses in the event of an unexpecteddelay in the rate at which development or sales personnel become productive.Any such revenue shortfall, and the resulting decrease in operating income orincrease in operating loss, could lead to volatility in the price of our commonstock.

 

***The market price of our common stock may bevolatile, which could lead to losses for individual investors.***

 

Stock markets in general, and the market for technology stocks,including our common stock, in particular, have experienced extreme price andvolume fluctuations that often have been unrelated, or disproportionate, to theoperating performance of those companies. The market for our common stock hasbeen and is likely to continue to be volatile. Many factors could cause thetrading price of our common stock to fluctuate substantially, including thefollowing:

 

*•**              *futureannouncements concerning our business, technology, acquisitions, strategicpartnerships, management, customers or competitors;

 

*•**              *introductionof new products or changes in product pricing policies by us, our competitorsor our customers;

 

*•**              *changesin earnings estimates by securities analysts or announcements of results ofoperations that are not aligned with the expectations of analysts andinvestors;

 

*•**              *changesin market valuations of similar companies;

 

*•**              *reducedspending for telecommunications hardware and software;

 

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*•**              *theeconomic and competitive conditions in the telecommunications sectors in whichour customers operate; and

 

*•**              *generaleconomic conditions and stock market trends.

 

In the past, following periods of volatility in the market price of aparticular company’s securities, securities class action litigation has oftenbeen brought against that company. Many technology companies have been subjectto this type of litigation. This type of litigation, if instituted against us,could result in substantial costs and a diversion of our management’s attentionand resources.

 

***Our corporate documents may prevent a changein control or management that stockholders consider desirable.***

 

Our charter and by-laws contain provisions that might enable ourmanagement to resist a takeover of our company. In addition, we haveimplemented a shareholder rights plan. These provisions and our shareholderrights plan could have the effect of delaying, deferring, or preventing achange in control of Brooktrout or a change in our management that stockholdersconsider favorable or beneficial. They could discourage proxy contests and makeit more difficult for stockholders to elect directors and take other corporateactions. They also could limit the price that investors may be willing to payin the future for shares of our common stock.

 

***We may need additional financing in thefuture, and any additional financing may result in restrictions on ouroperations or substantial dilution to our stockholders.***

 

We may need to raise additional funds in the future, for example, todevelop new technologies, support our expansion, respond to competitivepressures, acquire complementary businesses or respond to unanticipatedsituations. We may decide to raise additional funds through public or privatefinancings, strategic relationships or other arrangements. Our ability toobtain debt or equity funding will depend on a number of factors, includingmarket conditions, our operating performance and investor interest. Additionalfunding may not be available to us on acceptable terms or at all. If adequatefunds are not available, we may be required to revise our business plan toreduce expenditures, including curtailing our growth strategies, foregoingacquisitions or reducing our product development efforts. If we succeed inraising additional funds through the issuance of equity or convertiblesecurities, the issuance could result in substantial dilution to existingstockholders. If we raise additional funds through the issuance of debtsecurities or preferred stock, these new securities would have rights,preferences and privileges senior to those of the holders of our common stock.The terms of these securities, as well as any borrowings under our bank line ofcredit agreement, could impose restrictions on our operations.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Market riskrepresents the risk of loss that may affect us due to adverse changes infinancial market prices and rates. Our market risk exposure is primarily fromfluctuations in interest rates and foreign exchange rates.

 

***Interest Rate Risks***

 

We invest cash balances in excess of operating requirements inshort-term securities, generally with maturities of 90 days or less on the dateof purchase. These securities consist of U.S. government notes and bonds,commercial paper, and certificates of deposit. We also invest in marketabledebt securities that consist of notes and bonds issued by various federalagencies of the United States, as well as corporate commercial paper, withmaturities greater than 90 days on the date of purchase. If we were toexperience a 1% increase in the effective interest rate, the effect on thecarrying value of marketable debt securities as of March 31, 2005 would bea decrease of approximately $0.2 million. Changes in interest rates and therelated impact on the carrying value of marketable debt securities do notgenerally affect our net income or loss because our securities are consideredavailable-for-sale for accounting purposes and any unrealized gain or loss isdeferred as a component of accumulated other comprehensive income.

 

***Foreign Currency Exchange Rate Risks***

 

We generally conduct business in U.S. dollars; however, some of ourinternational sales are denominated in foreign currencies. We also operatesales and support offices located outside of the United States and we incurexpenses that are denominated in foreign currencies. As a result of theseactivities, we are exposed to market risk from changes in foreign currencyexchange rates. The impact of changes in foreign currency exchange rates can bepositive or negative in any period. We manage our exposure to foreign currencymarket risks through regular operating and financing activities. We also makeuse of foreign currency forward exchange contracts to minimize the impact offluctuations in foreign currency exchange rates. We do not enter into foreigncurrency forward exchange contracts for trading purposes. As of March 31,2005, a 10% appreciation or depreciation in foreign currency exchange ratesfrom the prevailing market rates would not have had a material impact on ourresults for the first quarter of 2005.

 

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**Item 4.Controls and Procedures**

 

***(a) Evaluation ofdisclosure controls and procedures.***

 

Our management, with the participation of our chief executive officerand chief financial officer, evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31,2005. In designing and evaluating our disclosure controls and procedures, ourmanagement recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives, and our management necessarily applied its judgment in evaluatingthe cost-benefit relationship of possible controls and procedures. Based onthis evaluation, our chief executive officer and chief financial officerconcluded that, as of March 31, 2005, our disclosure controls andprocedures were (1) designed to ensure that material information relatingto our company, including our consolidated subsidiaries, is made known to ourchief executive officer and chief financial officer by others within thoseentities, particularly during the period in which this report was beingprepared and (2) effective, in that they provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms.

 

***(b) Changes ininternal control over financial reporting.***

 

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred duringthe fiscal quarter ended March 31, 2005 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II – OTHER INFORMATION**

 

**Item 2.  Unregistered Sales ofEquity Securities and Use of Proceeds**

 

Our repurchases ofequity securities for the first quarter of fiscal 2005 were as follows:

 
| **Period**                                | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares  Purchased as  Part of Publicly  Announced Plans  or Programs (1)** | ** ** | **Maximum  Number of  Shares That May  Yet Be Purchased  Under the Plans  or Programs** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
|                                      |       |                                   |       |                              |       |                                                                                          |       |                                                                                    |       |
| January 1  - January 31, 2005   |       | —                                 |       | —                            |       | —                                                                                        |       | 717,900                                                                                 |       |
| February 1  - February 28, 2005 |       | 93,800                                 |       | $                                 | 12.89      |                                                                                          | 93,800     |                                                                                    | 624,100    |   |
| March 1  - March 31, 2005       |       | 117,730                                |       | $                                 | 12.68      |                                                                                          | 117,730    |                                                                                    | 506,370    |   |
|                                      |       |                                   |       |                              |       |                                                                                          |       |                                                                                    |       |
| Total                                     |       | 211,530                                |       | $                                 | 12.77      |                                                                                          | 211,530    |                                                                                    | 506,370    |   |

 

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| (1)  - |   | In  October 2004, our Board of Directors authorized the repurchase of up to  1,000,000 shares of our common stock from time-to-time on the open market or  in privately negotiated transactions. The program expires in  October 2005.  All shares repurchased during the period covered by this report were  purchased under this publicly announced plan. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item6.  Exhibits**

 

The Exhibits filed as part of this Quarterly Report on Form 10-Q arelisted on the Exhibit Index following the signature pages hereto and areincorporated herein by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|     |         | BROOKTROUT, INC. |
|----------|--------------|------------------|
|     |         |             |   |
| Date:    | May 10, 2005 | By:              | /s/ ERIC R. GILER |
|     |         |             | Eric R. Giler |
| * * | * *     | * *         | *President* |
| * * | * *     | * *         | *(Principal  Executive Officer)* |
|     |         |             |   |
|     |         |             |   |
| Date:    | May 10, 2005 | By:              | /s/ ROBERT C. LEAHY |
|     |         |             | Robert C. Leahy |
| * * | * *     | * *         | *Vice President of  Finance and Operations* |
| * * | * *     | * *         | *(Principal  Financial and Accounting Officer)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.1              |       | Restated Articles of Organization of Brooktrout, Inc. are hereby  incorporated by reference from Exhibit 3.1 to Annual Report on Form 10-K for  the fiscal year ended December 31, 1992 filed with the SEC on March 31,  1993 (File No. 000-20698).                                                                                                                                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2              |       | Articles of Amendment to the Restated Articles of Organization of  Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to  Annual Report on Form 10-K for the fiscal year ended December 31, 1998  filed with the SEC on March 30, 1999 (File No. 000-20698).                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.3              |       | Articles of Amendment to the Restated Articles of Organization of  Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.2 to  Annual Report on Form 10-K for the fiscal year ended December 31, 1999  filed with the SEC on March 30, 2000 (File No. 000-20698).                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.4              |       | Articles of Amendment to the Restated Articles of Organization of  Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.3 to  Amendment No. 2 to the Quarterly Report on Form 10-Q/A for the fiscal quarter  ended June 30, 2000 filed with the SEC on November 17, 2000 (File  No. 000-20698).                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.5              |       | Articles of Amendment to the Restated Articles of Organization of  Brooktrout, Inc. are hereby incorporated by reference from Exhibit 3.5 to the  Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004  filed with the SEC on August 6, 2004 (File No. 000-20698).                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 3.6              |       | Amended and Restated By-laws of Brooktrout, Inc. are hereby  incorporated by reference from Exhibit 3.4 to Annual Report on Form 10-K for  the fiscal year ended December 31, 2001 filed with the SEC on March 25,  2002 (File No. 000-20698).                                                                                                                                                                               |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.1              |       | Shareholder Rights Agreement, dated as of September 9, 1998,  between Brooktrout, Inc. and State Street Bank and Trust Company, as Rights  Agent is hereby incorporated by reference from Exhibit 4.1 to Registration  Statement on Form 8-A filed with the SEC on September 14, 1998 (File No.  000-20698).                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 4.2              |       | Amendment No. 1 to Shareholder Rights Agreement, dated as of March 1,  2002, between Brooktrout, Inc., State Street Bank and Trust Company, as  Rights Agent, and EquiServe Trust Company, N.A. as successor Rights Agent, is  hereby incorporated by reference from Exhibit 4.2 to Annual Report on Form  10-K for the fiscal year ended December 31, 2001 filed with the SEC on March 25,  2002 (File No. 000-20698). |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.1            |       | Standard form of Non-Employee Director Non-Qualified Stock Option  Agreement pursuant to the Brooktrout, Inc. 2001 Stock Option and Incentive  Plan is hereby incorporated by reference from Exhibit 10.13 to Annual Report  on Form 10-K for the fiscal year ended December 31, 2004 filed with the  SEC on March 16, 2005 (File No. 000-20698).                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.2            |       | 2004 Bonus Plan for Executive Officers is hereby incorporated by  reference from Exhibit 10.14 to Annual Report on Form 10-K for the fiscal  year ended December 31, 2004 filed with the SEC on March 16, 2005  (File No. 000-20698).                                                                                                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.3            |       | 2005 Management Compensation Plan is hereby incorporated by reference from  Exhibit 10.15 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.4            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and Ronald J. Bleakney is hereby incorporated by reference from  Exhibit 10.16 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *10.5            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and David W. Duehren is hereby incorporated by reference from  Exhibit 10.17 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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| **Exhibit  No.** | ** ** | **Exhibit**                                                                                                                                                                                                                                                                                                          |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                 |
| *10.6            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and Eric R. Giler is hereby incorporated by reference from  Exhibit 10.18 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).          |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| *10.7            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and Robert C. Leahy is hereby incorporated by reference from  Exhibit 10.19 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).        |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| *10.8            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and Heather J. Magliozzi is hereby incorporated by reference from  Exhibit 10.20 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698).   |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| *10.9            |       | Executive Retention Agreement dated March 16,  2005 between Brooktrout, Inc. and R. Andrew O’Brien is hereby incorporated by reference from  Exhibit 10.21 to Annual Report on Form 10-K for the fiscal year ended December 31,  2004 filed with the SEC on March 16, 2005 (File No. 000-20698). |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| 31.1             |       | Certification of Principal Executive Officer pursuant to Exchange Act  Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of  Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| 31.2             |       | Certification of Principal Financial and Accounting Officer pursuant  to Exchange Act Rules 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302  of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                                        |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| 32.1             |       | Certification of Principal Executive Officer pursuant to Exchange Act  Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is filed herewith.                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                 |
| 32.2             |       | Certification of Principal Financial and Accounting Officer pursuant  to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 is  filed herewith.                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                 |

 

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** -*Managementcontract or compensatory plan.

 

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