**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

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

**Forthe fiscal year ended July 31, 2005**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                              to                             **

**CommissionFile Number**0-21709

**INTELLISYNC CORPORATION**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                                    |   | **77-0349154**       |
|---------------------------------------------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of                                                |   | (I.R.S. Employer     |
| incorporation or  organization)                                                 |   | Identification  No.) |
| **2550 North First Street, Suite 500**                                     |   | ** **           |
| **San  Jose, California**                                                       |   | **95131**            |
| (Address of  principal executive offices)                                       |   | (ZIP Code)           |
| **(408) 321-7650**                                                              |
| (Registrant’s  telephone number, including area code)                      |
| Securities  registered pursuant to Section 12(b) of the Act: **None** |

 

| Securities registered  pursuant to Section 12(g) of the Act:  | **Common Stock, $.001 par value**   |
|------------------------------------------------------------------------------|-------------------------------------|
|                                                                         | **Preferred Stock Purchase Rights** |
| ** **                                                                   | (Title of class)                    |

 

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

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

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Act). Yes  x          No  o

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

The aggregate market valueof the voting stock held by non-affiliates of the registrant was approximately$129,158,201 at January 31, 2005 the registrant’s most recently completedsecond fiscal quarter.

The number of theregistrant’s $0.001 par value Common Stock outstanding as of October 10,2005, was 67,255,129 sharesof Common Stock.

**DOCUMENTS INCORPORATED BYREFERENCE:**

**Part III**

Certain sections of the proxy statement for registrant’s2005 Annual Meeting of Stockholders tentatively scheduled for December 2,2005 to be filed with the Commission pursuant to Regulation 14A no later than120 days after the fiscal year ended July 31, 2005.

 

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**TABLE OF CONTENTS**

|                                    | ** **                                                                                                          |         | **Page** | ** ** |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------|---------|----------|------------|
| **PART I**                    |                                                                                                                | **1**   |     |
| ITEM 1.                            | Business                                                                                                            |    | 1        |       |
|                               | Overview                                                                                                            |    | 1        |       |
|                               | Available  Information                                                                                              |    | 1        |       |
|                               | Industry  Background                                                                                                |    | 2        |       |
|                               | Our  Technology Solutions                                                                                           |    | 3        |       |
|                               | Products                                                                                                            |    | 4        |       |
|                               | Our  Strategy                                                                                                       |    | 7        |       |
|                               | Sales  And Marketing                                                                                                |    | 8        |       |
|                               | Customer  Support                                                                                                   |    | 10       |       |
|                               | Seasonality                                                                                                         |    | 10       |       |
|                               | Competition                                                                                                         |    | 10       |       |
|                               | Research  and Development                                                                                           |    | 11       |       |
|                               | Professional  Services Group                                                                                        |    | 12       |       |
|                               | Acquisitions                                                                                                        |    | 12       |       |
|                               | Proprietary  Technology and Intellectual Property                                                                   |    | 12       |       |
|                               | Employees                                                                                                           |    | 13       |       |
|                               | Risk  Factors                                                                                                       |    | 13       |       |
|                               | Executive  Officers and Directors of the Registrant                                                                 |    | 28       |       |
| ITEM 2.                            | Properties                                                                                                          |    | 32       |       |
| ITEM 3.                            | Legal  Proceedings                                                                                                  |    | 33       |       |
| ITEM 4.                            | Submission  of Matters to a Vote of Security Holders                                                                |    | 33       |       |
| **PART II**                   |                                                                                                                | **34**  |     |
| ITEM 5.                            | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |    | 34       |       |
| ITEM 6.                            | Selected  Financial Data                                                                                            |    | 35       |       |
| ITEM 7.                            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |    | 37       |       |
| ITEM 7A.                           | Quantitative  and Qualitative Disclosures about Market Risk                                                         |    | 72       |       |
| ITEM 8.                            | Financial  Statements and Supplementary Data                                                                        |    | 73       |       |
| ITEM 9.                            | Changes  In and Disagreements With Accountants on Accounting and Financial Disclosure                               |    | 73       |       |
| ITEM 9A.                           | Controls  and Procedures                                                                                            |    | 73       |       |
| ITEM 9B.                           | Other  Information                                                                                                  |    | 75       |       |
| **PART III**                  |                                                                                                                | **76**  |     |
| ITEM 10.                           | Directors  and Executive Officers of the Registrant                                                                 |    | 76       |       |
| ITEM 11.                           | Executive  Compensation                                                                                             |    | 76       |       |
| ITEM 12.                           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |    | 76       |       |
| ITEM 13.                           | Certain  Relationships and Related Transactions                                                                     |    | 76       |       |
| ITEM 14.                           | Principal  Accountant Fees and Services                                                                             |    | 76       |       |
| **PART IV**                   |                                                                                                                | **77**  |     |
| ITEM 15.                           | Exhibits,  Financial Statement Schedules                                                                            |    | 77       |       |
| **SIGNATURES**                     |                                                                                                                | **82**  |     |
| **POWER OF  ATTORNEY**             |                                                                                                                | **83**  |     |
| **INDEX TO  FINANCIAL STATEMENTS** |                                                                                                                | **F-1** |     |
|                                    |                                                                                                                     |         |          |            |  |  |  |

 

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**PART I**

**ITEM 1.**                BUSINESS

*This Annual Report on Form 10-K containscertain forward-looking statements that involve risks and uncertainties. Wordssuch as “anticipates,” “believes,” “expects,” “future,” “plan,” “intends,” “should,”and similar expressions are used to identify forward-looking statements. Thesestatements are only projections based on current assumptions made bymanagement. The actual results that we achieve may differ materially from thoseindicated in any forward-looking statements due to the risks and uncertaintiesset forth under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” “Risk Factors” and elsewhere in this Form 10-K.We undertake no obligation to revise any forward-looking statements in order toreflect events or circumstances that may arise after the date of this report. Readersare urged to review and consider carefully the various disclosures made by usin this report and our reports filed with the Securities and ExchangeCommission that inform interested parties about the risks and factors that mayaffect our business.*

**OVERVIEW**

Intellisync Corporation develops, markets and supportsdesktop, enterprise and mobile carrier-class software that enables consumers,business executives and information technology professionals to extend thecapabilities of enterprise groupware and vertical applications, data-enabledmobile devices and other personal communication platforms. The primary softwareapplications we developed and marketed include push-email, data synchronizationand systems management software. Our software also enables organizations tosearch, find, match and synchronize identity data within their computer systemsand network databases.

Intellisync was incorporated in California on August 27,1993 and was subsequentlyreincorporated in Delaware on November 27, 1996. Our principal executiveoffices are located at 2550 North First Street, Suite 500, San Jose,California 95131, and our Web address is *www.intellisync.com*.The information posted on our website is not incorporated into this AnnualReport on Form 10-K.

We have organized our operations into a singleoperating segment encompassing the development, marketing and support ofsoftware and services that provide synchronization, wireless messaging, mobileapplication development, application/device management, real-time remoteinformation access, secure VPN and identity searching/matching/screeningcapabilities. For further discussion of financial information related to ouroperating segment, as well as geographic areas, refer to note 15 toconsolidated financials statements set forth in Part IV of this AnnualReport on Form 10-K.

We license our softwareproducts directly to corporations, mobile carriers, original equipmentmanufacturers, or OEMs, and business development organizations worldwide. Inaddition, we sell our retail products through several distribution channelsboth in the United States and internationally, including major distributors,resellers, computer dealers, retailers and mail-order companies.Internationally, we are represented by distributors, resellers and retailers inNorth America, Europe, the Asia-Pacific region, South America and Africa. Wealso allow individuals and organizations to utilize our software directly byhosting our products and charging a subscription fee.

**AVAILABLEINFORMATION**

All reports we filed electronically with the UnitedStates Securities and Exchange Commission, or the SEC, including our annualreports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and proxy statements, and other information andamendments to those reports filed electronically (if applicable), areaccessible at no cost on our Web site at *www.intellisync.com*.They are also available by contacting our Investor Relations at *invrel@intellisync.com* or 408-321-7650. Thesefilings are also accessible on the SEC’s Web site at *www.sec.gov.*The public may read and copy any materials we filed 

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with the SEC at the SEC’sPublic Reference Room at 100 F Street, NE, Washington, DC 20549. Thepublic may obtain information for the Public Reference Room by calling theSEC at 1-800-SEC-0330.

We have adopted an ethics policy for all of ouremployees, as well as a code of ethics for our principal officers and financialprofessionals. Copies of the ethics policy and code of ethics are alsoavailable on our Web site.

Our Web site and theinformation contained therein or incorporated therein are not intended to beincorporated into this Annual Report on Form 10-K or our otherfilings with the SEC.

**INDUSTRYBACKGROUND**

Significant advancements in miniaturization, visualdisplays, long-life batteries and portable communications in the 1990’shave led to the introduction of many innovative mobile computing devices today.In addition, with the increasing mobility ofwork-forces, as well as additional competitive pressures, businessprofessionals and enterprises are continuously seeking ways to improveproductivity and, as a result, are increasingly using the growing number ofthese mobile computing devices. These highly portable devices allowusers to work and communicate while they are away from the office and havefueled the significant growth of mobile computing. From laptops to handhelddevices and now to smart phones, a variety of computing devices have foundtheir way into most organizations.

Laptop computers and mobile handheld devices such asPDAs and smartphones are carried by a high percentage of corporate employees. Laptopsprovide enough power to support almost any application a user wants to run,with the added benefit of being the standard platform for almost allapplication development. Then, in the past few years, we have seen asignificant increase in the deployment of handheld devices within corporations.These devices are used for a variety of reasons including email and personalinformation management, (PIM) access and mobile applications. The form factorof these devices makes them ideal for certain tasks where a laptop may beineffective. Today’s popular handheld devices are mostly based on Palm, Symbianor Windows Mobile operating systems.

The use of mobile devices has increased tremendouslyas these devices have achieved wide acceptance and become more advanced andincreasingly capable of running complex applications. Recent developments inmobile technology and wireless infrastructure are enabling mobile devices toexchange an immense amount of both personal and corporate information, and theyare therefore now widely used for an extensive range of both data and voice applications.

Mobile devicemanufacturers, corporate enterprises and application developers face constantpressure to provide increased mobile functionality. Many of thesemanufacturers, enterprises and developers seek to incorporate mobile datacommunication, exchange and synchronization capabilities to enhance existingservices or expand into new markets. Enablingmobile devices to intelligently communicate, exchange and synchronizeinformation is a complex and challenging task and has historically beencumbersome and expensive because it may have required combining products frommultiple companies to arrive at a mobile solution. Simply facilitating synchronization or data messaging requires data-level,or content-aware, synchronization technology to maintain complete, up-to-dateand accurate information. In order to manage information effectively, mobiledevice users need convenient connectivity and synchronization solutions for thespecific combination of networks, devices and applications that they use. Thesesoftware solutions must allow these users to synchronize information maintainedseparately on multiple devices (for example, contact databases maintained by amobile professional using a handheld computer in the field and by a supportcolleague using a desktop personal computer, or PC, in the office). A softwaresolution that links such different devices must address multiple hardwarearchitectures, operating systems, communications architectures andapplication-specific data formats and structures.

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**OUR TECHNOLOGY**SOLUTIONS**

We provideenterprises, network operators, mobile device manufacturers and softwareproviders with a complete mobility platform. Our products are branded andmarketed under several names for specific markets or needs; these include our award-winningIntellisync family, the Intellisync Mobile SuiteTM, the Intellisync Mobile Suite forCarrier, the Intellisync SyncML platform, Identity Search server andIntellisync IM (formerly VeriChat). Encompassing all aspects of mobility, weprovide the critical technology solutions needed for businesses to realize thefull potential of smart devices and advanced wireless networks. Our mobilityofferings include:

·       **Wireless Messaging**:   Email/PIMsynchronization and instant messaging solutions connect mobile devices toconsumer and corporate industry standard email servers like Microsoft Exchange,Novell Groupwise and Lotus Domino, simplifying the process for businessprofessionals to access their email, messages, calendar, contacts, and tasks.

·       **PIM Synchronization**:   Desktop-PDA(personal digital assistant) synchronization offerings include Intellisync®Handheld Edition for Enterprise and Intellisync Handheld Edition, supportingthe synchronization needs of a mobile workforce. For independent softwarevendors, or ISVs, and internet service providers, or ISPs, we offer the PIMPlatform.

·       **File Distribution**:   Filesynchronization capabilities automate the process of distributing informationthroughout an organization.

·       **Device Management**:   Device managementprovides a robust platform for mobile carriers to configure, update, andprovision leading mobile devices for their customers and offers a mechanism forremotely maintaining and securing mobile devices.

·       **Application Mobilization**:   We alloworganizations to mobilize a wide range of enterprise applications and data to awide variety of devices and platforms.

·       **Services**:   We provide professional and maintenanceservices to support the evaluation, purchase, installation and use of ourproducts.

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**PRODUCTS**

We provide individuals andorganizations with a complete mobile platform featuring a comprehensive suiteof software products and services that synchronizes and distributes criticalinformation to employees, customers or partners. Our solutions are designed tosupport continued innovation—the growing number of devices, access points anddata sources utilized by the typical mobile worker in today’s enterprise—allowingbusinesses of all sizes to maximize productivity while minimizing complexityand cost.

| Product Name                                             | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Description** | ** ** | **Introduction Date** |
|----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------------|
| ***Intellisync Mobile  Suite for the Enterprise***  |       | Designed to  extend an organization’s existing technology infrastructure to mobile and  remote staff, delivering access to enterprise applications, file content,  email and PIM data, intranet sites, and Web content and provide tools for  remotely managing mobile devices.                                                                                                                                                                                                                              |       |            |
| ·   Intellisync Wireless Email            |       | Provides *Wireless Push Email and PIM Synchronization*, enabling  users to receive email, calendar, contacts, and other updates from all the  leading groupware/email servers, including Microsoft Exchange and Lotus Domino,  on nearly any mobile device, including Palm OS, Pocket PC, and Windows  Mobile-based devices. XML (Extensible Markup Language) Platform opens  Wireless Email to easy access to CRM (customer relationship management), SFA  (Sales Force Automation), and collaboration software. |       | December 2003   |
| ·   Intellisync Data Sync                 |       | Provides *Mobilized Enterprise Applications*, extending any of  corporate data or applications to mobile workers, on handheld devices as well  as laptop and tablet PCs. Data Sync is used by enterprises to deliver  large-scale, high-ROI (return on investment) mobile applications to several  users.                                                                                                                                                                                                         |       | December 2003   |
| ·   Intellisync File Sync                 |       | Provides an *Efficient File and Web-content Distribution* as it  automates distribution of any file or intranet content on a network to mobile  devices, keeping them up-to-date and relevant.                                                                                                                                                                                                                                                                                                                    |       | December 2003   |
| ·   Intellisync Mobile Systems Management |       | Provides a *Comprehensive Security  and Device Management*, enabling users to manage every aspect of a  mobile solution through an easy-to-use administrative console. With features  that drive administrative efficiency and security, such as over-the-air  deployment and automatic device backups, Systems Management helps minimize  the IT (information technology) resources required for a mobile solution.                                                                                              |       | December 2003   |
| **Wireless  Email Express**                              |       | An  easy-to-install, subscription version of Intellisync Wireless Email, ideal  for the smaller enterprise deployment, or small to medium businesses.                                                                                                                                                                                                                                                                                                                                                             |       | August 2005     |

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| ***Intellisync Mobile Suite for the Carrier*** |   | A full-featured mobile  data middleware platform that provides operators with a single platform they  can use to deliver wireless email, device management, and data access  solutions to their customers. The Intellisync Mobile Suite for Carrier  delivers the following modules:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |            |
|-----------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|
| ·   Intellisync Wireless Email       |   | See product description under Intellisync Mobile  Suite.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | December 2003   |
| ·   Intellisync Consumer Email       |   | Designed to provide simple, secure, and affordable  email access on BREW-enabled mobile devices that operators choose to deploy.  The solution supports POP3 email from a variety of sources including AOL,  Hotmail, Yahoo, and MSN. The solution can also be configured to provide  access to a user’s corporate email via an IMAP4 connection into the user’s  Microsoft Exchange or Lotus Domino mail server.                                                                                                                                                                                                                                                                                                                                                                                                                            |   | March 2005 |
| ·   Intellisync Device Management    |   | Provides mobile  operators with device management capabilities that can be offered to  enterprises as either a hosted solution or a behind-the-firewall solution.  This offering includes capabilities for Device Security, Asset Management,  Software Management, Device Troubleshooting, Network Optimization, and Device  Configuration.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | March 2003      |
| ·   Intellisync File Sync            |   | See product  description under Intellisync Mobile Suite.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | December 2003   |
| ·   Intellisync Data Sync            |   | See product  description under Intellisync Mobile Suite.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | December 2003   |
| ***Intellisync  SyncML Platform***                  |   | Provides over-the-air  (OTA) push of PIM data, OTA synchronization services for custom data types,  and hosted Web PIM services. It works on a broad range of mobile devices,  making it the perfect fit for operators needing to deploy a variety of  consumer devices. Intellisync SyncML Platform offers mobile consumers  on-demand pull and push access to their PIM data, email and files, and makes  vital data portable and accessible wherever consumers may go. It allows  on-demand synchronization and scheduled push for any data type, including  email with attachments and PIM data, such as contacts, calendar events,  memos, and tasks. It also provides Web PIM services, allowing consumers to  remotely access their data online, provision mobile devices, backup and  restore PIM data, retrieve files and bookmarks and more. |   | March 2003 |

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| ***Intellisync Carrier ASP Service*** |       | Intellisync offers  mobile carriers a wide range of deployment options for delivering wireless  data solutions. Carriers can, in turn, offer these same options to their  customers, giving them the ultimate in flexibility. Carrier can choose to:                                                                                                                      |   | May 2004 |
|---------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------|
|                                  | ** ** | ·   **Host the Intellisync Mobile Suite for Carrier  inside their network**—this gives the operator total control  over the environment and enables them to deliver a hosted service to their  customers, easing the customers’ installation and support burden.                                                                            |   |          |
|                                  | ** ** | ·   **Have Intellisync host the solution**—this  will enable the mobile operators to deploy wireless data solutions quickly  with minimal delay. Intellisync integrates this hosted solution with the  carriers’ authentication and billing systems to insure that user accounts are  valid and properly billed.                                 |   |          |
|                                  | ** ** | ·   **Have the customer host the solution behind the  firewall**—this option enables companies that want to control  their corporate data to do so by having the infrastructure behind their  firewall.                                                                                                                                               |   |          |
| ***Intellisync  OEM Licensing***      |       | Provides all-in-one corporate-licensing  solution to enable inter-operability for all of the PIM software, handheld  devices, and desktop operating systems that Intellisync Handheld Edition  supports.                                                                                                                                                                  |   |          |
| ·   Wireless to Server |       | PIM Platform-Wireless to  Server (W2S) extends application data via wireless email and PIM “push” to  the leading mobile devices. It offers rapid integration to the widest  possible customer base.                                                                                                                                                            |   | February 1998 |
| ·   Server to Server   |       | With Intellisync’s  server development solution, Intellisync PIM Platform-Server to Server (S2S),  developers can integrate their application’s server-based data with leading  groupware servers such as Microsoft Exchange and Lotus Domino.                                                                                                                  |   | August 2003   |
| ·   Client to Server   |       | To synchronize data to  client PIM applications and cradled devices, Intellisync PIM Platform-Client  to Server (C2S) offers cost-effective integrations through “connectors.”                                                                                                                                                                                  |   | February 1998 |
| ***Identity  Search Server***         |       | Designed to provide  solutions that significantly enhance an organization’s ability to search,  find, match, and group identity data within their computer systems and  network databases. Identity Systems software is an “out of the box” solution  for searching and matching names, addresses, and identity data for Oracle,  DB2/UDB, and SQL Server. |   | March 2004    |

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| ***Intellisync Handheld Edition***                             |   | Designed to provide robust, secure client  synchronization solutions capable of extending information and  mission-critical data beyond the confines of the desktop. It provides  organizations of all sizes and needs with cost-effective, easy-to-administer  solutions for sharing email, PIM, file, and application data with a wide  range of mobile devices and platforms. |   |           |
|----------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
| ·   Intellisync Handheld Edition for Enterprise |   | Designed specifically  for the high-demand corporate environment, Intellisync Handheld Edition for  Enterprise software makes it easy and affordable to support the desktop  synchronization needs of a mobile workforce, no matter which handheld devices  or software they use.                                                                                                |   | June 2001      |
| ·   Intellisync Handheld Edition                |   | Designed to keep a user  constantly current with direct, two-way synchronization between his/her PC  and Palm OS, Pocket PC or Windows Mobile-based Smartphone device.                                                                                                                                                                                                           |   | August 1996    |
| ·   Intellisync Lite Upgrades                   |   | Upgrade to the  full version of Intellisync—special offers for Sony, NEC, Group Sense,  Garmin, Panasonic, and PI Tech customers.                                                                                                                                                                                                                                           |   | June 2001      |
| Intellisync IM (formerly  VeriChat)                            |   | An always-on,  unified Instant Messaging (IM) application for PalmOS devices. On a  smartphone, such as a Treo 600, Intellisync IM works with the user’s  persistent (GPRS/CDMA 1xRTT) or CSD wireless data connection, providing an  “always-on” presence on the Yahoo!, ICQ, MSN & AOL chat networks.                                                  |   | June 2005 |

 

**OUR STRATEGY**

Our strategy is to be aleading developer and marketer of innovative wireless software solutions forthe global mobile communications market by leveraging our engineering,technology and domain expertise and executing on a plan to broaden our marketreach through distribution agreements and partnerships with leadingenterprises, mobile carriers, device manufacturers, and software providers. Webelieve that our strategy will allow us to deepen relationships with ourexisting customers, attract new customers and further diversify our revenuestreams.

Our strategy includes thefollowing key elements:

***Extend Technology and Product Leadership.******  ***We believethat we currently have and are enhancing one of the broadest and mostcomprehensive mobile and wireless infrastructure enterprise solutions. Weintend to continue to invest in research and development and remain involvedwith new and developing industry standards. We also intend to increase theperformance, functionality and ease of use of our solutions by supporting newmobile devices and developing new ways for our products to be marketed and supportedby service providers and our strategic partners.

***Maintain and Strengthen Strategic Relationships.***   Wedepend on and have strategic relationships with service providers, systemsintegrators, mobile carriers, independent software resellers, and other typesof technology providers to build applications based on our infrastructureplatform and technologies. We plan to continue building these relationships aswell as forming new partnerships to increase visibility and distribution of oursolutions.

***Increase Brand Awareness and Marketing Efforts.******  ***We intend toincrease customer awareness of our products, technologies and services. We planto enhance awareness of the Intellisync brand by increasing 

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our marketingactivity and furthering our image as a high-quality provider with acomprehensive offering of technology solutions.

***Expand Our Worldwide Presence.******  ***We believethat international markets present a substantial growth opportunity for us asthe worldwide market for mobile and wireless products continues to grow. We arecurrently selling our products in Canada, Europe,the Asia-Pacific region, South America and Africa, and plan to expandour sales, marketing and support functions in those areas by expanding ourdirect sales force, improving our customer service capabilities and developingrelationships with international resellers, distributors, carriers and OEMs.

***Further Enhance Customer Satisfaction.******  ***We arecommitted to providing world-class technical support, training, consulting andprofessional services and view building long-term customer relationships as acritical component of growing our business. We believe servicing our existingcustomer base will allow us to more easily up-sell and cross-sell additionalproducts, features and customer service offerings.

***Build Value Through Strategic Acquisitions.******  ***We haveacquired and integrated core technologies from Spontaneous Technology, Inc.,Synchrologic, Inc., Identity Systems (formerly Search Software America, orSSA), Tourmaline Networks, Inc. and PDAapps. We are willing to acquire,when appropriate, additional businesses and technologies that will expand andadd functionality to our product offerings, augment our distribution channels,expand our market opportunities or broaden our customer base.

***Continue Revenue Growth and Improve OperatingEfficiencies.******  ***We maintain a disciplined commitmentto increasing our quarterly revenue. Together with our other strategies listedabove, we plan to improve revenue by continuing to develop new and currentproducts, services and technologies. We intend to capitalize on the continuedgrowth in demand for wireless services and the related infrastructure required,including hosting, application and other related services, to support thatgrowth. We also actively seek to improve our operational efficiency and reduceour costs throughout our operations, removing administrative complexities,eliminating redundancies, and integrating acquired businesses.

**SALES AND MARKETING**

We market and sell ourproducts through a direct sales force and several third party distributionchannels in the United States and internationally, including wireless carriers,retail, the Internet, value-added resellers, distributors, software providersand system integrators. We have also historically developed partnerships withoriginal equipment manufacturers, or OEMs, service providers, mobile carriersand other enterprises around the world to market or to create marketingopportunities for our applications. We depend on these partners tohelp us deliver world class mobility solutions and we believe that by workingtogether we combine the strengths of our broad mobility platform with theexpertise, tools and networks of our technology and distribution partners tocreate substantial value, not only for our customers, but also for both ourpartners and our company. Intellisync Corporation’s Partner Program is designedto provide organizations a variety of tools, information, training andresources needed to successfully sell our products and solutions. We work withthese organizations to train certain of their sales forces and collaborate withthem in joint marketing programs.

Through ongoingcommunications with OEMs, enterprises and carrier sales and marketingorganizations, we match our application portfolio with the strategic needs ofthe carrier and the preferences of their subscribers. We have sales andmarketing offices located in San Jose, California; Greenwich, Connecticut;Alpharetta, Georgia; Sydney, Australia; Cologne, Germany; Reading, United Kingdom;and Tokyo, Japan and a number of sales representatives working from their homesin the United States, Italy and Germany, to cover local territories.

Our active participation in multi-channel sales,marketing and service of the enterprise, carrier, retail, and OEM mobilemiddleware markets provides a significant business opportunity for our partners.Our customers continue to expand and optimize their deployments of Intellisyncsoftware products. As a result, 

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Intellisync’scustomer base presents a ready market for complementary products, services, andsolutions from our partners.

In addition, Intellisyncis the mobile platform of choice for some of the largest mobile carriers andoperators in the world. From wireless messaging to device management to mobileapplications, we are helping carriers in their efforts to reduce churn,increase average revenue per user (ARPU), penetrate enterprise accounts andincrease mobile data profits.

We strive to be both atechnology and marketing partner with our OEM and strategic customers. Oursales and marketing organization sells our products directly to our OEMpartners, distributors and end users. We work closely with OEM partners ontheir new hardware products by providing them with technical input, therebyhelping to ensure that our software products will work successfully with theOEM’s hardware products. We also train and educate the OEM’s sales andmarketing organizations on our products, allowing them to act as our “virtual”sales force to their channels and direct customers. In addition, we workclosely with our hardware and software strategic partners to develop effectivemarketing programs designed to increase sales. Refer to the discussion belowunder the caption “*Risk Factors*—*If we fail to maintain ourexisting relationships or enter into new relationships with OEM and businessdevelopment organizations, or if products offered by our OEM partners fail toachieve or maintain market acceptance, our brand awareness, the sales of ourproducts and use of our services would suffer.**”*

We manage a content-richweb site to facilitate the sale and support of our products and engage inelectronic marketing through email, newsletter and white paper postings todrive awareness and sales leads. Over the years, we have built a substantialdatabase of users who have opted to receive information about enterprise mobilecomputing. In addition, we participate in a number of industry conferences andtrade shows both independently and with strategic partners.

In the United States, oursales organization works directly with major distributors, resellers, computerdealers, retailers, mail-order companies and Web stores to distribute ourretail packaged products. Internationally, we market and sell through selecteddistributors and resellers that focus on specific geographic and market segmentareas. These international partners operate as an extension of our marketingand sales organizations, developing the appropriate sales channels in theirregions. They also work with local resellers as well as local offices of ourOEM customers to develop specific marketing and channel promotions for theirregions. As of July 31, 2005, we were represented by over 150distributors, resellers and retailers in North America, Europe, Asia Pacific,South America and Africa, and are continuing to expand our international reachas appropriate distributors or resellers are found. Also, refer to thediscussion below under the caption “*Risk Factors*—*We are dependent on our international operations for a significantportion of our revenue*.”

Consistent with industry practice,we provide our distributors with stock balancing and price protection rights. Theserights permit our distributors to return slow-moving products to us for creditand to receive price adjustments for inventories of our products held bydistributors if we lower the price of those products. We recognize revenues onproducts shipped to distributors at the time the merchandise is sold by thedistributor; as a result, the immediate effect of returns and adjustments onour quarterly operating results has been minimal to date. Also, to date, wehave not experienced any significant returns or price protection adjustments.

No customers, distributoror otherwise, accounted for more than 10% of our total revenue during fiscal2005 and 2004. During fiscal 2003, Ingram Micro US accounted for 10% of ourtotal revenue.

In order to developfurther our brand name recognition, we plan to continue to expand our jointmarketing programs, marketing channel promotions and bundling arrangements withour strategic partners. We also plan to continue to leverage our relationshipswith industry leaders and to expand and diversify our own sales and marketinginitiatives to increase our sales to mobile carriers and enterprises. Hence, weanticipate that sales and marketing expenses will increase in fiscal 2006.

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**CUSTOMERSUPPORT**

Our service and supportorganization provides secondary technical support to OEMs, primary technicalsupport to enterprises, retailers and end users, and education and trainingservices to enterprises, OEMs and retailers. We also utilize an outsourcedvendor to provide first line technical support related to the majority of ourretail products. Our current OEMs typically have software maintenanceagreements with us. These agreements provide for technical support and includemaintenance of our products in accordance with specifications contained in ourguidelines for such products, as well as access to technical support personnelby telephone, fax and e-mail. Customers under license agreements aretypically entitled to certain product updates and modifications, primarily bugfixes. Our OEMs and some of our retail channel partners provide telephone andinitial support to end-users.

**SEASONALITY**

Typically, our productsand services experience seasonal variations in demand, with weaker revenue in July andAugust because of reduced corporate buying patterns during the vacationseason. This seasonality is especially notable in Europe. Overall, weexperience fluctuations in the demand for our products and services consistentwith the fluctuations experienced in the industry as a whole.

**COMPETITION**

The market for our software remains intenselycompetitive and is characterized by rapid technological changes and evolvingstandards. Although we believe we compete favorably in this market, we alsobelieve that this market is likely to become more competitive as the demand forwireless and mobile date solutions continues to increase. We believe that ourproducts and services support a broad range of mobile devices and services,allowing us to compete favorably with other companies with no similar platformor whose mobile solutions are highly fragmented. We also believe that users demanding synchronization functionality witha wide variety of mobile computing devices and software applications will viewour products favorably compared to those of larger companies whose products maynot be able to support such a degree of interoperability. In addition, ourstrategic relationships with hardware and software vendors enable us to provideinteroperability among a broader range of applications than many of ourcompetitors. To maintain or increase our competitive advantage, we willneed to continually enhance and expand our current product, service andtechnology offerings and our professional service capabilities.

The principalcompetitive factors affecting the market for our software are:

·       thecompatibility, functionality and reliability of the products and servicesprovided;

·       brandrecognition and reputation for providing trusted products and services;

·       thelevel of security of the products and services provided;

·       theprice for which products and services are offered;

·       convenienceand breadth of products and services offered;

·       thequality and market acceptance of new enhancements to our current services andfeatures; and

·       OEMrelationships and other strategic arrangements with third parties.

We are subject to current and potential competitionwith respect to our Intellisync Handheld Edition, Intellisync Handheld Editionfor Enterprise, Intellisync Mobile Suite, Intellisync SyncML Server andIdentity Systems products.

We also face indirect competition from existing andpotential customers that may provide internally developed solutions for each ofour technology licensing components. We currently face limited direct 

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competition from majorapplications and operating systems software vendors who may in the futurechoose to incorporate data synchronization functionality into their operatingsystems software, thereby potentially reducing the need for OEMs to include ourproducts in their devices. Forexample, Microsoft’s inclusion of certain features permitting datasynchronization between computers utilizing the Windows Mobile and Exchange**operating system may have the effect of reducing revenuefrom our software if users of these operating systems perceive that theirmessaging and synchronization needs are adequately met by Microsoft. Furthermore,current or potential competitors have established or may establish financialand strategic relationships among themselves or with existing or potentialcustomers or other third parties to increase the ability of their products toaddress the needs of customers. Accordingly, it is possible that newcompetitors or alliances among competitors could emerge and rapidly acquiresignificant market share, which would harm our business.

Also, refer to thediscussion below under the caption *“Risk Factors—We faceintense competition in the market for mobile computing synchronization productsand services, which could reduce our market share and revenue.”*

**RESEARCHAND DEVELOPMENT**

The markets for our products are characterized byrapidly changing technologies, evolving industry standards, frequent productintroductions and short product life cycles. As a result, our research anddevelopment activities are critical to our continued growth. Employees in ourengineering group are engaged in both product research and development as wellas localization efforts for existing products. Product maintenance and customersupport responsibilities are shared by engineering group employees on an as-neededbasis. In developing new products or enhancements, we work closely with currentand prospective customers, as well as with industry experts, to ensure that ourproducts address current problems and emerging requirements. We believe thatsuch collaboration is critical to develop and improve our products and services.Our engineering group also works closely with our sales and marketing andprofessional services groups to develop products that meet real customer needs.

We also complement our engineering capacity with anumber of software development engineers located in our research anddevelopment facilities in Sofia, Bulgaria and Cluj-Napoca, Romania. TheseEuropean facilities were established to take advantage of the considerablelocal knowledge and expertise in the areas of information technology andsoftware programming, and to offer extensive development, support andmanagement for our current projects and potential software solutions. Inaddition, the companies we acquired from our recent acquisitions have given usexpanded research and development capabilities with employees that haveextensive knowledge and experience in the synchronization and mobileinfrastructure software solutions.

As part of our strategic plan, our engineering group,strengthened by our recent acquisitions, is currently aiming their efforts atexpanding support for synchronization of wireless messaging, data sync, devicemanagement and application mobilization for wireless handhelds, smartphones,laptops and tablet. We are extending our core synchronization technology toincrease scalability and extensibility, and at supporting next-generationwireless technology and device platforms. We also continue efforts on enhancingour data synchronization platform and other technology solutions to providefurther value to our wireless carrier and enterprise customers. We willcontinue to develop our platforms to mobilize and synchronize verticalenterprise applications, such as customer relationship management, or CRM,software with corporate groupware either on the device, desktop or viaserver-to-server connectivity.

In fiscal 2005, 2004 and2003, research and development expenses were $14.6 million, $11.5 million and$7.4 million, respectively. Research and development is important to our futuresuccess, and we expect that research and development expenses will increase infuture periods. Although we plan our budget for research and development basedon planned product introductions and enhancements, actual expenditures 

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maysignificantly differ from budgeted expenditures. In addition, a number of risksare inherent in the product development process. Refer to the discussion belowunder the caption “*Risk Factors—Our market changesrapidly due to evolution in technology and industry standards. If we do notadapt to meet the sophisticated needs of our customers, our business andprospects will suffer.”*

**PROFESSIONALSERVICES GROUP**

We believe that delivering quality professionalservices provides us with a significant opportunity to differentiate ourselvesin the marketplace. The members of our professional services group are expertsin the fields of synchronization and mobility, with a proven track record ofdelivering carrier-grade solutions for mobile devices, desktop applications anddatabases. Our professional services group specializes in producing softwarethat delivers a measurable competitive advantage for customers deploying andintegrating our solutions with a wide variety of applications and systems.

By transforming emergingtechnologies into robust, reliable, revenue-producing products and services,our professional services group has the expertise to develop enterprisesolutions that combine handheld, mobile, wireless, desktop, internet, synchronization,back-office applications and database technologies. Our professional servicesteam works across multiple phases of development projects: business analysisand strategic technology consulting, project management, design, engineering,quality assurance, software testing, localization and technical writing. Thegroup’s clients have included America Online, Inc., Merck & Co., Inc.,Oracle/PeopleSoft, Inc., Pfizer, Inc. and Verizon Wireless.

**ACQUISITIONS**

The markets in which we compete require a wide varietyof technologies, products, and capabilities. Our strategy of acquiring assetsor businesses with complementary products, technologies and engineeringresources has resulted in the completion of a number of acquisitions, includingthe transfer of workforce from SoftVision SRL and the acquisition of PDAapps,Tourmaline, Identity Systems, Synchrologic and Spontaneous Technology. We maymake additional acquisitions as part of our growth strategy.

The acquisition ofhigh-technology companies is inherently risky. These risks are more fullydiscussed in the risk factors below under the captions “*Our recent and anypotential acquisitions could require significant management attention and provedifficult to integrate with our business, which could distract our management,disrupt our business, dilute stockholder value and adversely affect ouroperating results*.” Refer to the discussions under the caption “*Acquisitions”* set forth in Item 7, Part II of thisAnnual Report on Form 10-K for more information on the acquisitions.

**PROPRIETARYTECHNOLOGY AND INTELLECTUAL PROPERTY**

Our success depends significantly upon our proprietarytechnology. We rely on a combination of patent, copyright and trademark laws,trade secrets, confidentiality procedures, contractual provisions and othermeasures to protect our proprietary rights. We also believe that factors suchas the technological and creative skills of our personnel, new productdevelopments, frequent product enhancements and name recognition are essentialto establishing and maintaining a technology leadership position. We seek toprotect our software, documentation and other written materials under tradesecret and copyright laws, which afford only limited protection. We currentlyhave 59 issued United States patents and have 68 patent applications pending inareas covering push email and data synchronization for both wireless and wiredcommunications.

We have designed, developed and sold synchronizationproducts since the early 1990s. It is in this area that we were awarded ourfirst patent. From this activity, we believe we have learned a great deal aboutwhat it takes to build a robust synchronization product to deal with the manysubtleties presented by the 

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wide range of capabilitiesamong the various PDAs, Mobile Devices, PIMs, enterprise applications and databases that must be mobilized.

We believe that the defense of our intellectualproperty is an important portion of our overall IP strategy. However, we cannotbe certain that our patents will not be invalidated, circumvented orchallenged, that the rights granted thereunder will provide competitiveadvantages to us or that any of our pending or future patent applications,whether or not being currently challenged by applicable governmental patentexaminers, will be issued with the scope of the claims sought by us, if at all.Furthermore, we cannot be certain that others will not develop technologiesthat are similar or superior to our technology or design around the patentsowned by us.

We also subject to claims by third parties allegingthat our products infringe proprietary rights held by them. We expect thatsoftware product developers will increasingly be subject to infringement claimsas the number of products and competitors in our industry segment grows, thefunctionality of products in different industry segments overlaps, and aspatent protection for software becomes increasingly popular.

Also, refer to thediscussion below under the captions *“Risk Factors—We may beunable to adequately protect our proprietary rights;” “Risk Factors—We may besubject to intellectual property infringement claims, which are costly todefend and could limit our ability to use certain technologies in the future”and “Risk Factors—We have been, are and may in the future be involved inlitigation that could result in significant costs to us.”*

**EMPLOYEES**

As of July 31, 2005, we had a total of 456full-time employees, including 279 in engineering, professional services andcustomer support, 122 in sales and marketing and 55 in operations, finance andadministration. 201 of our employees are located outside the United States,including 98 in Romania, 33 in Bulgaria, 29 in other parts of Europe, 31 inAsia-Pacific and 10 in Japan. None of our employees is represented by a laborunion. We have experienced no work stoppages.

Many of our current keypersonnel have substantial experience in our industry and would be difficult toreplace. Competition for qualified personnel in our industry is intense. Webelieve that our future success will depend in part on our continued ability tohire, train and retain qualified personnel. Also, refer to the discussion belowunder the caption “*Risk Factors—We depend onkey employees in a competitive market for skilled personnel.”*

**RISKFACTORS**

*The following risks and uncertainties may have amaterial and adverse effect on our business, financial condition or results ofoperations. You should carefully consider these risks and uncertainties,together with all of the other information included or incorporated byreference in this Annual Report on Form 10-K. If any of the material risksor uncertainties we face were to occur, the trading price of our securitiescould decline.*

***We havehistorically incurred losses and we expect these losses to continue in the future.We may not be able to sustain consistent future revenue growth on a quarterlyor annual basis, or achieve or maintain profitability.***

We have not beenprofitable since fiscal 1998. Although we have reported record revenue forfiscal 2005, we cannot be certain that our revenue will continue to grow, thatwe will produce sufficient revenue to achieve profitability or that our revenuewill not decline in the future. We have experienced losses of $13.4 million, $9.5 million and $7.7million for fiscal 2005, 2004 and 2003, respectively. At July 31, 2005, wehad an accumulated deficit of $144.5 million. To become profitable andsustain profitability, we will need to generate additional revenues to offsetour expenses. We may not achieve or sustain revenue growth and our losses maycontinue or increase in the future. The synchronization market is evolving, andas a result we cannot accurately predict either the future growth rate, if any,or the ultimate size of the market for our 

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productsand services. Because our operating expenses are relatively fixed in the shortterm, any shortfalls in revenues would materially affect our results ofoperations.

***Our quarterlyrevenue and operating results are subject to significant fluctuations, and ourstock price may decline if we do not meet the expectations of investors andanalysts.***

Our quarterly revenue and operating results aredifficult to predict and have and may in the future fluctuate significantlyfrom quarter to quarter due to a number of factors, many of which are outsideour control. These factors include, but are not limited to:

·       growthin the market for enterprise synchronization applications and our ability tosuccessfully address this market;

·       ourreliance on international sales and growth;

·       ourability to penetrate the international market;

·       marketacceptance of products in which our software is integrated by original equipment manufacturers, or OEMs;

·       ourability to realize our goals with respect to recent and potential futureacquisitions;

·       ourneed and ability to generate and manage growth;

·       rapidevolution of technology;

·       ourevolving business model;

·       litigation-relatedexpenses;

·       fluctuationsin gross margins;

·       theseasonal nature of the market for some of our products;

·       changesin the market for mobility and identity search/screening software;

·       introductionof new products and services by us or our competitors;

·       therecent decline in the market for traditional personal digital assistants;

·       changesin our mix of sources of revenue; and

·       entrenchedand substantial competition.

Additionally, we generallyderive our technology licensing revenue from multi-year contracts withenterprise and other customers that frequently include license fees,professional services fees, royalty payments and maintenance. We typically earnboth the license fees and the professional services in the initial one or twoquarters subsequent to the signing of a contract. We periodically have largeprofessional services implementations that individually contribute as much as5% or more to quarterly revenue. Combined with related license revenue, totalrevenue from individual customers in the initial quarters of a contract mayexceed the revenue we earn during subsequent periods covered by the contract.To the extent that we do not secure additional contracts with the same customeror secure comparably sized commitments from other customers, we may not be ableto sustain or grow our revenue.

***We may incursignificant stock-based compensation charges related to certain stock optionsand restricted stock in future periods.***

The Financial AccountingStandards Board (FASB) issued in December 2004 Statement of FinancialAccounting Standards (SFAS) No. 123R, “*Share-Based Payment, anamendment of FASB Statements*

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*Nos. 123and 95*,” that addresses the accounting treatment for employeestock options and other share-based payment transactions. The statementeliminates the ability to account for share-based compensation transactionsusing Accounting Principles Board (APB) Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and generallyrequires that such transactions be accounted for using a fair-value-basedmethod and recognized as expenses. The statement and the change in accountingtreatment will result in our reporting increased operating expenses beginningfor our next fiscal quarter ending October 31, 2005, which would decreaseany reported net income or increase any reported net loss, and could adverselyaffect the market price of our common stock.

***We face intensecompetition in the market for mobile computing synchronization products andservices, which could reduce our market share and revenue.***

Our market contains few substantial barriers to entry.We believe we will face additional competition from existing competitors andnew market entrants in the future. We are subject to current and potentialcompetition with respect to our Intellisync Handheld Edition, IntellisyncHandheld Edition for Enterprise, Intellisync Mobile Suite, Intellisync SyncMLand Identity Search Servers.

·       IntellisyncMobile Suite enterprise server software—CommonTime, Good Technology, Inc.,Research In Motion Limited, Sybase Inc.’s iAnywhere, and others.

·       IntellisyncMobile Suite and Intellisync SyncML software for mobile carriers—GoodTechnology, Inc., Research In Motion Limited, Seven Networks, Inc.,Visto Corporation, and others.

·       Intellisyncconsumer and enterprise desktop sync products—Chapura, Inc.’s PocketMirror, CommonTime’s Cadenza mNotes, IBM Corporation, Microsoft CorporationActiveSync, Palm Desktop from PalmSource, Inc., Sybase Inc.’s iAnywhere,and others.

·       IdentitySearch Server—Ascential, Dataflux, Firstlogic, Group1, IBM Corporation,Intelligent Search Technology, Language Analysis Systems, Trillium Software,and others.

In addition to the direct competition noted above, weface indirect competition from existing and potential customers that mayprovide internally developed solutions for each of our technology licensingcomponents. As a result, we must educate prospective customers as to theadvantage of our products compared to internally developed solutions. Wecurrently face limited direct competition from major applications and operatingsystems software vendors who may in the future choose to incorporate datasynchronization functionality into their operating systems software, therebypotentially reducing the need for OEMs to include our products in theirdevices. For example, Microsoft’s inclusion of certain features permitting datasynchronization between computers utilizing the Windows Mobile and Exchangeoperating systems, or the Exchange 2003 platform, may have the effect ofreducing revenue from our software if users of these operating systems perceivethat their data synchronization needs are adequately met by Microsoft.

Many of our competitors have substantially greaterfinancial, technical and marketing resources, larger customer bases, longeroperating histories, greater brand recognition and more establishedrelationships in the industry than we do. Our larger competitors may be able toprovide customers with additional benefits in connection with their productsand costs, including reduced communications costs. As a result, these companiesmay be able to price their products and services more competitively than we canand respond more quickly to new or emerging technologies and changes incustomer requirements. If we are unable to compete successfully against ourcurrent or future competitors, we may lose market share, and our business andprospects would suffer.

Consolidation in wirelessmessaging and mobile computing synchronization industry may strengthen ourcompetitors’ position in our market. Consolidation of our competitors hasoccurred, and we expect it 

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tocontinue to occur in the foreseeable future. Acquisitions may furtherstrengthen our competitors’ financial, technical and marketing resources.

***If we fail todevelop and sell products designed for OEMs, enterprises and mobile carriers,our revenue and operating results will be adversely affected.***

We have recently madesubstantial investments to develop and offer an expanded range of enterprisesynchronization applications, including our acquisition of PDAapps, Tourmaline,Synchrologic and Identity Systems. Our operating plans assume revenue growthfrom the enterprise market. Enterprise sales present a variety of challengesthat are different from those inherent in our historical licensing and consumerbusiness model, and we have limited experience addressing these challenges. Forexample, enterprise sales typically involve large up-front license fees, whichcan result in lengthy sales cycles and uncertainties as to the timing of salesdriven by customers’ budgetary processes. As a result, we generally have lessvisibility into future enterprise sales than is typically the case in ourroyalty-based technology licensing business. In addition, while enterprisesales generally result in ongoing maintenance revenue and may lead to follow-onpurchases or upgrades, we are typically dependent on sales to new customers fora significant portion of our enterprise revenue in a given quarter. If ourproduct and service offerings fail to achieve market acceptance, or ifenterprise sales fail to meet our expectations in a particular quarter, ourrevenue and operating results may be materially and adversely affected.

***Our business andprospects depend, to a significant degree, on demand for wireless and othermobile computing devices.***

The use of wireless and other mobile computing devicesfor retrieving, sharing and transferring information among businesses,consumers, suppliers and partners has begun to develop only in recent years.Our success will depend in large part on continued growth in the use ofwireless and other mobile computing devices, including handheld computers,smart phones, pagers and other mobile devices. In addition, our markets facecritical unresolved issues concerning the commercial use of wireless and othermobile computing devices, including security, reliability, cost, ease of accessand use, quality of service, regulatory initiatives and necessary increases inbandwidth availability. Demand for, and market acceptance of, wireless andother mobile computing devices which require our products and services aresubject to a high level of uncertainty and are dependent on a number offactors, including:

·       growthin sales of handheld devices, smart phones and other mobile computing devicessupported by our software and growth in wireless network capabilities to matchend-user demand and requirements;

·       emergenceof a viable and sustainable market for wireless and mobile computing services;

·       ourproduct and service differentiation and quality;

·       thedevelopment of technologies that facilitate interactive communication betweenorganizations;

·       ourdistribution and pricing strategies as compared with those of our competitors;

·       thegrowth in access to, and market acceptance of, new interactive technologies;

·       increasesin bandwidth for data transmission;

·       theeffectiveness of our marketing strategy and efforts;

·       ourindustry reputation; and

·       generalindustry and economic conditions such as slowdowns in the computer or softwaremarkets or the economy in general.

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If the market for wireless and other mobile computingdevices as a commercial or business medium does not develop, or develops moreslowly than expected, our business, results of operations and financialcondition will be seriously harmed.

Even if the wireless andmobile computing services market does develop, our products and services maynot achieve widespread market acceptance. If our target customers do not adopt,purchase and successfully deploy our other current and planned products andservices, our revenue will not grow significantly and our business, results ofoperations and financial condition will be seriously harmed.

***We are exposed topotential risks and we will continue to incur increased costs as a result ofthe internal control testing and evaluation process mandated by Section 404 ofthe Sarbanes-Oxley Act of 2002.***

Although we have now completed the documentation andtesting of the effectiveness of our internal control over financial reportingfor fiscal 2005, as required by Section 404 of the Sarbanes-Oxley Act of2002, we expect we will have to incur continuing costs, including increasedaccounting fees and increased staffing levels, in order to maintain compliancewith that section of the Sarbanes-Oxley Act. In the future, if we fail tocomplete the Sarbanes-Oxley 404 evaluation in a timely manner, or if ourindependent registered public accounting firm cannot attest in a timely mannerto our evaluation, we could be subject to regulatory scrutiny and a loss ofpublic confidence in our internal controls. In addition, any failure toimplement required new or improved controls, or difficulties encountered intheir implementation, could harm our operating results or cause us to fail tomeet our reporting obligations.

Also, if our efforts to comply with new or changedlaws, regulations and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to our practices, ourreputation may be harmed or we may be subject to litigation.

Future acquisitions ofcompanies, some of which may have operations outside the United States, mayprovide us with challenges in implementing the required processes, proceduresand controls in our acquired operations. Acquired companies may not havedisclosure controls and procedures or internal control over financial reportingthat are as thorough or effective as those required by securities law in theUnited States. Although we intend to devote substantial time and incursubstantial costs, as necessary, to ensure ongoing compliance, we cannot becertain that we will be successful in complying with Section 404.

***We are placingincreasing emphasis on our hosting services, of which potential growth may bedifficult to manage effectively, and, as a result, our results of operationscould be adversely affected.***

We are increasingly focusing our sales and marketingand engineering efforts on hosting services. This focus may cause increasedbusiness risks associated specifically with our ability to manage the level ofcomplexity involved in executing successfully our strategies to providesuperior services for mobile carriers. The rapid growth of our hosting businessmay place a significant strain on our management, operations and resources. Ourfuture performance and profitability will depend on our ability to:

·       increaseour capital investments and further build our infrastructure to meet the demandsof our carrier customers;

·       maintaintechnical capabilities to compete effectively in the hosting business; and

·       effectivelyoversee and manage our outsourced hosting center.

There can be no assurancethat our systems, procedures and controls will be adequate to support rapidexpansion of our hosting services. If we are unable to manage such growthsuccessfully, our business and results of operations could be harmed.

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***Revenue fromhosting services may carry lower gross margins and an overall increase in suchrevenue as a percentage of total revenue could have an adverse impact on ourbusiness.***

Our commitment toproviding quality services to our enterprise and mobile carrier customers mayresult in our hosting service revenue having a lower gross margin than otherservices and license revenue. Due to the lower margin, an increase in thehosting service revenue as a percentage of total revenue could have adetrimental impact on our overall gross margins and could adversely affectoperating results. In addition, a change in the mix between services that areprovided by our own employees and those services provided by third-partyvendors may negatively affect our gross margins.

***System failures oraccidental or intentional security breaches could disrupt our operations, causeus to incur significant expenses, expose us to liability and harm ourreputation.***

Our operations, including hosting services, dependupon our ability to maintain and protect our computer systems and core businessapplications, which are located at our offices, as well as hosted bythird-party vendors. Although we are taking various precautions to maintain andprotect our systems, they could still be vulnerable to damage from break-ins,unauthorized access, vandalism, fire, floods, earthquakes, power loss,telecommunications failures and similar events. We maintain insurance againstbreak-in, unauthorized access, vandalism, fires, floods, earthquakes andgeneral business interruptions. The amount of coverage, however, may not beadequate in any particular case, and will not likely compensate us for all thedamages caused by these or similar events. In addition, while we put varioussecurity measures in place to detect any unauthorized access to our computersand computer networks, we may be unable to prevent computer programmers orhackers from penetrating our network security or creating viruses to sabotageor otherwise attack our computer networks from time to time. A breach of oursecurity could seriously damage our operations or reputation. In addition,because a hacker who penetrates our network security could misappropriateproprietary information or cause interruptions in our services, we might berequired to expend significant resources to protect against, or to alleviate,problems caused by hackers. We might also face liability to persons harmed bymisappropriation of secure information if it is determined that we did notexercise sufficient care to protect our systems.

Systems failure or damagecould cause an interruption of our services and result in loss of customers,difficulties in attracting new customers and could adversely impact ouroperating results. In addition, if the number of customers who purchase ourhosting services increases over time, our systems must be able to accommodateincreased usage. If we are unable to increase our capacity to accommodategrowth in usage, we could encounter system performance issues, which could harmour relationships with customers and our reputation.

***We expect that wemay become increasingly dependent on mobile carriers for the success of ourwireless software.***

The success of our wireless business strategy isincreasingly becoming dependent on our ability to establish new relationshipsand build on our existing relationships with domestic and international mobilecarriers. We cannot assure you that we will be successful in establishing newrelationships or advancing existing relationships with mobile carriers or thatthese mobile carriers will act in a manner that will promote the success of ourwireless products. Factors that are largely within the control of mobilecarriers but which are important to our success, include:

·       thedegree to which mobile carriers facilitate the introduction of and activelypromote, distribute and resell our products;

·       testingof our products on mobile carriers’ networks;

·       qualityand coverage area of wireless services offered by the mobile carriers;

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·       theextent to which mobile carriers require specific hardware and software featureson our products to be used on their networks;

·       contractualterms and conditions imposed on us by mobile carriers that, in somecircumstances, could limit our ability to make similar products availablethrough competitive carriers in some market segments; and

·       mobilecarriers’ pricing requirements and subsidy programs.

Mobile carriers have significant bargaining power aswe negotiate agreements with them. They could require contract terms that aredifficult for us to meet and could result in higher costs to completecertification requirements and negatively impact our results of operations andfinancial condition. Mobile carriers also place significant conditions on ourability to develop and launch products for use on their wireless networks. Ifwe fail to address the needs of mobile carriers, identify new product andservice opportunities or modify or improve our products in response to changesin technology, industry standards or mobile carrier requirements, our productscould rapidly become less competitive or obsolete. If we fail to timely developproducts that meet carrier product planning cycles or fail to deliversufficient quantities of products in a timely manner to mobile carriers, thosecarriers may choose to offer similar products from our competitors and therebyreduce their focus on and cease offering our products which would have anegative impact on our business, results of operations and financial condition.

In addition, the potentialrapid growth of our business, as we become more dependent on mobile carriers,may place a strain on our management, operations, employees, or resources. Wemay not be able to maintain a rapid growth rate, effectively manage ourexpanding operations, or achieve planned growth on a timely or profitablebasis. If we are unable to manage our growth effectively, we may experienceoperating inefficiencies, and our net income may be materially adverselyaffected.

***Most sales withmobile carriers and enterprises have a long sales cycle process, whichincreases the cost of completing sales and renders completion of sales lesspredictable.***

The sales cycle processwith mobile carriers could be long, making it difficult to predict the quarterin which we may recognize revenue from a sale, if at all. The general length ofthe sales cycle increases our costs and may cause license revenue and otheroperating results to vary significantly from period to period. Our products ortechnology often are part of significant strategic decisions by our customersregarding their information systems. Accordingly, the decision to license ourproducts typically requires significant pre-purchase evaluation. We spendsubstantial time providing information to prospective customers regarding theuse and benefits of our products. During this evaluation period, we may expendsignificant funds in sales and marketing efforts. If anticipated sales from aspecific customer for a particular quarter are not realized in that quarter,our operating results may be adversely affected.

***Our stock price hashistorically been and may continue to be volatile, which may cause you to losemoney and could lead to costly litigation against us that could divert ourresources.***

Stock markets have recently experienced dramatic priceand volume fluctuations, particularly for shares of technology companies. Thesefluctuations can be unrelated to the operating performance of these companies.Broad market fluctuations may reduce the market price of our common stock andcause you to lose some or all of your investment. These fluctuations may beexaggerated if the trading volume of our common stock is low. In addition, dueto the technology-intensive nature and growth rate of our business and themobile computing synchronization market, the market price of our common stockhas in the past and may in the future rise and fall in response to:

·       quarterlyvariations in operating results;

·       seasonalfluctuations on product sales;

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·       announcementsof technological innovations;

·       announcementsof new software or services by us or our competitors;

·       acquisitionsor strategic alliances by us or by our competitors;

·       commencementor outcome of litigation involving us;

·       changesin financial estimates by securities analysts; and

·       otherevents beyond our control, including general market conditions.

Furthermore, our operatingresults and prospects from time to time may be below the expectations of publicmarket analysts or investors. Any negative change in the public’s perception ofcompanies in the wireless communications market could depress our stock priceregardless of our operating results. Recently, companies experiencing highvolatility or significant drops in their stock prices have faced securitiesclass action lawsuits when the market price of a stock has been volatile.Holders of that stock have often instituted securities class action litigationagainst the company that issued the stock when such stock declines. If any ofour stockholders brought such a lawsuit against us, we could incur substantialcosts defending the lawsuit. We maintain some level of insurance for suchmatters however we cannot guarantee that such insurance will be available orwill cover the amount of any award. The lawsuit could also divert the time andattention of our management. Further, any settlement of such a lawsuit couldadversely affect us.

***We may be unable toadequately protect our proprietary rights.***

The rights we rely upon toprotect our intellectual property underlying our products and services may notbe adequate, which could enable third parties to use our technology and wouldreduce our ability to compete in the market. To protect our proprietary rights,we rely on a combination of patent, trademark, copyright and trade secret laws,confidentiality agreements with our employees and third parties, and protectivecontractual provisions. These efforts to protect our intellectual propertyrights may not be effective in preventing misappropriation of our technology.These efforts also may not prevent others from developing products ortechnologies similar to, competitive with, or superior to those we develop. Anyof these results could reduce the value of our intellectual property. We may beforced to litigate to enforce or defend our intellectual property rights and toprotect our trade secrets. Any such litigation could be very costly and coulddistract our management from focusing on operating our business. Moreover, ourbusiness could be harmed if our patents were determined to be invalid.

***We may be subjectto intellectual property infringement claims, which are costly to defend andcould limit our ability to use certain technologies in the future.***

Third parties may assertinfringement or other intellectual property claims against us. From time totime, we receive notices from third parties alleging that our products orservices infringe proprietary rights held by them. For example, as we announcedin August 2004, NCR Corporation filed a complaint alleging patentinfringement in the U.S. District Court for the Southern District of OhioWestern Division (Dayton). In the complaint, NCR alleged that certain of ourproducts infringe upon three of NCR’s patents. That case was settled anddismissed by mutual agreement in July 2005. Our customers may receivenotices of patent or other infringement from third parties and ask forindemnification in the future. We cannot predict whether third parties willassert claims of infringement against us, or whether any past, present orfuture claims will prevent us from offering products or operating our businessas planned.

Due to the inherentlyuncertain nature of intellectual property protection and the competitive areain which we operate our business, it is possible that some or all of ourproducts and services could be found to be infringing on the intellectualproperty of others. We may have to pay substantial damages, including 

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trebledamages, for past infringement if it is ultimately determined that our productsor services infringe a third party’s proprietary rights. We may have to complywith injunctions, or stop distributing our products and services while were-engineer them or seek licenses to necessary technology, which might not beavailable on reasonable terms, or at all. We could also be subject to claimsfor indemnification resulting from infringement claims made against ourcustomers, which could increase our defense costs and potential damages. Evenif the claims are without merit, defending a lawsuit takes significant time,may be expensive and may divert management’s attention from other businessconcerns.

***We have been, areand may in the future be involved in litigation that could result insignificant costs to us.***

In order to protect ourproprietary rights, we may decide to sue other companies. Litigationproceedings are inherently uncertain, and we may not prevail in our defenses orclaims. In addition, such litigation is expensive and time-consuming, andmanagement has been in the past and may in the future be required to spendsignificant time in the prosecution of such suits. If we do not prevail in ourclaims, we might be forced to accept an unfavorable settlement or judgment andeven be required to reimburse other companies in a suit for their legalexpenses in defending the suit. An unfavorable settlement or judgment couldalso materially harm our ability to use existing intellectual property andseverely harm our business as a result.

***Future sales of ourcommon stock, including the shares underlying the convertible senior notes werecently issued, may depress our stock price.***

If our current stockholders sell substantial amountsof common stock in the public market, the market price of our common stockcould fall. In addition, these sales of common stock could adversely affect thetrading price of our recently issued convertible senior notes and impede ourability to raise funds in the future at an advantageous price, or at all,through another sales of securities.

As of July 31, 2005, we had approximately66,639,299 shares of common stock outstanding. Assuming that the maximum numberof shares and options are issued and registered by us in connection with all ofour recent acquisitions and assuming that all shares subject to vested optionsto purchase common stock under our stock plans are issued, additional shares ofour common stock could become issued or issuable and freely tradeable in thepublic market through approximately July 31, 2006, as follows:

·       approximately360,000 shares of our common stock that may be issued in August 2005 and February 2006under our employee stock purchase plan; and

·       approximately6,350,000 shares issuable upon exercise of outstanding options that will bevested by July 31, 2006.

In addition, conversion ofsome or all of the $60,000,000 aggregate principal amount of convertiblesubordinated notes that we issued in March 2004 will dilute the ownershipinterests of investors. Any sales in the public market of the common stockissuable upon such conversion could adversely affect prevailing market pricesfor our common stock.

***If we fail tomaintain our existing relationships or enter into new relationships with OEMand business development organizations, or if products offered by our OEMpartners fail to achieve or maintain market acceptance, our brand awareness,the sales of our products and use of our services would suffer.***

Our revenue from technology licensing depends, inlarge part, on our ability to develop and maintain relationships with OEMs andbusiness development organizations that help distribute our products andpromote our services. We depend on these relationships to:

·       distributeour products to purchasers of mobile devices;

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·       increasethe use of our technology licensing components;

·       buildbrand awareness through product marketing; and

·       marketour products and services cooperatively.

If the products that these equipment manufacturers orbusiness development organizations sell, or if the operating systems upon whichthese products are based, fail to achieve or sustain market acceptance, or ifany of these companies cease to use our product and service offerings insignificant volumes, our product sales would decline and our business wouldsuffer. For example, if growth in the number of devices sold by our OEM partnersis delayed or did not occur, our business would suffer.

Although several OEMs are subject to certaincontractual minimum purchase obligations, we cannot be certain that anyparticular OEM will satisfy its minimum obligations. Weakening demand from anykey OEM and the inability to replace revenue provided by such an OEM could havea material adverse effect on our business, operating results and financialcondition. We maintain individually significant receivable balances from majorOEMs. If these OEMs fail to meet their payment obligations, our operatingresults could be materially and adversely affected.

Our agreements with OEMs,distributors, and resellers generally are nonexclusive and may be terminated onshort notice by either party without cause. Furthermore, our OEMs, distributorsand resellers are not within our control, are not obligated to purchaseproducts from us, and may represent other lines of products, includingcompeting products. A reduction in sales effort or discontinuance of sales ofour products by our OEMs, distributors, and resellers could lead to reducedsales and could materially adversely affect our operating results.

***Our market changesrapidly due to evolution in technology and industry standards. If we do notadapt to meet the sophisticated needs of our customers, our business andprospects will suffer.***

The market for our products and services ischaracterized by rapidly changing technology, evolving industry standards andfrequent new product and service introductions. For example, the traditionalpersonal digital assistant market, is declining and may continue to do so. Ourfuture success will depend to a substantial degree on our ability to offerproducts and services that adapt to these changing markets, incorporate leadingtechnology, address the increasingly sophisticated and varied needs of ourcurrent and prospective customers and respond to technological advances andemerging industry standards and practices on a timely and cost-effective basis.Our rapidly evolving market makes it more likely that:

·       ourtechnology or products may become obsolete upon the introduction of alternativetechnologies;

·       wemay not have sufficient resources to develop or acquire new technologies or tointroduce new products or services capable of competing with futuretechnologies or service offerings of other companies; and

·       wemay not have sufficient resources to develop or acquire new technologies or tointroduce new products or services capable of competing with futuretechnologies or service offerings of other companies.

To the extent we determinethat new technologies and equipment are required to remain competitive, thedevelopment, acquisition and implementation of these technologies and equipmentare likely to continue to require significant capital investment by us.Moreover, we cannot be certain that we can develop, market and deliver newproducts and technology on a timely basis. Sufficient capital may not beavailable for this purpose in the future, and even if it is available, investmentsin new technologies may not result in commercially viable technologicalprocesses and there may not be commercial applications for such technologies.If we do not develop, acquire and introduce new products and services andachieve market acceptance in a timely manner, our business and prospects willsuffer.

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***If we fail tomaintain an effective system of internal controls, we may not be able to detectfraud or report our financial results accurately, which could harm ourbusiness.***

Effective internalcontrols are necessary for us to provide reliable financial reports and todetect and prevent fraud. We periodically assess our system of internalcontrols, and the internal controls of service providers upon which we rely, toreview their effectiveness and identify potential areas of improvement. Theseassessments may conclude that enhancements, modifications or changes to oursystem of internal controls are necessary. In addition, from time to time weacquire businesses, many of which have limited infrastructure and systems ofinternal controls. Performing assessments of internal controls, implementingnecessary changes, and maintaining an effective internal controls process isexpensive and requires considerable management attention, particularly in thecase of newly acquired entities. Internal control systems are designed in partupon assumptions about the likelihood of future events, and all such systems,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met. Because of theseand other inherent limitations of control systems, there can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions, regardless of how remote. If we fail to implement andmaintain an effective system of internal controls or prevent fraud, we couldsuffer losses, could be subject to costly litigation, investors could loseconfidence in our reported financial information and our brand and operatingresults could be harmed, which could have a negative effect on the tradingprice of our common stock.

***We are dependent onour international operations for a significant portion of our revenue.***

Internationalrevenue, primarily from customers based in Europe and Asia Pacific, accountedfor 31%, 33% and 36% of our revenue in fiscal 2005, 2004 and 2003, respectively.In the future, we may further expand our international presence. As we continueto expand internationally, we are increasingly subject to risks of doingbusiness internationally, including:

·       longerpayment cycles and problems in collecting accounts receivable;

·       seasonalreductions in business activity during the summer months in Europe and certainother parts of the world;

·       unexpectedchanges in regulatory requirements and tariffs;

·       exportcontrols relating to encryption technology and other export restrictions;

·       reducedprotection for intellectual property rights in some countries;

·       fluctuationsin currency exchange rates, against which we do not currently hedge;

·       difficultiesin staffing and managing international operations; and

·       anadverse effect on our provision for income taxes based on the amount and mix ofincome from international customers.

Our international salesgrowth will be limited if we, in the future, are unable to expand internationalsales channel management and support, customize products for local markets, anddevelop relationships with international service providers, distributors anddevice manufacturers. For example, in recent quarters we have investedsubstantially in expanding sales operations, and these investments may notgenerate offsetting increases in revenue. Even if we are able to expandinternational operations successfully, we cannot be certain that we will succeedin maintaining or expanding international market demand for our products.

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***Geographic expansion and growth, including theestablishment of new sales or engineering operations, may negatively affect ouroverall operations and cause us to incur significant additional costs andexpenses.***

We have an engineeringfacility in Delhi, India, gained through our acquisition of PDAapps, and weestablished engineering facilities in Sofia, Bulgaria and Cluj-Napoca, Romania.In the future, we may further expand our engineering or sales operations toother geographic areas within the United States and internationally. Ourexpansion may cause us to incur various costs and expenses, and may place asignificant strain upon our operating and financial systems and resources thatcould materially adversely affect our financial results following such anexpansion. We also face significant business risks related to the difficulty inassimilating new operations and the diversion of management’s attention fromother business. Additionally, if we fail to align employee skills andpopulations with revenue and market requirements, it may have a materialadverse impact on our business and operating results. Moreover, these newlyestablished operations may not contribute significantly to our sales orearnings.

***Foreign exchange fluctuations could decrease ourrevenue or cause us to lose money, especially since we do not hedge againstcurrency fluctuations.***

We believe that in thefuture, an increasing portion of our costs will be denominated in foreigncurrencies as we increase operations in Europe and open offices in othercountries. We currently do not engage in foreign exchange hedging activitiesand, although we have not yet experienced any material losses due to foreigncurrency fluctuation, a portion of our international revenue are currentlysubject to the risks of foreign currency fluctuations, and these risks willincrease as our international revenue increases.

***Our recent and any potential acquisitions couldrequire significant management attention and prove difficult to integrate withour business, which could distract our management, disrupt our business, dilutestockholder value and adversely affect our operating results.***

As part of our strategy,we intend to continue to make investments in complementary companies, productsor technologies. We recently acquired PDAapps, Inc. (June 2005),Tourmaline Networks, Inc. (in March 2005), SoftVision SRL’s workforce(through a transfer in June 2004), Identity Systems (in March 2004),Synchrologic, Inc. (in December 2003) and Spontaneous Technology, Inc.(in September 2003). We may not realize future benefits from any of theseacquisitions, or from any acquisition we may make in the future. If we fail tointegrate successfully our past and future acquisitions, or the technologiesassociated with such acquisitions, into our company, the revenue and operatingresults of the combined company could be adversely affected. Any integrationprocess will require significant time and resources, and we may not be able tomanage the process successfully. If our customers are uncertain about ourability to operate on a combined basis, they could delay or cancel orders forour products. We may not successfully evaluate or utilize the acquiredtechnology and accurately forecast the financial impact of an acquisitiontransaction, including accounting charges.

Acquisitionsinvolve a number of additional difficulties and risks to our business,including, but not limited to, the following:

·       failureto integrate management information systems, personnel, research anddevelopment and marketing, sales and support operations;

·       potentialloss of key employees from Intellisync or the acquired company;

·       disruptionof our ongoing business;

·       potentialloss of the acquired company’s customers;

·       failureto develop further the acquired company’s technology successfully, resulting inthe potential impairment of amounts capitalized as intangible assets under SFASNo. 142, “*Goodwill and Other*

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*Intangible Assets*”and SFAS No. 144, “*Accounting for theImpairment or Disposal of Long-Lived Assets;*”

·       unanticipatedcosts and liabilities, including those that may arise from disputes over theearnout provision of the acquisition agreement; and

·       amortizationexpenses related to intangible assets (other than goodwill).

Further, we have issuedcommon stock and paid cash for recent acquisitions and may have to pay cash,incur debt or issue equity securities to pay for any future acquisition, eachof which could affect our financial condition or the market price of our commonstock. The sale of additional equity or debt to finance such futureacquisitions could result in dilution to our stockholders. The incurrence ofindebtedness would result in increased fixed obligations and could also includecovenants or other restrictions that would impede our ability to manage ouroperations.

***Goodwill and otherintangibles resulting from our acquisitions could become impaired.***

As of July 31, 2005,our goodwill, developed and core technology and other intangibles amounted to$94,420,000, net of accumulated amortization. We ceased to amortize ourexisting goodwill upon our adoption of SFAS No. 142 in the beginning offiscal 2003. We will amortize approximately $8,616,000, $7,980,000, $4,404,000,$2,190,000 and $2,756,000 for fiscal 2006, 2007, 2008, 2009 and thereafter,respectively, of developed and core technology and other intangibles. Weexpect, however, that amortization expense may increase significantly as aresult of any future acquisitions. To the extent we do not generate sufficientcash flows to recover the net amount of any investment in goodwill and otherintangibles recorded, the investment could be considered impaired and subjectto write-off. We expect to record further goodwill and other intangible assetsas a result of any future acquisitions we may complete. Future amortization ofsuch other intangible assets or impairments, if any, of goodwill wouldadversely affect our results of operations in any given period.

***We depend on keyemployees in a competitive market for skilled personnel.***

The success of ourbusiness will continue to depend upon certain key technical and seniormanagement personnel, including our president and chief executive officer,chief operating officer, chief marketing officer, chief financial officer andother key senior executives, many of whom would be extremely difficult toreplace. Competition for such personnel is intense, and we cannot be certainthat we will be able to retain our existing key managerial, technical, or salesand marketing personnel. The loss of these officers and other or key employeesin the future might adversely affect our business and impede the achievement ofour business objectives. We believe our ability to achieve increased revenueand to develop successful new products and product enhancements will depend inpart upon our ability to attract and retain highly skilled sales and marketingand qualified product development personnel. In addition, competition foremployees in our industry and geographic location could be intense. We may notbe able to continue to attract and retain skilled and experienced personnel onacceptable terms. Our ability to hire and retain such personnel will depend inpart upon our ability to raise capital or achieve increased revenue levels tofund the costs associated with such personnel. Failure to attract and retainkey personnel may adversely affect our business.

***If we are unable toprovide satisfactory and high quality services through our professionalservices group, customer satisfaction and demand for our products will suffer.***

Many of our customers havebeen successful in implementing our various technology initiatives withoutfurther provision of technical service. However, we believe that buildingstrong relationships with our customers, as well as future growth in ourproduct sales, depends on our ability to provide our customers withprofessional services, including customer support, training, consulting andinitial 

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implementationand deployment of our products when necessary. We have an in-house professionalservices group and use international software development partners with aworkforce that can perform these tasks and that also educates third-partysystems integrators in the use of our products so that these systemsintegrators can provide these services to our customers. If we are unable todevelop sufficient relationships with third-party systems integrators and othercustomers, unable to complete product implementations in a timely manner, orunable to provide customers with satisfactory and quality support, consulting,maintenance and other services, we could face customer dissatisfaction, damageto our reputation, decreased overall demand for our products and loss ofrevenue.

***We may have tospend substantial funds on sales and marketing in the future.***

To increase awareness forour new and existing products, technology and services, we may have to spendsignificantly more on sales and marketing in the future. We also plan tocontinue to leverage our relationships with industry leaders and to expand anddiversify our sales and marketing initiatives to increase our sales to mobilecarriers and enterprises. If our marketing strategy is unsuccessful, we may notbe able to recover these expenses or even generate any revenue. We will berequired to develop a marketing and sales campaign that will effectivelydemonstrate the advantages of our products, technology and services. We mayalso elect to enter into agreements or relationships with third parties regardingthe promotion or marketing of our products, technology and services. We cannotbe certain that we will be able to establish adequate sales and marketingcapabilities, that we will be able to enter into marketing agreements orrelationships with third parties on financially acceptable terms, or that anythird parties with whom we enter into such arrangements will be successful inmarketing and promoting the products, technology and services offered by us.

***Our products maycontain errors that could subject us to product-related claims.***

Our products may containundetected errors or failures, which can result in loss of or delay in marketacceptance and could adversely impact future operating results. Our insurancemay not cover us for certain claims related to product failures. Although ourlicense agreements contain provisions limiting our liability in the case ofdamages resulting from use of the software, in the event of such damages, wemay be found liable, and in such event, such damages could materially affectour business, operating results and financial condition.

***Our revenue fromconsumer sales is subject to risks associated with the declining wired PDAmarket and reliance on sales distribution channels.***

While the market forconverged mobile devices or smartphones and other wireless mobile devices hasexperienced growth recently, the market for traditional personal digitalassistants, or PDAs, has declined. The decline in traditional PDA sales had adirect impact on sales of our Intellisync products through the consumer andonline channels, where sales of our synchronization software typically occur atthe same time a PDA is purchased, or shortly thereafter. The increase in demandfor smartphones and other such devices may not offset the decline in traditionalPDA sales. Our consumer sales are also dependent upon distribution andmarketing channels outside our control. There are also a significant number ofour customers that purchase our products and services through other resellers,and we anticipate they will continue to do so as we expand our productofferings. Our sales, therefore, could also be negatively affected bydisruptions in our relationships with resellers or disruptions in therelationships between our resellers and customers. Resellers may also choosenot to emphasize our products to their customers. If we are unable to offsetdeclining revenue from PDA-related software, or if we experience disruption in,or reduced selling efforts from, our distribution channels, our revenue derivedfrom consumer sales would be adversely affected.

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***We may need toraise additional capital in the future resulting in dilution to ourstockholders.***

We may need to raiseadditional funds for our business operations and to execute our businessstrategy. We may seek to sell additional equity or debt securities or to obtainan additional credit facility. The sale of additional equity or convertibledebt securities could result in additional dilution to our stockholders. Ifadditional funds are raised through the issuance of debt securities, thesesecurities could have rights that are senior to holders of common stock andcould contain covenants that would restrict our operations. Any additionalfinancing may not be available in amounts or on terms acceptable to us, if atall.

***We may not havesufficient cash flow to make payments on any debt we may incur.***

Our ability to payprincipal and interest on our existing and any future indebtedness and to fundour planned capital expenditures depends on our future operating performance.Our future operating performance is subject to a number of risks anduncertainties that are often beyond our control, including general economicconditions and financial, competitive and regulatory factors. Consequently, wecannot assure you that we will have sufficient cash flow to meet our liquidityneeds, including making payments on existing and any future indebtedness.

***The fundamentalchange redemption rights in our outstanding convertible senior notes coulddiscourage a potential acquirer.***

If we engage in anytransaction or event in connection with which all or substantially all of ourcommon stock is exchanged for, converted into, acquired for or constitutessolely the right to receive, consideration which is not all or substantiallyall common stock listed on a United States national securities exchange orapproved for quotation on the Nasdaq National Market or any similar UnitedStates system of automated dissemination of quotations of securities prices,or, if for any reason, our common stock is no longer listed for trading on aUnited States national securities exchange nor approved for trading on theNasdaq National Market (a “fundamental change”), we may be required to redeemall or part of the notes and this could discourage a potential acquirer.However, this redemption feature is not the result of management’s knowledge ofany specific effort to obtain control of us by means of a merger, tender offeror solicitation, or part of a plan by management to adopt a series ofanti-takeover provisions. The term “fundamental change” is limited to specifiedtransactions and may not include other events that might adversely affect ourfinancial condition or business operations. Our obligation to offer to redeemthe notes upon a fundamental change would not necessarily afford you protectionin the event of a highly leveraged transaction, reorganization, merger orsimilar transaction involving us.

***We may not have theability to raise the funds necessary to finance the fundamental changeredemption option associated with our outstanding convertible senior notes.***

If we engage in anytransaction or event in connection with which all or substantially all of ourcommon stock is exchanged for, converted into, acquired for or constitutessolely the right to receive consideration which is not all or substantially allcommon stock listed on a United States national securities exchange or approvedfor quotation on the Nasdaq National Market or any similar United States systemof automated dissemination of quotations of securities prices, or, if for anyreason, our common stock is no longer listed for trading on a United Statesnational securities exchange nor approved for trading on the Nasdaq NationalMarket, we may be required to redeem all or part of the notes. We may not haveenough funds to pay the redemption price for all tendered notes. In addition,any credit agreement or other agreements relating to our indebtedness maycontain provisions prohibiting redemption of the notes under certaincircumstances, or expressly prohibit our redemption of the notes upon adesignated event or may provide that a designated event constitutes an event ofdefault under that agreement. Our failure to redeem tendered notes wouldconstitute an event of default under the indenture, which might also constitutea default under the terms of our other indebtedness.

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***Our certificate ofincorporation, our bylaws, Delaware law and our stockholder rights plan containprovisions that could discourage a takeover.***

Provisions of ourcertificate of incorporation, our bylaws, Delaware law and our stockholderrights plan contain provisions that may discourage, delay or prevent a mergeror acquisition or other change of control that a stockholder may considerfavorable.

**EXECUTIVEOFFICERS AND DIRECTORS OF THE REGISTRANT**

Theexecutive officers and directors of Intellisync as of October 17, 2005,are as follows:
| Name                 | ** ** | ** ** | ** ** | **Age**                                                                                                                                                              | ** ** | **Position** |
|----------------------|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| Woodson Hobbs        |       | 58         |       | President, Chief  Executive Officer and Director                                                                                                                     |
| David P. Eichler     |       | 56         |       | Chief Financial Officer                                                                                                                                              |
| Clyde Foster         |       | 44         |       | Chief Operating Officer                                                                                                                                              |
| Robert Gerber        |       | 42         |       | Chief Marketing Officer                                                                                                                                              |
| Blair Hankins        |       | 51         |       | Senior Vice President of  Technology, Client Development                                                                                                             |
| Scott Hrastar        |       | 41         |       | Senior Vice President of  Technology, Servers and Hosted Services                                                                                                    |
| J. Keith Kitchen     |       | 42         |       | Chief Accounting Officer and Principal Accounting Officer                                                                                                            |
| Michael M. Clair     |       | 57         |       | Chairman of the Board,  the Compensation Committee and the Nomination and Governance Committee and  Member of the Audit Committee and the Special Strategy Committee |
| Richard W. Arnold    |       | 57         |       | Director, Chairman of  the Audit Committee and the Special Strategy Committee and Member of the  Nomination and Governance Committee                                 |
| Kirsten Berg-Painter |       | 45         |       | Director and Member of  the Compensation Committee                                                                                                                   |
| Keith A. Cornell     |       | 45         |       | Director and Member of  the Compensation Committee                                                                                                                   |
| Said Mohammadioun    |       | 58         |       | Director                                                                                                                                                             |
| Terrence Valeski     |       | 58         |       | Director and Member of the Audit Committee and the  Nomination and Governance Committee                                                                              |

 

*Mr. Hobbs* became the presidentand chief executive officer of the Company in June 2002. He has alsoserved as a director of the Company since joining the company. Prior to joiningthe Company, Mr. Hobbs served as a consulting executive for the venturecapital community, and as a strategic systems consultant to large corporations.From 1995 to 2002, Mr. Hobbs held the position of interim chief executiveofficer at the following companies: FaceTime Communications, a provider ofinstant messaging network-independent business solutions; Tradenable, Inc.,an online escrow service company; BigBook, Inc., a pioneer in the onlineyellow pages industry; and I/PRO Corporation, a leader in quantitativemeasurement of Web site usage. From 1993 to 1994, Mr. Hobbs served as chiefexecutive officer of Tesseract Corporation, a human resources outsourcing andsoftware company. Mr. Hobbs spent the early part of his career withCharles Schwab Corporation, a securities brokerage and financial servicecompany, as chief information officer and with Service Bureau, a division ofInternational Business Machines Corporation, or IBM, the world’s largestinformation technology company, as one of the developers and the director ofoperations of Online Focus, an online credit union system that ultimatelyserved over 20 million members.

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*Mr. Eichler* became the chieffinancial officer of the Company in October 2005. Prior to joining theCompany, Mr. Eichler was vice president of finance and chief financialofficer of SiNett Corporation, an integrated chip and software company in thewireless network market from September 2004 to October 2005. From October 2002to September 2004, Mr. Eichler was vice president of finance andchief financial officer of Tripath Technology, Inc. a fablesssemiconductor company. Mr. Eichler was vice president of finance, chieffinancial officer and corporate secretary with Gadzoox Networks, Inc., asupplier of storage area networking equipment and software, from March 2001to May 2002, vice president of finance and administration and chieffinancial officer with Alliance Semiconductor Corporation, a provider of memory and analog andmixed signal products, from December 1999 to March 2001 and vicepresident of finance and chief accounting officer with Adobe Systems, Inc.,a maker of graphics andpublishing software, from December 1997 through December 1998. Mr. Eichleris a certified public accountant and received his BS degree in Accounting fromNortheastern University and MBA degree from the University of California LosAngeles.

*Mr. Foster*became the chief operating officer of the Company in July 2004 overseeingcorporate operations and the sales of the Company’s products to leadingenterprises, OEMs, and wireless operators. Mr. Foster previously served assenior vice president of sales and marketing since joining the Company in September 2002.From July 1999 to September 2002, Mr. Foster served as presidentand chief executive officer of eConvergent, Inc., a next-generationcustomer data integration software company. Prior to founding eConvergent, Mr. Fosterestablished and led the Global Solutions Services division of AspectCommunications Corporation, a provider of business communications solutionsfrom April 1996 to June 1999. Previously, Mr. Foster held avariety of sales and professional services management positions during his 14years at IBM. Mr. Foster holds a BS degree in Mathematics from NorthCarolina State University.

*Mr. Gerber* became the chief marketingofficer, overseeing all marketing, strategy, and e-commerce operations, of theCompany in April 2004. Most recently, prior to joining the Company, Mr. Gerberserved as managing director and group vice president of Carlson MarketingGroup, a relationship marketing company. Mr. Gerber also held a variety ofmanagement and consulting positions at Digitas, Inc., an integratedmarketing agency, from 2001 to 2004; Deloitte Consulting, a global managementconsulting firm, from 1992 to 1995; and American Express Company, a diversifiedworldwide travel, financial, and network services company, from 1987 to 1990.Mr. Gerber is the founder of and led @once, Inc., a private emailmessaging company, from 1995 to 2000. Previously, Mr. Gerber, served aschief marketing and strategy officer of Commtouch Software Limited, an emailinfrastructure company. Mr. Gerber holds a BS in engineering degree fromthe University of Virginia and an MBA degree from Harvard University.

*Mr. Hankins*became the senior vice president oftechnology, client development, of the Company in October 2005 responsiblefor ensuring Intellisync’s wireless messaging products offer the best possibleuser experience for mobile professionals worldwide. Mr. Hankins previouslyserved as vice president of engineering for Witness Systems, Inc, a leadingprovider of call center workforce optimization software from August 2004to September 2005. From January 2003 to August 2004, Mr. Hankinswas co-founder and served as chief technology officer of Ascendant Technology,LLC, a provider of industry-specific portal based solutions. From September 1989to December 2002, Mr. Hankins served as a director of messagingsolutions division of IBM Corporation. Mr. Hankins holds a BA degree inmathematics from Ohio State University and an MA degree in mathematics fromUniversity of Maryland.

*Mr. Hrastar*became the senior vice president oftechnology, servers and hosted services, of the Company in August 2005.Mr. Hrastar previously served as chief technical officer and vicepresident of engineering for AirDefense, Inc, a wireless LAN security software vendor from October 2001 to August 2005.From October 2000 to October 2001, Mr. Hrastar was vicepresident of engineering with Lancope, Inc., a network security intrusion detection software developer. From September 1997to September 2000, Mr. Hrastar served as vice president of researchand advanced technology division of 

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Pathfire, Inc., a digital television distributionsoftware-maker. Mr. Hrastar also served in a variety of engineeringpositions at Scientific-Atlanta, Inc.,a provider of DVR and high-definition set-tops, from 1993 to 1997 andHitachi-Telecom (USA), Inc., a developer and manufacturer of accesssystems, high-speed optical networking equipment and customer premises productsfor the U.S. market, from 1998 to 1993. Mr. Hrastar holds a B.S. degree inelectrical engineering from Ohio State University and earned both M.S. andPh.D. degrees in electrical engineering from the Georgia Institute ofTechnology.

*Mr. Kitchen*became chief accounting officer of the Company upon his resignation as chieffinancial officer, effective upon the appointment of his successor. Mr. Kitchenhas agreed to remain with the Company as the Company’s principal accountingofficer for an undetermined amount of time following the appointment of hissuccessor in order to provide transition services to the Company and the newlyappointed chief financial officer. Mr. Kitchen served as chief financialofficer of the Company from July 2004 to October 2005. Mr. Kitchenalso served as vice president of finance and administration and chiefaccounting officer from August 2002 to July 2004 and also ascorporate controller since joining the Company in February 2000 with theCompany’s acquisition of NetMind Technologies, Inc., a venturecapital-funded Internet software company. Mr. Kitchen joined NetMind in January 1999as its controller and later became its vice president of finance andadministration from July 1999 to February 2000. Mr. Kitchen alsoserved in a variety of financial management positions at Intellect Electronics, Inc.,a provider of electronic commerce and smart card solutions, from March 1997to December 1998, and at Bausch & Lomb, Inc., a globaltechnology based healthcare company, from July 1990 to March 1997. Previously,Mr. Kitchen served as certified public accountant with Ernst &Young LLP, a professional services organization. Mr. Kitchen holds abachelor of science in business administration degree from Bucknell Universityand is a graduate of Northwestern University’s Kellogg Graduate School ofManagement.

*Mr. Mohammadioun* became a director of theCompany in December 2003 and most recently served as the Company’s chief technology officer from December 2003to October 2005. From October 1996 to December 2003, Mr. Mohammadiounserved as chief executive officer of Synchrologic, Inc., a provider of mobileinfrastructure solutions, which was acquired by Intellisync in December 2003.Previously, Mr. Mohammadioun served as vice-president of Lotus DevelopmentCorporation, a provider of knowledge management solutions, from 1990 to 1995. From1983 to 1990, he was the chief executive officer of Samna Corporation, aword-processing software company founded by Mr. Mohammadioun in 1983. Samnawas sold to Lotus Development Corporation in 1990. Mr. Mohammadioun holds a masterdegree in electrical engineering from Georgia Institute of Technology and anMBA degree from Georgia State University.

In October 2005, Mr. Mohammadioun gavenotice to the Company of his intention to resign as a member of the Company’sBoard of Directors, effective as of the end of his current term, which isscheduled to expire at the Company’s 2005 annual meeting of stockholders.

*Mr. Clair* became a directorof the Company in December 1994 and has served as chairman of the board ofthe Company since March 1995. Since June 1995, Mr. Clair has servedas an independent financial consultant. Mr. Clair was a founder ofSynOptics Communications (now Nortel Networks), a computer networking company,and from January 1987 to November 1992, served as vice president ofsales and marketing and then as senior vice president of sales and customerservice of SynOptics. Mr. Clair has more than 30 years of experience indata processing, data and voice communications and local area networking, aswell as various wireless technologies. He spent the early part of hiscareer with Tymshare, Inc., a computer time-sharing company, and ROLM, amanufacturer of digital PBX equipment, in a variety of sales and marketingpositions. He holds a BS degree in business and an MBA degree from theUniversity of Buffalo. Mr. Clair is a director of several privatecompanies.

*Mr. Arnold*became a director of the Company in May 2004. Since June 2001, Mr. Arnoldhas served as founding partner of Committed Capital Proprietary Limited, aprivate equity investment company based in 

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Sydney, Australia. From August 1999to May 2001, Mr. Arnold served as executive director of ConsolidatedPress Holdings Limited, also a private investment company based in Sydney. Previously,Mr. Arnold served as managing director of TD Waterhouse Australia, a securitiesdealer; as chief executive officer of Integrated Decisions and Systems, Inc.,an application software company; as managing director of Eagleroo ProprietaryLimited, a corporate advisor company; and in various capacities with CharlesSchwab & Company., Inc., a securities and financial servicesbrokerage, including serving as chief financial officer and as executive vicepresident—Strategy and Corporate Development. Mr. Arnold holds a BS degreein psychology from Stanford University.

*Ms. Berg-Painter* became adirector of the Company in August 2001. Since November 2000, Ms. Berg-Painterhas served as an independent marketing consultant. From July 1998 to October 2000,Ms. Berg-Painter served as senior vice president of worldwidemarketing at Clarify, Inc., an enterprise customer relationshipmanagement, or CRM, company. From 1989 to 1998, Ms. Berg-Painter served invarious capacities with Aspect Communications Corporation, a provider ofcustomer relationship portals, last serving as general manager and vicepresident of one of its product divisions. Previously, Ms. Berg-Painterserved as director of product marketing for AST Research, Inc., a personalcomputer manufacturer, and as director of marketing for Syntellect, Inc.,a provider of call-center technology and hosted service solutions. Ms. Berg-Painterbegan her career at IBM where she held various systems engineering andmarketing positions. She holds a BA degree in business and economics fromUniversity of California, Los Angeles and attended business school at NorgesHandelshøyskolen in Bergen, Norway.

*Mr. Cornell*is a UK chartered director and became a director of the Company in May 2005.Since 2002, Mr. Cornell has served as chief executive officer of EmpowerInteractive Ltd., a private specialized messaging platform company workingglobally with mobile operators. From 2001 to 2002, Mr. Cornell served aspresident of British Telecom Wireless plc., a mobile telecommunicationscompany, for its Europe operations and in the same position in its spin-off, O2.Between May and October 2001, he served as interim chief executiveofficer for British Telecom’s Viag Intercom unit in Germany. From 1999 to 2001,Mr. Cornell worked for Firstmark Communications, a Pan-European broadbandcompany, as a senior vice president of business development. From 1995 to 1999,Mr. Cornell served in various capacities including as executive directorand vice president of international operations with Vodafone AirtouchInternational, Ltd. Previously, Mr. Cornell served as director or seniormanager for various companies including Airtouch Communications, Inc., awireless communications company, and Marakon Associates, a value-basedstrategy consultancy firm. He holds a BS degree in engineering from Harvey MuddCollege and an MBA degree from Carnegie Mellon University.

*Mr. Valeski*became a director of the Company in May 2005. From 2000 to 2005, Mr. Valeskiserved as chief executive officer and managing director of Eurotel Praha, aleading provider of wireless voice and data services in the Czech Republic. From1997 to November 2000, Mr. Valeski served in various capacities withBritish Telecommunications plc (BT), a United Kingdom telecommunicationscompany, as director for mobile marketing outside UK and later as chiefoperating officer and chief marketing officer for BT’s other divisions or jointventures such as Telfort, Blu and BT Wireless in Holland and Italy. From 1994to 1997, Mr. Valeski worked for Pacific Bell Mobile Services, adiversified telecommunications company, as a senior vice president and later aspresident and general manager. Previously, Mr. Valeski served as seniorvice president of sales and marketing for various companies including AtariCorporation, a manufacturer of video games; Mattel, Inc., the world’slargest toy company; Teledyne WaterPik, Inc., a diversified manufacturingcompany; and J. Walter Thompson Company, a New York-based advertising agency. Heholds an EA degree in liberal arts from the University of Arizona. Mr. Valeskiis a director of several private companies.

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**ITEM2.**                PROPERTIES

At July 31,2005, we leased the facilities described below:

| **Location**            | ** ** | ** **                                                                           | ** ** | **Function** | ** ** | **Square  Feet**   | ** ** | **Lease  Expiration Date** |
|-------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|----------------------------|
| ***United  States***    | * *   | * *                                                                             | * *   | * *     | * *   | * *           |
| San Jose, CA            |       | Corporate headquarters, administrative offices,  engineering and sales and marketing |       | 33,821       | (1)        | June 2006     |
| Los Gatos, CA           |       |                                                                                 |       | 15,000       | (2)        | August 2005   |
| Santa Cruz, CA          |       |                                                                                 |       | 20,924       | (3)        | May 2006      |
| Solano Beach, CA        |       | Administrative offices  and sales and marketing                                      |       | 2,776        |       | May 2006      |
| Greenwich, CT           |       | Administrative offices  and sales and marketing                                      |       | 4,276        |       | January 2008  |
| Alpharetta, GA          |       | Administrative offices, engineering, professional  services and sales and marketing  |       | 22,409       |       | December 2008 |
| Salt Lake City, UT      |       | Engineering                                                                          |       | 5,717        |       | April 2006    |
| ***Europe***            |       |                                                                                 |       |         |       |               |
| Sofia, Bulgaria         |       | Engineering and  professional services                                               |       | 15,200       |       | April 2007    |
| Cologne, Germany        |       | Sales                                                                                |       | 2,949        |       | June 2007     |
| Cluj-Napoca, Romania    |       | Engineering and  professional services                                               |       | 8,611        |       | May 2009      |
| Reading, United Kingdom |       | Sales                                                                                |       | 1,429        |       | August 2007   |
| ***Asia-Pacific***      |       |                                                                                 |       |         |       |               |
| Canberra, Australia     |       | Engineering                                                                          |       | 3,014        |       | August 2008   |
| Sydney, Australia       |       | Administrative offices  and sales and marketing                                      |       | 2,626        |       | June 2006     |
| Delhi, India            |       | Engineering                                                                          |       | 5,656        |       | July 2008     |
| Tokyo, Japan            |       | Administrative offices and sales and marketing                                       |       | 3,024        |       | July 2006     |

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(1)          6% of property issubleased to a third-party for the duration of the lease term.

(2)          Subleased to athird-party for the duration of the lease term.

(3)          Available for sublease.

The properties located in Solano Beach, California andDelhi, India were leased in May 2006 and July 2006 for the employeesof our newly acquired subsidiaries Tourmalineand PDAapps, respectively. We believe that these facilities are adequate tomeet the present and future operational requirements of our newly acquiredsubsidiaries.

We lease space in Los Gatos and Santa Cruz, Californiafor offices that were closed as a result of the restructuring and costreduction plans we implemented in previous fiscal years. Refer to thediscussions under the caption “*Restructuring and OtherCharges”* set forth in Item 7, Part II of this Annual Report on Form 10-Kfor more information on the restructure charges related to these facilities. Wehave secured tenants for some of our vacated facilities and are activelymarketing to sublet the remainder. We have experienced difficulties, however,in subletting our vacated office in Santa Cruz, California because of thecontinuing deterioration of the real estate markets in that location.

We believe that ourexisting facilities are sufficient to meet our present and future foreseeableneeds. We do not anticipate difficulty in renewing existing leases as theyexpire or in finding alternative facilities.

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**ITEM3.**                LEGAL PROCEEDINGS

On October 5, 2005, Plaintiff SpontaneousTechnology, Inc. served the Company with a complaint filed in the ThirdJudicial District Court, of Salt Lake County, State of Utah. In the Complaint,Plaintiff asserts a cause of action for breach of contract related to thecalculation of an earnout payment in the Asset Purchase Agreement entered intobetween the parties on July 30, 2003. Plaintiff seeks compensatory damagesin the amount of $673,750 and recovery of its attorneys’ fees and costs. Webelieve the action has no merit and are vigorously defending against it. Wecannot estimate any possible loss at this time.

We are party to various legal proceedings and claims,either asserted or unasserted, which arise in the ordinary course of business,including proceedings and claims that relate to acquisitions we have completedor to companies we have acquired, commercial, employment and other matters. While theoutcome of these matters cannot be predicted with certainty, we do not believethat the outcome of any of these claims or any of the above mentioned legalmatters will have a material adverse effect on our consolidated financialposition, results of operations or cash flow. In accordance with generally accepted accounting principles,we make a provision for a liability when it is both probable that a liabilityhas been incurred and the amount of the loss can be reasonably estimated. Theseprovisions are reviewed at least quarterly and adjusted to reflect the impactsof negotiations, settlements, rulings, advice of legal counsel, and otherinformation and events pertaining to a particular case. Litigation isinherently unpredictable. However, we believe that we have valid defenses withrespect to the legal matters pending against Intellisync. It is possible,nevertheless, that our consolidated financial position, cash flows or resultsof operations could be affected by the resolution of one or more of thesecontingencies.

Refer to the discussionset forth in Item 1 under the caption *“Risk Factors—We may beunable to adequately protect our proprietary rights;” “Risk Factors—We may besubject to intellectual property infringement claims, which are costly todefend and could limit our ability to use certain technologies in the future” and“Risk Factors—We have been, are and may in the future be involved in litigationthat could result in significant costs to us.”*

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

No matters were submitted to a vote of the Company’ssecurity holders during the fourth quarter of the fiscal year ended July 31,2005.

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**PART II**

**ITEM5.**                MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

Intellisync’scommon stock began trading on the Nasdaq National Market on December 5,1996, under the symbol “PUMA.” We changed our name to Intellisync Corporationon February 17, 2004, at which time our ticker symbol changed to “SYNC.”The following table sets forth the high and low closing prices for our commonstock as reported on the Nasdaq National Market from August 1, 2003, throughJuly 31, 2005.

| ** **                                                              | ** ** | **High**   | ** ** | **Low**    | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ***Fiscal  2004***                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| First fiscal  quarter (August 1, 2003 to October 31, 2003)    |       | $          | 6.99       |       | $          | 3.05 |   |
| Second fiscal  quarter (November 1, 2003 to January 31, 2004) |       | $          | 7.51       |       | $          | 3.98 |   |
| Third fiscal  quarter (February 1, 2004 to April 30, 2004)    |       | $          | 4.65       |       | $          | 2.26 |   |
| Fourth fiscal  quarter (May 1, 2004 to July 31, 2004)         |       | $          | 3.35       |       | $          | 1.64 |   |
| ***Fiscal  2005***                                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| First fiscal  quarter (August 1, 2004 to October 31, 2004)    |       | $          | 3.05       |       | $          | 1.75 |   |
| Second fiscal  quarter (November 1, 2004 to January 31, 2005) |       | $          | 2.31       |       | $          | 1.77 |   |
| Third fiscal  quarter (February 1, 2005 to April 30, 2005)    |       | $          | 3.66       |       | $          | 2.06 |   |
| Fourth fiscal quarter  (May 1, 2005 to July 31, 2005)         |       | $          | 3.07       |       | $          | 2.43 |   |

 

As of October 10, 2005, there were approximately433 stockholders of record of our common stock and 67,255,129 shares of commonstock outstanding. Additionally, on such date the last reported closing saleprice of our common stock, as reported by the Nasdaq National Market, was $4.27per share.

We have never paid dividends on our capital stock. Wecurrently intend to retain any future earnings for use in our business and donot anticipate paying any cash dividends in the foreseeable future.

The disclosure required byItem 201(d) of Regulation S-K is incorporated by reference to the definitiveproxy statement for our 2005 Annual Meeting of Stockholders to be filed withthe SEC pursuant to Regulation 14A no later than 120 days after the end of thefiscal year covered by this form under the caption “*EquityCompensation Plan Information.*”

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**ITEM 6.**                SELECTEDFINANCIAL DATA

The following selected consolidated financial data arederived from our consolidated financial statements. Historical results shouldnot be taken as indicative of the results that may be expected for any futureperiod. This summary of our consolidated financial information for fiscal years2001 to 2005 should be read along with our audited consolidated financialstatements contained in this Annual Report on Form 10-K. Thesummarized financial information, other than the statements of operations datafor fiscal 2001 and 2002 and the balance sheets data at July 31, 2001,2002 and 2003, was taken from these financial statements.

This summary of consolidated financial statementsincludes the accounts of Intellisync Corporation and our wholly ownedsubsidiaries.

In addition to theeffect of acquisitions, there were a number of other items that affected thecomparability of this information:

·       Theresults of operations for fiscal year 2005 include the effects of chargesrecorded during the fourth quarter of fiscal 2005, including $505,000 for thesettlement of NCR Corporation’s patent infringement claim, which is more fullydescribed in note 9 to the consolidated financial statements set forth under Part IV,Item 15 of this Annual Report on Form 10-K., and various legal costs.The results of operations for fiscal 2005 also include $220,000 for purchasedin-process research and development in connection with the acquisition ofPDAapps, Inc. We also recorded a $25,000 recovery of non-cash stockcompensation during fiscal 2005 in connection with certain stock optionsaccounted for using variable accounting.

·       Theresults of operations for fiscal year 2004 include the effect of chargesincluding $600,000 for facilities cost adjustment relating to restructuringactions implemented in a prior year, $253,000 for severance costs, and $76,000for operating expenses relating to a potential acquisition that wassubsequently abandoned. We recorded a charge of $3,667,000 for purchasedin-process research and development in connection with the acquisitions ofSpontaneous Technology, Inc., and acquisition of Synchrologic, Inc.,and Identity Systems (formerly Search Software America Pty. Ltd., or SSA). Anadditional charge of $745,000 was incurred in connection with certain stockoptions accounted for using variable accounting. A net gain of $1,576,000 whichresulted from the settlement of patent litigation with Extended Systems wasalso recorded in fiscal 2004.

·       Theresults of operations for fiscal year 2003 include the effect of chargesincluding $379,000 for operating expenses relating to a potential acquisitionthat was subsequently abandoned, $257,000 for severance and separation costs,and $159,000 for facilities cost adjustment relating to restructuring actionsimplemented in the prior year. We also recorded a $60,000 recovery of leasepayments deemed uncollectible in the prior year. Additional charges incurred infiscal 2003 include an other-than-temporary impairment of investments of$2,394,000, non-cash stock compensation expense of $1,585,000 in connectionwith certain stock options and restricted stock accounted for using variableaccounting and $157,000 in connection with the options granted by NetMindTechnologies, Inc. prior to our acquisition of NetMind, and purchasedin-process research and development of $406,000 in connection with ouracquisition of Starfish Software, Inc.

·       Theresults of operations for fiscal year 2002 include the effect of chargesincluding $5,595,000 for severance and separation costs, facilitiesconsolidation and assets held for disposal associated with the cost reductionprogram implemented during the third and fourth quarters of fiscal 2002 and$5,249,000 for write-downs of impaired intangibles and assets related to our terminatedonline operations. We recorded a charge for impairment of certain excess software development tools, aprovision for rent reimbursement deemed uncollectible and another-than-temporary impairment of investments of approximately $580,000,$330,000 and $380,000, respectively. Non-cash stock 

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compensation expense of$367,000 was also recorded in connection with the options granted by NetMindprior to our acquisition of NetMind.

·       The results of operationsfor fiscal year 2001 include the effect of a $1,417,000 charge for severancecosts, facilities consolidation and assets held for disposal associated withthe cost reduction programs implemented in the third and fourth quarters offiscal 2001. Additional charges were incurred for write-downs of impairedintangibles and other assets of $10,614,000 and direct investments of$1,180,000, and non-cash stock compensation expense of $1,058,000 in connectionwith the options granted by NetMind prior to our acquisition of NetMind and thestock option regrant program implemented in July 2001.

***CondensedConsolidated Statements of Operations Data***(in thousands, except per common share data)

| ** **                                   | ** ** | **Year Ended July 31,** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                   | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenue                                      |       | $                                      | 59,498     |   | $ | 42,308 |   | $ | 24,860 |   | $ | 22,940 |   | $ | 38,202 |   |
| Net  loss                                    |       | $                                      | (13,414    | ) | $ | (9,455 | ) | $ | (7,736 | ) | $ | (34,518 | ) | $ | (41,818 | ) |
| Basic  and diluted net loss per common share |       | $                                      | (0.20      | ) | $ | (0.16 | ) | $ | (0.17 | ) | $ | (0.77 | ) | $ | (0.96 | ) |

 

***CondensedConsolidated Balance Sheets Data***(in thousands)

| ** **                                        | ** ** | **July 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|
| ** **                                        | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Cash, cash equivalents and short-term investments |       | $                 | 38,852     |   | $ | 53,648 |   | $ | 27,159 |   | $ | 34,431 |   | $ | 48,908 |   |
| Working capital                                   |       | $                 | 38,068     |   | $ | 51,848 |   | $ | 25,173 |   | $ | 28,099 |   | $ | 44,489 |   |
| Total assets                                      |       | $                 | 160,793    |   | $ | 170,354 |   | $ | 41,167 |   | $ | 47,312 |   | $ | 78,934 |   |
| Long-term obligations                             |       | $                 | 60,880     |   | $ | 61,229 |   | $ | 921 |   | $ | 1,991 |   | $ | — |   |
| Total  stockholders’ equity                  |       | $                 | 82,211     |   | $ | 94,391 |   | $ | 31,796 |   | $ | 34,884 |   | $ | 68,192 |   |

 

***Summary CondensedQuarterly Data***(unaudited, in thousands, except per common share data)

| ** **                                                           | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                           | ** ** | **July 31,**                | ** ** | **April 30,** | ** ** | **Jan 31,** | ** ** | **Oct 31,** | ** ** | **July 31,** | ** ** | **April 30,** | ** ** | **Jan 31,** | ** ** | **Oct 31,** | ** ** |
| ** **                                                           | ** ** | **2005**                         | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                                              |       | $                                | 15,703     |   | $ | 15,237 |   | $ | 16,256 |   | $ | 12,302 |   | $ | 13,282 |   | $ | 11,007 |   | $ | 10,003 |   | $ | 8,016 |   |
| Cost of revenue                                                      |       | 3,833                            |       | 3,723 |   | 3,693 |   | 3,497 |   | 3,490 |   | 3,227 |   | 2,197 |   | 1,787 |   |
| Gross profit                                                         |       | 11,870                           |       | 11,514 |   | 12,563 |   | 8,805 |   | 9,792 |   | 7,780 |   | 7,806 |   | 6,229 |   |
| Operating expenses                                                   |       | 15,723                           |       | 15,315 |   | 13,104 |   | 12,013 |   | 11,148 |   | 11,396 |   | 11,148 |   | 8,509 |   |
| Operating loss                                                       |       | $                                | (3,853     | ) | $ | (3,801 | ) | $ | (541 | ) | $ | (3,208 | ) | $ | (1,356 | ) | $ | (3,616 | ) | $ | (3,342 | ) | $ | (2,280 | ) |
| Net loss                                                             |       | $                                | (4,573     | ) | $ | (4,361 | ) | $ | (973 | ) | $ | (3,506 | ) | $ | (1,758 | ) | $ | (2,184 | ) | $ | (3,252 | ) | $ | (2,261 | ) |
| Basic and diluted net loss per  common share                         |       | $                                | (0.07      | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.05 | ) | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.05 | ) |
| Shares used in computing basic and diluted net loss per common share |       | 66,635                           |       | 66,523 |   | 65,076 |   | 64,418 |   | 64,070 |   | 63,859 |   | 54,475 |   | 48,266 |   |

 

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**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion includes a number offorward-looking statements. You should read this section in conjunction withthe cautionary language applicable to such forward-looking statements describedabove in Item 1 found in Part I of this Annual Report on Form 10-K.You should not place undue reliance on these forward-looking statements, whichspeak only as of the date of this Annual Report on Form 10-K. We undertakeno obligation to release publicly any revisions to the forward-lookingstatements or reflect events or circumstances after the date of this document.*

**Business Overview**

We develop, market and support desktop, enterprise andmobile carrier-class software that enables consumers, business executives andinformation technology professionals to extend the capabilities of enterprisegroupware and vertical applications, data-enabled mobile devices and otherpersonal communication platforms. The primary software applications wedeveloped and marketed include push-email, data synchronization and systemsmanagement software. Our software also enables organizations to search, find,match and synchronize identity data within their computer systems and networkdatabases.

We have organized our operations into a singleoperating segment encompassing the development, marketing and support ofsoftware and services that provide synchronization, wireless messaging, mobileapplication development, database application/device management, real-timeremote information access, secure VPN, and identity synchronizationcapabilities.

We license our software products directly tocorporations, mobile carriers, original equipment manufacturers, or OEMs, andbusiness development organizations worldwide. In addition, we sell our retailproducts through several distribution channels both in the United States andinternationally, including major distributors, resellers, computer dealers,retailers and mail-order companies. Internationally, we are represented by over150 distributors, resellers and retailers in North America, Europe, theAsia-Pacific region, South America and Africa.

One component of our business strategy is to enhancestockholder value through the acquisition of companies and technologies that wecan leverage to improve our strategic market position and growth potential inboth emerging and established technologies. Our recent acquisitions, togetherwith our internal development efforts, have been aimed at expanding our focusfrom cabled synchronization to synchronization for wireless handhelds,smartphones, laptops and tablets, where a number of industry analysts, such asInternational Data Corporation, or IDC, predict future growth. For details onour recent acquisitions, refer to the discussion under the caption “*Acquisitions*” set forth under Liquidityand Capital Resources below.

We intend to capitalize on the continued growth indemand for wireless services and the related infrastructure required, includinghosting, application and other related services, to support that growth. Assuch, maintaining and cultivating relationships with mobile carriers iscurrently one of the critical focus areas of our research and development andsales and marketing groups. We believe that wireless services will continue tobe one of the fastest growing segments of the telecommunications industry andthat mobile carriers will be under increasing competitive pressure. As aresult, we believe there will be significant opportunities to provide mobilecarriers with services that enable them to focus internal resources on theircore business activities while increasing revenues, improving service qualityand reducing costs.

We expect to continue toimplement our business development strategy in fiscal 2006. To increase marketshare, we may also attempt to acquire or seek alliances with key competitorsand other companies that may have important products and synergies with ourexisting operations and products.

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**Estimates,Assumptions and Critical Accounting Policies**

The following discussion and analysis of financialcondition and results of operations are based on our consolidated financialstatements and notes thereto set forth in Part IV of this Annual Report onForm 10-K. Our consolidated financial statements are prepared inaccordance with generally accepted accounting principles, or GAAP, in theUnited States of America. These accounting principles require us to makecertain estimates, judgments and assumptions, which we review with our audit committee.We believe that the estimates, judgments and assumptions upon which we rely arereasonable based upon various factors and information available to us at thetime that these estimates, judgments and assumptions are made. These factorsand information may include, but are not limited to, history and priorexperience, experience of other enterprises in the same industry, new relatedevents, current economic conditions and information from third partyprofessionals. The estimates, judgments and assumptions we make can affect thereported amounts of assets and liabilities as of the date of the financialstatements, as well as the reported amounts of revenues and expenses during theperiods presented. To the extent there are material differences between theseestimates, judgments or assumptions and actual results, our financialstatements will be affected.

We useestimates in accounting for, among other things, various revenue contracts,returns, recoverability of long-lived assets and investments, in-processresearch and development, restructuring accruals, contingencies, allowances foruncollectible receivables, depreciation and amortization and valuation ofincome taxes. The significant accounting policies that we believe are the mostcritical to aid in fully understanding and evaluating our reported financialresults include the following:

·       *License and services revenue recognition.*

Revenue from license feesis recognized when persuasive evidence of an arrangement exists, delivery ofthe product has occurred, no significant Company obligations with regard to implementation or integration exist, the fee isfixed or determinable and collectibility is probable. Arrangements for whichthe fees are not deemed probable for collection are recognized upon cash collection.If we were to assess the collectibility of fees differently, the timingand amount of our revenue recognition might differ substantially frompreviously estimated or reported.

Services revenue primarilycomprises revenue from consulting fees, maintenance contracts and training. Servicesrevenue from consulting and training is recognized as the service is performed.Maintenance contracts include the right to unspecified upgrades and ongoingsupport. Maintenance revenue is deferred and recognized ratably as services areprovided over the maintenance period. If we were to allocate more or less valueto the unspecified upgrades and ongoing support, the timing of our revenuerecognition might differ substantially from that previously reported.

For contracts withmultiple elements, and for which vendor-specific objective evidence of fairvalue for the undelivered elements exists, revenue is recognized for thedelivered elements based upon the residual contract value as prescribed by theAmerican Institute of Certified Public Accountants in Statement of Position(SOP) No. 98-9. We have accumulated relevant information fromcontracts to use in determining the availability of vendor-specific objectiveevidence and believe that such information complies with the criteriaestablished in SOP No. 97-2, “*Software RevenueRecognition*” which provides guidance on generally acceptedaccounting principles for recognizing revenue on software transactions. If wewere to allocate the respective fair values of the aforementioned elementsdifferently, the timing of our revenue recognition might differ substantiallyfrom that previously estimated or reported.

License and servicesrevenue associated with contracts that involve significant implementation ofcustomization of services, which are essential to the functionality of thesoftware, is recognized over the period of each engagement, primarily using thepercentage-of-completion method. Costs 

38

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incurred are generallyused as the measure of progress towards completion as prescribed by SOP No. 81-1,“*Accounting for Performance of Construction-Type andCertain Product-Type Contracts*.” Revenue for these arrangements isclassified as license revenue and services revenue based upon estimates of fairvalue of each element, and the revenue is recognized based on thepercentage-of-completion ratio for the arrangement. Recognized revenue issubject to revisions as the engagement progresses to completion. Revisions inestimates or estimated losses on engagements are made in the period in whichthe loss becomes probable and can be reasonably estimated. Considerablejudgment, such as the scope of work and reliance on the customer or othervendors to fulfill some tasks, may be required in determining estimates tocomplete an engagement. If we were to make different judgments or utilizedifferent estimates of the total amount of work required to complete theengagement, the timing of our revenue recognition from period to period, aswell as the related margins, might differ substantially from that previouslyestimated or reported. We consider a project completed at the go-live date.When we sell additional licenses, we recognize revenue after the go-live dateif the products or seats have been delivered and no remaining obligationsexist.

We license rights to use our intellectual propertyportfolio, whereby licensees, particularly OEMs, typically pay a non-refundablelicense fee in one or more installments and on-going royalties based on theirsales of products incorporating our intellectual property. Revenue from OEMsunder minimum guaranteed royalty arrangements, which are not subject to futureobligations, is recognized when such royalties are earned and become payable. Royaltyrevenue is recognized as earned when reasonable estimates of such amounts canbe made. Royalty revenue that is subject to future obligations is recognizedwhen such obligations are fulfilled. Royalty revenue that exceeds minimumguarantees is recognized in the period earned. If we were to assess thecollectibility of royalties differently or make different judgments or utilizedifferent estimates, the timing and amount of our revenue recognition mightdiffer substantially from previously estimated or reported.

·       *Channel inventory and product returns.*

The primary sales channelinto which we sell our retail products is a network of distributors andvalue-added resellers in North America, Europe, Asia Pacific, South America andAfrica. Agreements with our distributors and resellers contain specific productreturn privileges for stock rotation and obsolete products that are generallylimited to contractual amounts. Reserves for estimated future returns areprovided for upon revenue recognition. Product returns are recorded as areduction of revenues. Accordingly, we have established a product returnsreserve composed of 100% of product inventories held at our distributionpartners, as well as an estimated amount for returns from customers of ourdistributors and other resellers as a result of stock rotation and obsoleteproducts, among others.

We evaluate our productreturns reserve on a quarterly basis. In estimating our product returnsreserve, we evaluate the following factors:

·        ourdemand forecast by product in each of our principal geographic markets, whichis affected by our product release schedule, seasonal trends, and analysesdeveloped by our internal sales and marketing group;

·        historicalproduct returns and inventory levels on a product by product basis;

·        currentinventory levels and sell through data on a product by product basis asreported to us by our major distributors worldwide on a monthly basis;

·        riskassociated with recognizing revenue on individual customers, based on facts andcircumstances; and

·        generaleconomic conditions.

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In general, we would expect product returns toincrease following the announcement of new or upgraded versions of our productsor in anticipation of such product announcements, as our distributors andresellers seek to reduce their inventory levels of the prior version of aproduct in advance of receiving the new version. Similarly, we would expectthat product inventory held by our distributors and resellers would increasefollowing the successful introduction of new or upgraded products, as theseresellers stock the new version in anticipation of demand. In assessing theappropriateness of product inventory levels held by our resellers and theimpact on potential product returns, we may limit sales to our distributors andresellers in order to maintain inventory levels deemed by management to beappropriate. We generally estimate and provide product returns reserve based onanticipated level of returns and the criteria noted above. Accordingly, actualproduct returns may differ from our estimates and may have a material adverseeffect on our revenues and consolidated results of operations in future periodsdue to factors including, but not limited to, market conditions and productrelease cycles.

·       *Provision for doubtful accounts.*

Our provision for doubtful accounts relates tocustomer accounts receivable. The provision for doubtful accounts is anestimate prepared by management based on identification of the collectibilityof specific accounts and the overall condition of the receivable portfolios. Wespecifically analyze customer receivables, as well as analyze the aging of ouraccounts receivable, historical bad debts, customer credits, customerconcentrations, the financial condition of the customers and theircredit-worthiness, changes in payment terms, current economic trends, our historicalwrite-off experience and other assumptions, when evaluating the adequacy of theprovision for doubtful accounts. If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, additional allowances may be required. Likewise, should we determinethat we would be able to realize more of our receivables in the future thanpreviously estimated, an adjustment to the allowance would increase income inthe period such determination was made. The provision for doubtful accounts isreviewed on a quarterly basis and adjustments are recorded as deemed necessary.

·       *Valuation of goodwill, other intangibles, investments and otherlong-lived assets.*

We have accumulated overthe years a significant amount of goodwill, other intangible assets, long-termand other long-lived assets as a result of our investments and acquisitions.

Goodwill represents theexcess of the purchase price of acquired businesses over the fair value of theidentifiable net assets acquired and is tested for impairment at July 31of each year and written down only when impaired. Identifiable intangibleassets result from the application of the purchase method of accounting for ouracquisitions. Our identifiable intangible assets as of July 31, 2005, werecomposed of our unamortized developed and core technology, patents, trademark,customer base, covenant not-to-compete, customer contracts and acquiredworkforce (not accounted as a business combination). Developed and coretechnology, patents and customer base are amortized over the period of benefit,generally three to seven years. Trademarks are amortized over the period ofbenefit of two or three years. Covenants not-to-compete, customer contracts andacquired workforce are amortized over the period of benefit, ranging from ninemonths to three years.

The ongoing evaluation forimpairment of certain identifiable intangibles, investments and long-livedassets requires significant management estimation and judgment. We evaluate thecarrying value of these assets for impairment, when events and circumstancesindicate that the carrying amount of the underlying asset may not berecoverable as defined in the respective literature. In addition, SFAS No. 142,“*Goodwill and Other Intangible Assets*,”requires us to test goodwill annually using a two-step process. The first stepis to identify a potential impairment. The second 

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step measures the amountof the impairment loss, if any. Intangible assets with indefinite lives aretested for impairment using a one-step process that compares the fair value tothe carrying amount of the asset. Changes in the manner of use of the acquiredassets, changes in overall business strategy, negative industry or economictrends, and decline in stock price and market capitalization may trigger animpairment review for certain intangibles. Poor operating results of underlyinginvestments or adverse changes in market conditions may result in losses or aninability to recover the carrying value of investments. Changes in market valueof the assets, physical changes and continuing operating or cash-flow lossesassociated with assets used to generate revenue may suggest problems ofrecoverability for certain long-lived assets. In assessing potentialimpairment, we also make significant estimates and assumptions regarding thediscounted future cash flows of our reporting units to determine each unit’sfair value. Such estimates include, but are not limited to, projected futureoperating results, working capital ratios, cash flow, terminal values, marketdiscount rates and tax rates. Whenever the evaluation demonstrates that thecarrying amount of an intangible, investment or any other long-lived asset isnot recoverable, an impairment charge may be required.

As of July 31, 2005, our total goodwill amountedto $68,474,000. The annual impairment review for goodwill was completed on July 31,2005, and did not identify any impairment. As of July 31, 2005, otherintangibles amounted to $25,946,000, net of accumulated amortization. We expectto amortize approximately $8,616,000, $7,980,000, $4,404,000, $2,190,000 and$2,756,000 of our other intangibles in fiscal 2006, 2007, 2008, 2009 andthereafter, respectively, based on our acquisitions completed as of July 31,2005. To the extent we do not generate sufficient cash flows to recover the netamount of our investment in goodwill, intangibles and other long-lived assetsrecorded, the investment could be considered impaired and subject to earlierwrite-off.

·       *In-Process Research and Development.*

We value tangible and intangible assets acquiredthrough our business acquisitions, including in-process research anddevelopment, or IPR&D, at fair value. We determine IPR&D throughestablished valuation techniques for various projects for the development ofnew products and technologies and expenses IPR&D when technical feasibilityis not reached. The value of IPR&D is determined using the income approach,which discounts expected future cash flows from projects under development to theirnet present value. Each project is analyzed and estimates and judgments aremade to determine the technological innovations included; the utilization ofcore technology; the complexity, cost and time to complete development; theappropriate discount rates; any alternative future use or current technologicalfeasibility; and the stage of completion. During fiscal 2005, 2004 and 2003, weexpensed approximately $220,000, $3,667, 000 and $406,000, respectively, inIPR&D charges primarily related to the various acquisitions we had becausethe technological feasibility of certain products under development had notbeen established and no future alternative uses existed. If we acquire othercompanies with IPR&D in the future, we will value the IPR&D through establishedvaluation techniques and will incur future IPR&D charges if those productsunder development have not reached technical feasibility.

·       *Restructuring accruals.*

In recent years, we implemented several cost-reductionplans as part of our continued effort to streamline our operations to properlysize ongoing operating expenses. These plans resulted in restructuring chargesrelated to, among others, the consolidation of excess facilities. These chargesrelate to facilities and portions of facilities we no longer utilize and eitherseek to terminate early or sublease. Lease termination costs for the abandonedfacilities were estimated for the remaining lease obligations and brokeragefees offset by estimated sublease income. Estimates related to 

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sublease costs and income are based on assumptionsregarding the period required to locate and contract with suitable sub-lesseesand sublease rates which can be achieved using market trend informationanalyses provided by a commercial real estate brokerage retained by us. Eachreporting period we review these estimates and to the extent that theseassumptions change due to continued negotiations with landlords or changes inthe market, the ultimate restructuring expenses for these abandoned facilitiescould vary by material amounts.

·       *Loss contingencies.*

We are subject to the possibility of various losscontingencies arising in the ordinary course of business. We consider thelikelihood of the incurrence of a liability as well as our ability to estimatereasonably the amount of loss in determining loss contingencies. An estimatedloss contingency is accrued in accordance with SFAS No. 5, “*Accounting for Contingencies*.” SFAS No. 5 requires thatwe record an estimated loss from a loss contingency when information availableprior to the issuance of our financial statements indicates that it is probablethat a liability has been incurred on the date of the financial statements andthe amount of the loss can be reasonably estimated. Accounting forcontingencies such as legal matters requires us to use our judgment. While webelieve that our accruals for such matters are adequate, if the actual lossfrom a loss contingency is significantly different than the estimated loss, ourresults of operations may be overstated or understated. We regularly evaluatecurrent information available to us to determine whether such accruals shouldbe adjusted.

·       *Income Taxes*

As part of the process ofpreparing consolidated financial statements, we are required to estimate incometaxes in each of the jurisdictions in which we operate. This process involvesestimating our actual current tax exposure together with assessing temporarydifferences resulting from differing treatment of items, such as deferredrevenue, for tax and accounting purposes. These temporary differences result indeferred tax assets and liabilities, which are included within our consolidatedbalance sheet. We then assess the likelihood that our deferred tax assets willbe recovered from future taxable income and, to the extent we believe thatrecovery is not likely, we establish a valuation allowance. To the extent thatwe establish or increase a valuation allowance in a period, the change isincluded as an expense within the tax provision in the consolidated statementof income. Significant management judgment is required in determining ourprovision for income taxes, our deferred tax assets and liabilities, and anyvaluation allowance recorded against our net deferred tax assets. Based on ourestimates concerning future results of operation, we have recorded a valuationallowance for net operating losses and for foreign tax credits. In the eventthat actual results differ from these estimates or we adjust these estimates infuture periods, we may need to establish an additional valuation allowance,which could materially impact our financial position and results of operations.In addition, the estimation of our tax liabilities involves dealing withuncertainties in the application of complex tax regulations in all thejurisdictions in which we do business. We recognize liabilities for anticipatedtax audit issues based on our estimate of the possibility that additional taxeswill be due. If we ultimately determine that payment of additional amounts isunnecessary, we reverse the associated liabilities and recognize a tax benefitin the period in which this determination is made. If we determine that ourrecorded tax liability is less than we expect the ultimate assessment to be, werecord an additional charge in our provision for taxes in the period in whichthis determination is made.

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**Results ofOperations**

Thefollowing table sets forth items included in the consolidated statements ofoperations (Part IV of this AnnualReport on Form 10-K) as a percentage of revenue for theperiods indicated.

| ** **                                      | ** ** | **Years Ended July 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                        |       |                                    |       |   |   |   |   |
| License                                         |       | 66.0                                    | %          | 66.9 | % | 77.1 | % |
| Services                                        |       | 34.0                                    |       | 33.1 |   | 22.9 |   |
| Total revenue                                   |       | 100.0                                   |       | 100.0 |   | 100.0 |   |
| Cost of revenue:                                |       |                                    |       |   |   |   |   |
| Cost of license revenue                         |       | 2.7                                     |       | 4.9 |   | 4.8 |   |
| Cost of services revenue                        |       | 14.2                                    |       | 14.0 |   | 11.7 |   |
| Amortization of  developed and core technology  |       | 7.9                                     |       | 6.4 |   | 2.5 |   |
| Total cost of revenue                           |       | 24.8                                    |       | 25.3 |   | 19.0 |   |
| Gross profit                                    |       | 75.2                                    |       | 74.7 |   | 81.0 |   |
| Operating expenses:                             |       |                                    |       |   |   |   |   |
| Research and development                        |       | 24.5                                    |       | 27.1 |   | 29.7 |   |
| Sales and marketing                             |       | 46.3                                    |       | 39.1 |   | 46.1 |   |
| General and  administrative                     |       | 15.2                                    |       | 18.0 |   | 23.3 |   |
| In-process research and  development            |       | 0.4                                     |       | 8.7 |   | 1.6 |   |
| Amortization of other  intangible assets        |       | 7.1                                     |       | 4.6 |   | 0.4 |   |
| Restructuring and other  charges                |       | 0.9                                     |       | 2.2 |   | 3.2 |   |
| Total operating expenses                        |       | 94.4                                    |       | 99.7 |   | 104.3 |   |
| Operating loss                                  |       | (19.2                                   | )          | (25.0 | ) | (23.3 | ) |
| Other income (expense)                          |       |                                    |       |   |   |   |   |
| Interest income                                 |       | 1.8                                     |       | 1.5 |   | 3.3 |   |
| Interest expense                                |       | (2.3                                    | )          | (0.6 | ) | (0.0 | ) |
| Litigation settlement  gain, net                |       | —                                  |       | 3.7 |   | — |   |
| Other, net                                      |       | (1.5                                    | )          | (0.8 | ) | (0.3 | ) |
| Other-than-temporary  impairment of investments |       | —                                  |       | — |   | (9.6 | ) |
| Total other income  (expense)                   |       | (2.0                                    | )          | 3.8 |   | (6.6 | ) |
| Loss before income taxes                        |       | (21.2                                   | )          | (21.2 | ) | (29.9 | ) |
| Provision for income  taxes                     |       | (1.3                                    | )          | (1.1 | ) | (1.2 | ) |
| Net loss                                        |       | (22.5                                   | )%         | (22.3 | )% | (31.1 | )% |

 

***Fiscal Year Ended July 31, 2005 as Compared toFiscal Year Ended July 31, 2004***

*Revenue*

| ** **    | ** ** | **Year Ended July 31,**               | ** ** |
|---------------|------------|------------------------------------------------------|------------|
| ** **    | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(In thousands, except percentage)** | ** ** |
| Total revenue |       | $                                                    | 59,498     |   |   | 40.6 | % |   | $ | 42,308 |   |
|               |            |                                                      |            |  |  |  |  |  |  |  |  |

 

We derive revenue from two primary sources: softwarelicenses and fees for services. Fiscal 2005 reflected record revenue forIntellisync primarily due from revenue contributions of Synchrologic andIdentity Systems product sales, both of which we acquired during fiscal 2004. Therevenue increase was also brought about by new revenue streams as we launchednew wireless products and ramped up our wireless messaging solution with theglobal wireless market, as well as by an increase in our sales and marketingefforts, both domestically and internationally.

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While the market for smartphones and other wirelessmobile devices has grown recently, the market for wired or traditional personaldigital assistants, or PDAs, has continued to face challenges. The overalldecline in traditional PDA sales has had a direct impact on sales of ourIntellisync products through the consumer and online channels, where sales ofour synchronization software typically occur at the same time a PDA ispurchased, or shortly thereafter. Due to this decline, our retail revenue,which consists of sales to distributors and direct sales to end-users,decreased during fiscal 2005.

Our acquisitions of Spontaneous Technology, Synchrologic,Identity Systems, and, recently, Tourmaline and PDAapps have provided and areexpected to further provide us with access to new technology capabilities,potential access to new markets and customers and other revenue-generationopportunities. We expect revenue and operational benefits over time throughsynergies in technology, product development and operations.

·       *LicenseRevenue*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| License revenue                |       | $                                                    | 39,244     |   |   | 38.7 | % |   | $ | 28,292 |   |
| As percentage of total revenue |       | 66.0                                                 | %          |   |   |   |   | 66.9 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Licenserevenue is earned from the sale and use of software products (including ourtechnology licensing components) and royalty agreements with original equipmentmanufacturers, or OEMs. The increase in license revenue in absolutedollars for fiscal 2005 as compared with that for fiscal 2004 reflected an increase in revenue of approximately$10,000,000 from licensing to our enterprise customers and $3,800,000 from ourmobile carrier customers. A significant portion of the increase in enterpriserevenue was contributed by sales of Intellisync Mobile Suite and otherproducts from Synchrologic (acquired in December 2003) and products fromIdentity Systems (acquired in March 2004). The increase in license revenuewas partially offset by a $3,500,000 decrease in our retail revenue as a result of overall decline in sales of wired ortraditional PDAs. We expect that the decreasing revenue from PDAs will continueas more consumers move to smartphones and other wireless mobile devices.

·       *Servicesrevenue*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Services revenue               |       | $                                                    | 20,254     |   |   | 44.5 | % |   | $ | 14,016 |   |
| As percentage of total revenue |       | 34.0                                                 | %          |   |   |   |   | 33.1 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Service revenue is derived from fees for services,including fixed-price and time-and-materials professional servicesarrangements, amortization of maintenance contract programs and hosting fees. Theincrease in service revenue for fiscal 2005 as compared with that for fiscal2004 resulted from a total increase of approximately $9,000,000 brought aboutby an increase in amortization of our maintenance contract programs relating tothe increase in license revenue, as well as revenue from our hosting services. Thisincrease was offset by a decrease of approximately $2,200,000 in professionalservice revenue associated with our technology licensing partners.

In any period, service revenue from time and materialscontracts is dependent, among other things, on license transactions closedduring the current and preceding quarters and customer decisions regardingimplementations of licensed software.

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*Revenue by Customer Group*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent   Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Enterprise and retail           |       | $                                                    | 33,800     |   |   | 56.7 | % |   | $ | 21,564 |   |
| As percentage of total  revenue |       | 56.8                                                 | %          |   |   |   |   | 51.0 | % |
| OEMs                            |       | $                                                    | 16,028     |   |   | (18.4 | )% |   | $ | 19,631 | % |
| As percentage of total  revenue |       | 27.0                                                 | %          |   |   |   |   | 46.4 | % |
| Mobile carriers                 |       | $                                                    | 9,670      |   |   | 768.8 | % |   | $ | 1,113 |   |
| As percentage of total  revenue |       | 16.2                                                 | %          |   |   |   |   | 2.6 | % |
| Total revenue                   |       | $                                                    | 59,498     |   |   |   |   |   | $ | 42,308 |   |

 

Our enterprise and retail products revenue includessales to retail distribution channels, as well as direct sales of our personaland server products licensed to corporations for internal use. The increase inrevenue from enterprise and retail for fiscal 2005 as compared with that forfiscal 2004 resulted from the full-year revenue from products of Synchrologicand Identity Systems, both acquired during fiscal 2004. Revenue from suchproducts increased by approximately $13,500,000. The increase in revenue fromenterprise and retail for fiscal 2005 was also due to approximately $2,100,000in revenue from amortization of support and maintenance based on a higherlicense revenue base. This increase was offset by a decrease of approximately$3,500,000 in revenue from retail sales of our Intellisync software. Enterprisesales frequently involve large up-front license fees, which can result inlengthy sales cycles and uncertainties as to the timing of sales driven bycustomers’ budgetary processes. As a result, we generally have less visibilityinto future enterprise sales than is typically the case with OEMs in ourroyalty-based technology licensing business. In addition, while enterprisesales generally result in ongoing maintenance revenue and may lead to follow-onpurchases or upgrades, we are typically dependent on sales to new customers fora significant portion of our enterprise revenue in a given quarter.

Fiscal 2005 reflected a full-year revenue from ourmobile carrier business. The revenue increase from mobile carriers alsoreflected increased business volume from existing customers and increasednumber of new contracts signed during the fiscal year.

The growth in revenue fromenterprise and retail and mobile carriers was partially offset by a decline inroyalty revenue from our OEM customers. This decrease was primarily a result ofdeclining demand for the products of our OEM customers.

*International Revenue*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| International revenue          |       | $                                                    | 18,409     |   |   | 31.6 | % |   | $ | 13,992 |   |
| As percentage of total revenue |       | 30.9                                                 | %          |   |   |   |   | 33.1 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Internationalrevenue continues to represent a significant portion of our revenue. Theyear-over-year increase in our international revenues accounted for 26% of ourtotal revenue increase for fiscal 2005. Our international revenue growth, inabsolute dollars, was a result of a number of factors including an increase inthe number of our international technology licensing partners, particularly inEurope; the full-year revenue effect of Identity Systems during fiscal 2005; anincrease in the number of sales people worldwide; and the effect of foreignexchange fluctuation. Our sales of Intellisync Mobile Suite particularlyin United Kingdom and Italy were stronger than usual for the first half offiscal 2005. This increase in international revenue was offset by a decrease inrevenue from Japan primarily from the delay in closing of certain 

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contractsassociated with our new products. The slight decrease in international revenueas a percentage of total revenue for fiscal 2005 was primarily due to increasedrevenue from our newer offerings in the United States. We expect thatSynchrologic, Identity Systems and our other acquisitions will furtherstrengthen our revenue, as well as our presence in Europe and Asia-Pacific. Webelieve, however, that international revenue will fluctuate on a quarter toquarter basis as we periodically enter into new agreements for professionalservices and new international partner contracts for technology licensing.International revenue may be subject to certain risks not normally encounteredin operations in the United States, including exposure to tariffs, varioustrade regulations, fluctuations in currency exchange rates, as well asinternational software piracy as described more fully in “*Factors ThatMay Affect Future Operating Results*” set forth below. Webelieve that continued growth will require further expansion in internationalmarkets. We have utilized and will likely continue to utilize substantial resourcesboth to expand and establish international operations in the future.

*Top Customers*

No customers accounted formore than 10% of our total revenue during fiscal 2005 and 2004.

*Cost of Revenue*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Total cost of revenue          |       | $                                                    | 14,745     |   |   | 37.8 | % |   | $ | 10,701 |   |
| As percentage of total revenue |       | 24.8                                                 | %          |   |   |   |   | 25.3 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Cost of revenue consists of license costs, servicecosts and the amortization of developed and core technology. License costscomprise product-packaging expenses such as product media and duplication,manuals, packing supplies, and shipping costs, as well as third party royaltyfees. Service costs include the following types of costs: personnel-relatedexpenses such as salaries and other related costs associated with workperformed under professional service contracts and non-recurring engineeringagreements; post-sales customer support costs and hosting costs associated withour technology licensing partners and end users. Hosting costs include expensesrelated to bandwidth for hosting, tape backup, security and storage,third-party fees and internal personnel costs associated with logistics andoperational support of the hosting services. Service costs can be expected tovary significantly from period to period depending on the mix of services weprovide.

In general, licenserevenue costs represent a smaller percentage of license revenue when comparedwith services revenue costs as a percentage of services revenue; this is due tothe high cost structure of services revenue. Additionally,license costs tend to be variable based on license revenue volumes, whereasservice costs tend to be fixed within certain services revenue volume ranges. Wewould expect that an increase in services revenue as a percentage of our totalrevenue would generate lower overall gross margins as a percentage of totalrevenue. Also, given the high level of fixed costs associated with theprofessional services group and our hosting operations, our inability togenerate revenue sufficient to absorb these fixed costs could lead to low ornegative service gross margins.

·       *Cost ofLicense Revenue*

| ** **                       | ** ** | **Year Ended July 31,**               | ** ** |
|----------------------------------|------------|------------------------------------------------------|------------|
| ** **                       | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                       | ** ** | **(In thousands, except percentage)** | ** ** |
| Cost of license revenue          |       | $                                                    | 1,585      |   |   | (23.0 | )% |   | $ | 2,059 |   |
| As percentage of license revenue |       | 4.0                                                  | %          |   |   |   |   | 7.3 | % |
|                                  |            |                                                      |            |  |  |  |  |  |  |  |  |

 

46

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The decrease in cost oflicense revenue in fiscal 2005 was attributed to lower packaging anddistribution costs due to decrease in overall revenue from retail products.

·       *Cost ofServices Revenue*

| ** **                        | ** ** | **Year Ended July 31,**               | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In thousands, except percentage)** | ** ** |
| Cost of services revenue          |       | $                                                    | 8,478      |   |   | 42.5 | % |   | $ | 5,949 |   |
| As percentage of services revenue |       | 41.9                                                 | %          |   |   |   |   | 42.4 | % |
|                                   |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Theincrease in cost of services revenue in absolute dollars reflected the effectof planned increases of $1,100,000 in mobile hosting and $800,000 in post-salessupport infrastructure and $600,000 in other related expenses. In futureperiods, cost of revenue may further fluctuate from quarter to quarter due topotential changes in the infrastructure and other requirements of our hostingoperations to meet carriers demand. These changes, which may be costly, aredifficult to forecast. In addition, our cost of revenue is primarily driven byour expectation for different margin characteristics within and between licenseand service revenue as well as the expected mix between products and channels.

·       *Amortizationof Developed and Core Technology*

| ** **                                     | ** ** | **Year Ended July 31,**               | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Amortization of  developed and core technology |       | $                                                    | 4,683      |   |   | 73.9 | % |   | $ | 2,693 |   |
| As percentage of total revenue                 |       | 7.9                                                  | %          |   |   |   |   | 6.4 | % |
|                                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Developed and core technology amounted to $14,552,000and $15,867,000, net of accumulated amortization, as of July 31, 2005 and2004, respectively. We continue to amortize other intangible assets, reviewsuch assets for impairment under SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*,” reassess theiruseful lives and make any necessary adjustments.

Amortizationof purchased technology is computed over the estimated useful lives of therespective assets, generally three to seven years. The increase in theamortization of developed and core technology for fiscal 2005 were primarilydue to the impact of developed and core technology acquired from SpontaneousTechnology, Synchrologic and Identity Systems during fiscal 2004 and Tourmalineand PDAapps during fiscal 2005. Based on acquisitions completed as of July 31,2005, we expect the future amortization expense of developed and coretechnology is as follows (in thousands):

| Fiscal year ending  July 31, |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2006                              |   | $      | 4,992  |   |
| 2007                              |   | 4,872  |   |
| 2008                              |   | 2,568  |   |
| 2009                              |   | 1,195  |   |
| 2010                              |   | 733    |   |
| Thereafter                        |   | 192    |   |
|                              |   | $      | 14,552 |   |

 

We expect that we may acquire additional developed andcore technology in connection with any acquisitions we may complete in thefuture. As a result, we may further increase our amortization expense ofdeveloped and core technology.

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*Research and Development*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Research and development       |       | $                                                    | 14,604     |   |   | 27.4 | % |   | $ | 11,467 |   |
| As percentage of total revenue |       | 24.5                                                 | %          |   |   |   |   | 27.1 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Research and developmentexpenses consist primarily of salaries and other related costs for research anddevelopment personnel, quality assurance personnel, product localization, feesto outside contractors and the cost of facilities and depreciation of capitalequipment. We invest in research and development both for new products and toprovide continuing enhancements to existing products. Our engineering group iscurrently focused on developing new functionality for wireless handhelds,smartphones, laptops and tablets, on extending our core synchronizationtechnology to increase scalability and extensibility, and on supporting nextgeneration wireless technology and device platforms. The increase in researchand development spending in absolute dollars was due to the added headcount dueto the acquisition of approximately 25 engineers from acquisitions ofTourmaline and PDAapps during the second half of fiscal 2005 and 71 additionalengineers from the acquisitions of Spontaneous Technology, Synchrologic andIdentity Systems during the first three quarters of fiscal 2004. The decreasein research and development expense as a percentage of revenue was due to theoverall increase in total revenue. We expect that research and developmentexpenses will increase in absolute dollars as we continue to increaseassociated costs to pursue additional new product development opportunities,but such expenses will fluctuate as a percentage of revenue due to changes insales volume.

*Sales and Marketing*

| ** **                     | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|
| ** **                     | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Sales and marketing            |       | $                                                    | 27,551     |   |   | 66.6 | % |   | $ | 16,540 |   |
| As percentage of total revenue |       | 46.3                                                 | %          |   |   |   |   | 39.1 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Sales and marketing expenses consist primarily ofsalaries, commissions, promotional expenses (marketing and sales literature andpresentations), marketing programs (trade shows, public relations) and othercosts relating to sales and marketing employees. Sales and marketing expensesalso include costs relating to technical support personnel associated withpre-sales activities such as building brand awareness, performing product andtechnical presentations and answering customers’ product and service inquiries.Sales and marketing expenses increased year-over-year due to an increase innumber of sales people worldwide as we increased our selling efforts in theMobile Carrier sales channel. We also added 22 new sales and marketingemployees from the acquisitions of Synchrologic and 11 sales and marketingpersonnel from Identity Systems. The added personnel costs resulted in anincrease of approximately $6,094,000 in fiscal 2005.

The increase in sales and marketing expenses was alsodue to an increase in marketing programs and other related activities ofapproximately $3,627,000 to support increased revenue activities driven by ourrecent acquisitions and establishing strategic relationships with our existingand prospective enterprise customers. Increased sales and marketing-relatedtravel increased by approximately $1,290,000. We intend to increase awarenessand market presence of our existing and new products, services or technologyover time, which may require us to substantially increase the amount we spendon sales and marketing in future periods. We expect that our sales andmarketing expenses will continue to increase in terms of absolute dollars as weincrease and expand our sales and marketing efforts worldwide.

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*General and Administrative*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent    Change  ** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| General and  administrative     |       | $                                                    | 9,036      |   |   | 18.3 | % |   | $ | 7,639 |   |
| As percentage of total  revenue |       | 15.2                                                 | %          |   |   |   |   | 18.0 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

General and administrative expenses consist primarilyof salaries and other costs relating to administrative, executive and financialpersonnel and outside professional fees. The increase in general andadministrative spending for fiscal 2005 was due to an increase in audit andconsulting fees of approximately $1,200,000 which were related to complyingwith the new reporting requirements under The Sarbanes-Oxley Act of 2002, plusthe cost of three additional employees and other expenses amounting toapproximately $1,761,000. This increase was partially offset by a $675,000reduction in non-cash variable accounting charges associated with certainoutstanding stock options and a reduction of outside legal costs of $889,000,which was due to a settlement of a patent infringement lawsuit. The decrease ingeneral and administrative expense as a percentage of revenue for fiscal 2005was due to the overall increase in overall revenue.

In December 2004, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards (SFAS) No. 123R, “*Share-Based Payment, anamendment of FASB Statements Nos. 123 and 95*,” that requiresthe recognition of compensation cost relating to share-based paymenttransactions in financial statements. That cost will be measured by the fairvalue of the equity or liability instruments issued as of the grant date, basedon the estimated number of awards that are expected to vest. SFAS 123(R) coversa wide range of share-based compensation arrangements including share options,restricted shares, restricted share units performance-based awards, andemployee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,“Accounting for Stock-Based Compensation,” and supersedes Accounting PrinciplesBoard (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.”Statement 123(R), as amended, is effective for our fiscal year 2006. As aresult, we will be required to implement SFAS 123R in the quarter ending October 31, 2005. We arepresently studying SFAS No. 123R and have not yet determined which methodwe will select for our adoption of SFAS No. 123R. We expect that theadoption of SFAS No. 123 will have a material impact on our annual earnings.

*In-Process Research and Development*

| ** **                           | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2005**                                             | ** ** | **Percent    Change  ** | ** ** | **2004** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentage)** | ** ** |
| In-process  research and development |       | $                                                    | 220        |   |   | (94.0 | )% |   | $ | 3,667 |   |
| As percentage of total  revenue      |       | 0.4                                                  | %          |   |   |   |   | 8.7 | % |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The purchase price of our recent acquisition ofPDAapps was assigned to the fair value of the assets acquired, including thein-process research and development. As of the acquisition date, technologicalfeasibility of the in-process technology had not been established and thetechnology had no alternative future use and , therefore, we expensed thein-process research and development of $220,000 at the date of the acquisition.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which 

49

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discounts expected futurecash flows to present value. The key assumptions used in the valuation include,among others, expected completion date of the in-process projects identified asof the acquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations is normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for the inherentuncertainties surrounding the successful development of the in-process researchand development, the expected profitability levels of such technology, and theuncertainty of technological advances that could potentially impact theestimates. We assume the pricing model for the resulting product of theacquired in process research and technology to be standard within its industry.We, however, did not take into consideration any consequential amount ofexpense reductions from integrating the acquired in-process technology withother existing in-process or completed technology. Therefore, the valuationassumptions do not include significant anticipated cost savings. 

The key assumptions underlying the valuation ofacquired in-process research and development from PDAapps are as follows (inthousands, except percentage): 

Project names: Enhancedversion of VeriChat product—to feature J2ME (Java 2 Platform, Micro Edition)and IMode support, presence manager (uses phone state to dictate the status ofa user so others can decide if they should send an instant messaging, or IM, orplace a call), secure enterprise chat and carrier branded chat

Percentcompleted as of acquisition date: 30-50%

Estimatedcosts to complete technology at acquisition date: $900

Risk-adjusteddiscount rate: 25% 

First period expected revenue: 2nd quarterof calendar year 2006

The development of the above technology remains highlydependent on the remaining efforts to achieve technical viability, rapidlychanging customer markets, uncertain standards for a new product, andsignificant competitive threats from several companies. The nature of theefforts to develop this technology into a commercially viable product consistsprimarily of planning, designing, experimenting, and testing activitiesnecessary to determine that the technology can meet market expectations,including functionality and technical requirements. Failure to bring theproduct to market in a timely manner could result in a loss of market share ora lost opportunity to capitalize on emerging markets, and could have a materialadverse impact on our business and operating results. 

Subsequent to the acquisition of PDAapps, there havebeen no significant developments related to the current status of the acquiredin-process research and development project that would result in materialchanges to the assumptions.

In fiscal 2004 we recorded a charge of $3,667,000 forin-process research and development associated with the acquisitions ofSpontaneous Technology, Synchrologic and Identity Systems. For more details,refer to the discussion under the caption “*FiscalYear Ended July 31, 2004 as Compared to Fiscal Year Ended July 31,2003*” set forth below.

If all the abovein-process research and development projects are not successfully developed,our future revenues and profitability may be adversely affected. Failure toachieve the expected levels of revenue and net income from these products willnegatively impact the return on investment expected at the time that theacquisitions were completed and may result in impairment charges. Additionally,the value of other intangible assets acquired may become impaired.

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*Amortization of OtherIntangible Assets*

| ** **                               | ** ** | **Year Ended July 31,**               | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                             | ** ** | **Percent    Change  ** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(In thousands, except percentage)** | ** ** |
| Amortization of  other intangible assets |       | $                                                    | 4,239      |   |   | 116.39 | % |   | $ | 1,959 |   |
| As percentage of total  revenue          |       | 7.1                                                  | %          |   |   |   |   | 4.6 | % |
|                                          |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Other intangible assets, excluding developed and coretechnology, amounted to $11,394,000 and $13,961,000, net of accumulatedamortization, as of July 31, 2005 and 2004, respectively. We continue toamortize other intangible assets, review such assets for impairment under SFAS No. 144,reassess their useful lives and make any necessary adjustments. 

Amortizationof other intangible assets is computed over the estimated useful lives of therespective assets, generally nine months to seven years. The increase in theamortization of other intangible assets in fiscal 2005 was primarily due to theimpact of acquired intangibles from Spontaneous Technology, Synchrologic,Identity Systems, Tourmaline and PDAapps. Based on acquisitions completed as ofJuly 31, 2005, we expect the future amortization expense of otherintangible assets is as follows (in thousands):

| Fiscal  year ending July 31, |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2006                              |   | $      | 3,624  |   |
| 2007                              |   | 3,108  |   |
| 2008                              |   | 1,836  |   |
| 2009                              |   | 995    |   |
| 2010                              |   | 705    |   |
| Thereafter                        |   | 1,126  |   |
|                              |   | $      | 11,394 |   |

 

We expect that we mayacquire additional intangible assets associated with any acquisitions we maycomplete in the future. As a result, we may further increase our amortizationexpense of other intangible assets.

*Restructuring and Other Charges.*

| ** **                               | ** ** | **Year Ended July 31,**               | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                               | ** ** | **  2005  **                     | ** ** | **Percent      Change    ** | ** ** | **2004** | ** ** |
| ** **                               | ** ** | **(In thousands, except percentage)** | ** ** |
| Restructuring  charges:                  |       |                                                 |       |   |   |   |   |   |   |   |   |
| Severance costs                          |       |                                                 | $          | — |   |   |   |   |   |   | $ | 253 |   |
| Facilities costs                         |       |                                                 | —     |   |   |   |   |   |   | 600 |   |
| Restructuring charges                    |       |                                                 | $          | — |   |   |   |   |   |   | $ | 853 |   |
| Other charges:                           |       |                                                 |       |   |   |   |   |   |   |   |   |
| Litigation settlement and related costs  |       |                                                 | $          | 355 |   |   |   |   |   |   | $ | — |   |
| Costs relating to potential acquisitions |       |                                                 | 150        |   |   |   |   |   |   | 76 |   |
| Other charges                            |       |                                                 | $          | 505 |   |   |   |   |   |   | $ | 76 |   |
| Restructuring and  other charges         |       |                                                 | $          | 505 |   |   |   | (45.6 | )% |   | $ | 929 |   |
| As percentage of  total revenue          |       |                                                 | 0.9        | % |   |   |   |   |   | 2.2 | % |

 

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·       *Restructuring Charges and Accrual.  *During fiscal 2004,we implemented a number of cost-reduction plans aimed at reducing costs thatwere not integral to our overall strategy and better aligning our expenselevels with current revenue levels. These initiatives included a reduction inworkforce and facilities consolidation. 

During fiscal 2004, weimplemented a reduction in workforce affecting 17 employees in various businessfunctions (nine in research and development and eight in sales and marketing). Theprogram was completed by the end of April 2004, and the associatedseverance costs incurred were approximately $253,000, none of which remainedunused as of July 31, 2005.

Alsoduring fiscal 2004, as a result of vacating our remaining office space in Santa Cruz, California and the difficultiesin subletting such facility because of the continuing deterioration of the realestate market in this location, we determined that additional charges wereneeded for adjustments in our expected future sublease rates and brokerage fees.We therefore recorded total facilitiescosts of $600,000, inclusive of the costs of $250,000 for vacating a floor ofour office facility in San Jose, California.

The following table setsforth the activities in the restructuring accrual account for the periodspresented (in thousands):

| ** **                         | ** ** | **Workforce  Reduction** | ** ** | **Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| **Balance  at July 31, 2003** |       |                     | $          | —                                        |       |      |       | $ | 1,766 |   |   | $ | 1,766 |   |
| Restructuring  provision           |       |                     | 253        |                                          |       |      | 250        |   |   | 503 |   |
| Adjustment                         |       |                     | —     |                                          |       |      | 350        |   |   | 350 |   |
| Cash payments                      |       |                     | (253       | )                                             |       |      | (1,286     | ) |   | (1539 | ) |
| **Balance  at July 31, 2004** |       |                     | $          | —                                        |       |      |       | $ | 1,080 |   |   | $ | 1,080 |   |
| Cash payments                      |       |                     | —     |                                          |       |      | (994       | ) |   | (994 | ) |
| **Balance at July 31, 2005**  |       |                     | $          | —                                        |       |      |       | $ | 86 |   |   | $ | 86 |   |

 

The remaining unpaidamount as of July 31, 2005 of $86,000 related to the net lease expense dueto the consolidation of excess facilities, will be paid over the respectivelease terms through June 2006 using cash from operations and is reflectedaccordingly in “Accrued Liabilities” in the consolidated balance sheet as of July 31,2005.

We continually evaluatethe balance of the restructuring reserve we recorded in prior periods based onthe remaining estimated amounts to be paid. Differences, if any, between theestimated amounts accrued and the actual amounts paid will be reflected inoperating expenses in future periods.

We believe that the above restructurings havecontributed towards the improvement in our gross and operating income duringfiscal 2004 and 2005.

·       Othercharges.

*Litigation settlement andrelated costs.**  *Duringthe fourth quarter of fiscal 2005, we made a cash payment of $600,000 forlitigation settlement with NCR Corporation. This amount is amortized over thelicense period of certain NCR patents determined to be between January 2002and December 2010 based on the greater of straight line amortization or inproportion to volume of the deployed licenses. As a result, approximately$239,000 was expensed during the fourth quarter of fiscal 2005. The remaining$361,000 was recorded as “Other Assets” in the consolidated balance sheet as ofJuly 31, 2005. In addition, an expense of $116,000 was recorded for thelitigation related costs incurred during the fourth quarter of fiscal 2005.

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*Costs Relating To Potential Acquisitions.**  *During fiscal 2005 and 2004, weincurred residual costs of approximately $150,000 and $76,000, respectively foroperating expenses, mainly legal and accounting, relating to potentialacquisitions that we ceased pursuing. 

*Interest Income*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent     Change   ** | ** ** | **  2004  ** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Interest income                 |       | $                                                    | 1,065      |   |   | 71.8 | % |   |   | $ | 620 |   |   |
| As percentage of total  revenue |       | 1.8                                                  | %          |   |   |   |   |   | 1.5 | % |   |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Interest income representsinterest earned on cash and short-term investments and realized gains onmiscellaneous investments. The increase in net interest income was due tohigher yield on higher cash balances of cash and investments mainly from therealized proceeds from issuance of convertible senior notes during fiscal 2004.

*Interest Expense*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent    Change  ** | ** ** | **  2004  ** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Interest expense                |       | $                                                    | (1,352     | ) |   | (443.0 | )% |   |   | $ | (249 | ) |   |
| As percentage of total  revenue |       | (2.3                                                 | )%         |   |   |   |   |   | (0.6 | )% |   |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Interest expense for fiscal 2005 reflects primarily afull-year interest charge associated with the convertible senior notes weissued in March 2004.

During fiscal 2004, weentered into two interest rate swap agreements with a financial institution ona total notional amount of $60,000,000, whereby the Company receives fixed-rateinterest of 3% in exchange for variable interest payments. The interest rateswaps expire upon the maturity of the Company’s $60,000,000, 3% convertiblesenior notes in March 2009, and effectively convert fixed-rate notes intovariable-rate borrowings. The interest rate is reset semi-annually and is equalto the 6-month LIBOR rate less a rate spread. The total variable interest rate,approximately 2.9% at July 31, 2005, resulted in interest expense savingsrelative to fixed rates of approximately $499,000 for fiscal 2005. 

*Other, Net*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent    Change  ** | ** ** | **  2004  ** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Other, net                      |       | $                                                    | (919       | ) |   | (181.0 | )% |   |   | $ | (327 | ) |   |
| As percentage of total  revenue |       | (1.5                                                 | )%         |   |   |   |   |   | (0.8 | )% |   |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Other, net, represents amortization of debt issuancecosts, miscellaneous bank fees and charges and realized gain or loss on foreignexchange and investments. Other, net, for fiscal 2005 reflects $660,000 of debtissuance costs amortization expense associated with the convertible seniornotes we issued in March 2004, $140,000 of bank charges and $119,000 ofinvestment management fees, net realized loss on foreign exchange and otherexpenses. Other, net, for fiscal 2004 was $327,000. For more details on fiscal2004 other, net, refer to the discussion under the caption “*Fiscal Year Ended July 31, 2004 as Compared toFiscal Year Ended July 31, 2003*” set forth below.

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*Provision for Income Taxes*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                             | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Provision for  income taxes     |       | $                                                    | (805       | ) |   | (67.4 | )% |   | $ | (481 | ) |
| As percentage of total  revenue |       | (1.3                                                 | )%         |   |   |   |   | (1.1 | )% |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The provision for income taxes primarily representsforeign withholding taxes on royalties earned from certain foreign customersand state franchise and income taxes and estimated taxes for foreignsubsidiaries. The increase in the provision for income taxes for fiscal 2005was due to an increase in our international operations as a result of ouracquisitions and related increase in their net operating income. We expect oureffective income tax rate to remain at a relatively low rate in fiscal 2006.

As of July 31, 2005and 2004, our deferred tax assets, with the exception of Australia as of July 31,2005, were subject to a full valuation allowance based on our determinationthat these assets will probably not be realized. We have recorded a deferredtax asset of $242,000 in Australia as of January 31, 2005.

***Fiscal Year Ended July 31, 2004 as Compared toFiscal Year Ended July 31, 2003***

*Revenue*

| ** **    | ** ** | **Year Ended July 31,**               | ** ** |
|---------------|------------|------------------------------------------------------|------------|
| ** **    | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **    | ** ** | **(In thousands, except percentage)** | ** ** |
| Total revenue |       | $                                                    | 42,308     |   |   | 70.2 | % |   | $ | 24,860 |   |
|               |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Fiscal2004 reflected an increase in revenue primarily due from revenue contributionsof Intellisync Mobile Suite, professional service and Identity Systems productsand technology, as well as the growth in the number of our technology licensingpartners. These increases were largely the result of our acquisitions and, webelieve, of increase in sales and marketing efforts, both domestically andinternationally, and our emphasis on enhancing our product offerings.

·       *LicenseRevenue.*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| License revenue                 |       | $                                                    | 28,292     |   |   | 47.6 | % |   | $ | 19,169 |   |
| As percentage of total  revenue |       | 66.9                                                 | %          |   |   |   |   | 77.1 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

A significant portion ofthe increase in our license revenue for fiscal 2004 was contributed bySynchrologic and Identity Systems. The increase in license revenue was also dueto greater demand, as compared with the preceding fiscal year, for certain ofour customers’ products in which our technology is embedded. The increase inour customers’ sales provided us with increased royalty proceeds. As apercentage of total revenue, license revenue decreased due to significantincrease in our revenue from professional services as described below, as wellas the general impact of the decline in wired or traditional PDA sales to ourretail revenue.

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·       *Servicesrevenue.*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Services revenue                |       | $                                                    | 14,016     |   |   | 146.3 | % |   | $ | 5,691 |   |
| As percentage of total  revenue |       | 33.1                                                 | %          |   |   |   |   | 22.9 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The increase in services revenue for fiscal 2004 as compared with that for fiscal 2003 resultedfrom an increase of $4,525,000 in professional service revenue associated withour technology licensing partners. The increase in professional service revenuewas attributable to new customer contracts primarily associated with our recentacquisitions and increased sales effort. The increase in services revenue wasalso due to approximately $3,500,000 increase in amortization of ourmaintenance contract programs relating to increase in license revenue and agreater focus on renewals.

*Revenue by Customer Group*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Enterprise and  retail          |       | $                                                    | 21,564     |   |   | 77.9 | % |   | $ | 12,122 |   |
| As percentage of  total revenue |       | 51.0                                                 | %          |   |   |   |   | 48.8 | % |
| OEMs                            |       | $                                                    | 19,631     |   |   | 54.1 | % |   | $ | 12,738 |   |
| As percentage of  total revenue |       | 46.4                                                 | %          |   |   |   |   | 51.2 | % |
| Mobile carriers                 |       | $                                                    | 1,113      |   |   | — | % |   | $ | — |   |
| As percentage of  total revenue |       | 2.6                                                  | %          |   |   |   |   | — | % |
| Total revenue                   |       | $                                                    | 42,308     |   |   |   |   |   | $ | 24,860 |   |

 

The increase in enterprise and retail products revenuefor fiscal 2004 resulted from contributions of products from Synchrologic andIdentity Systems (both acquired during fiscal 2004), an increase in revenuefrom amortization of support and maintenance, and an increase in retail salesof our Intellisync software. This increase for fiscal 2004 was offset by adecrease in revenue from Intellisync Handheld Edition for Enterprise. Lessemphasis on marketing of Intellisync Handheld Edition for Enterprise and moreon the transition of our enterprise server offering to Intellisync MobileSuite, during fiscal 2004 contributed to the decrease in revenue fromIntellisync Handheld Edition for Enterprise.

The increase in revenue from OEMs was due to greaterdemand, as compared with the preceding fiscal year, for certain of ourcustomers’ products in which our technology is embedded. The increase in ourcustomers’ sales provided us with increased royalty proceeds.

As a percentage of totalrevenue, revenue from both enterprise and retail and OEMs decreased due toadditional revenue received from Identity Systems (acquired in March 2004)and mobile carrier products (initial ramp-up in fiscal 2004). The decrease wasalso due to the general impact of the decline in wired or traditional PDA salesto our retail revenue.

55

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*International Revenue*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| International  revenue          |       | $                                                    | 13,992     |   |   | 57.5 | % |   | $ | 8,883 |   |
| As percentage of total  revenue |       | 33.1                                                 | %          |   |   |   |   | 35.7 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The year-over-yearincrease in our international revenues accounted for 29% of our total revenueincrease for fiscal 2004. The increase in our professional services revenue andthe number of our international technology licensing partners, particularly inJapan, resulted in an increase in our international revenue in absolute dollars during fiscal 2004. The slight decrease ininternational revenue as a percentage of total revenue for fiscal 2004, on theother hand, was primarily due to increased revenue from our newer offerings inthe United States.

*Top Customers*

No customers accounted formore than 10% of our total revenue for fiscal 2004. During fiscal 2003, IngramMicro US, a distributor, accounted for 10% of our total revenue. No othercustomers accounted for more than 10% of total revenue during fiscal 2003.

*Cost of Revenue*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Total cost of  revenue          |       | $                                                    | 10,701     |   |   | 126.6 | % |   | $ | 4,722 |   |
| As percentage of total  revenue |       | 25.3                                                 | %          |   |   |   |   | 19.0 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

·       *Cost ofLicense Revenue*

| ** **                        | ** ** | **Year Ended July 31,**               | ** ** |
|-----------------------------------|------------|------------------------------------------------------|------------|
| ** **                        | ** ** | **2004**                                             | ** ** | **  Percent    Change** | ** ** | **2003** | ** ** |
| ** **                        | ** ** | **(In thousands, except percentage)** | ** ** |
| Cost of license  revenue          |       | $                                                    | 2,059      |   |   | 74.2 | % |   | $ | 1,182 |   |
| As percentage of license  revenue |       | 7.3                                                  | %          |   |   |   |   | 6.2 | % |
|                                   |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The increase in cost oflicense revenue in fiscal 2004 resulted from the increase in overall revenuefrom enterprise and retail products, much of which was brought about by theassimilation of products from our newly acquired subsidiaries. The cost ofcables associated with our Intellisync Phone Edition product also contributedto an increase in our cost of license revenue.

·       *Cost ofServices Revenue*

| ** **                         | ** ** | **Year Ended July 31,**               | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands, except percentage)** | ** ** |
| Cost of services  revenue          |       | $                                                    | 5,949      |   |   | 104.3 | % |   | $ | 2,912 |   |
| As percentage of  services revenue |       | 42.4                                                 | %          |   |   |   |   | 51.2 | % |
|                                    |            |                                                      |            |  |  |  |  |  |  |  |  |

 

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The increase in cost of services revenue in absolutedollars reflected the increase in professional services costs as a result ofthe Starfish Software, Inc. acquisition in the second half of fiscal 2003and Spontaneous Technology, Synchrologic and Identity Systems in the firstthree quarters of fiscal 2004. The decrease in cost of services revenue as apercentage of services revenue was due to low-cost maintenance contractsacquired as part of our acquisitions particularly of Identity Systems.

·       *Amortizationof Developed and Core Technology*

| ** **                                     | ** ** | **Year Ended July 31,**               | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **  2003  ** | ** ** |
| ** **                                     | ** ** | **(In thousands, except percentage)** | ** ** |
| Amortization of  developed and core technology |       | $                                                    | 2,693      |   |   | 328.8 | % |   |   | $ | 628 |   |   |
| As percentage of total  revenue                |       | 6.4                                                  | %          |   |   |   |   |   | 2.5 | % |   |
|                                                |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

Developed and core technology amounted to $15,867,000and $1,920,000, net of accumulated amortization, as of July 31, 2004 and2003, respectively. The increase in the amortization of developed and coretechnology for fiscal 2004 were primarily due to the impact of recentlydeveloped and core technology from Starfish, Loudfire, Inc., SpontaneousTechnology, Synchrologic and Identity Systems.

*Research and Development*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Research and  development       |       | $                                                    | 11,467     |   |   | 55.2 | % |   | $ | 7,389 |   |
| As percentage of total  revenue |       | 27.1                                                 | %          |   |   |   |   | 29.7 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The increase in researchand development spending in absolute dollars was due to acquired workforce ofapproximately 71 engineers from the acquisition of Spontaneous Technology,Synchrologic and Identity Systems during the first three quarters of fiscal2004. The decrease in research and development spending as a percentage ofrevenue for fiscal 2004 resulted from an increase in our total revenue.

*Sales and Marketing*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| Sales and  marketing            |       | $                                                    | 16,540     |   |   | 44.2 | % |   | $ | 11,468 |   |
| As percentage of total  revenue |       | 39.1                                                 | %          |   |   |   |   | 46.1 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

Sales and marketingexpenses increased year-over-year in absolute dollars as a result ofestablishing strategic relationships with our existing and prospectiveenterprise customers, as well as increase in sales commissions and increase inmarketing program spending to support increased revenue activities driven byour recent acquisitions. We also acquired 22 new sales and marketing employeesfrom Synchrologic during the second quarter of fiscal 2004 and 11 from IdentitySystems. Sales and marketing expenses decreased as a percentage of revenue dueto an increase in our total revenue.

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*General and Administrative.*

| ** **                      | ** ** | **Year Ended July 31,**               | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                             | ** ** | **  Percent    Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands, except percentage)** | ** ** |
| General and  administrative     |       | $                                                    | 7,639      |   |   | 31.9 | % |   | $ | 5,793 |   |
| As percentage of total  revenue |       | 18.0                                                 | %          |   |   |   |   | 23.3 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |  |  |

 

The major factors for theincrease in general and administrative spending in absolute dollars for fiscal2004 include an increase of $1,040,000 in outside services brought aboutprimarily by legal costs associated with our patent infringement lawsuits andan increase in accounting costs. Also a major factor for an increase in generaland administrative expenses was personnel-related costs of $271,000 as a resultprimarily of acquisitions of Synchrologic and Identity Systems. General andadministrative expenses decreased as a percentage of revenue due to an increasein our total revenue.

*In-Process Research and Development*

| ** **                           | ** ** | **Year Ended July 31,**               | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                             | ** ** | **Percent  Change** | ** ** | **  2003  ** | ** ** |
| ** **                           | ** ** | **(In thousands, except percentage)** | ** ** |
| In-process  research and development |       | $                                                    | 3,667      |   |   | 803.2 | % |   |   | $ | 406 |   |   |
| As percentage of total  revenue      |       | 8.7                                                  | %          |   |   |   |   |   | 1.6 | % |   |
|                                      |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The purchase price of each of our acquisitions(Spontaneous Technology, Synchrologic, and Identity Systems in Fiscal 2004 andStarfish in fiscal 2003) was assigned to the fair value of the assets acquired,including the in-process research and development. As of the respectiveacquisition date, technological feasibility of the in-process technology hadnot been established and the technology had no alternative future use.Accordingly, we expensed the in-process research and development of $469,000,$2,423,000, and $775,000 at the date of the acquisition of SpontaneousTechnology, Synchrologic and Identity Systems, respectively, in fiscal 2004 and$406,000 associated with Starfish at the date of its acquisition in fiscal2003.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which discounts expected future cash flows topresent value. The key assumptions used in the valuation include, among others,expected completion date of the in-process projects identified as of theacquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations is normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful development of the in-processresearch and development, the expected profitability levels of such technology,and the uncertainty of technological advances that could potentially impact theestimates. We assume the pricing model for the resulting product of theacquired in process research and technology to be standard within its industry.We, however, did not take into consideration any consequential amount ofexpense reductions from integrating the acquired in-process technology withother existing in-process or completed technology. Therefore, the valuationassumptions did not include significant anticipated cost savings.

58

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The key assumptionsunderlying the valuation of acquired in-process research and development are asfollows (in thousands, except percentage):

*SpontaneousTechnology*

Project names:Version upgrade of Spontaneous Technology’s secure Virtual Private Network, orsVPN

Percent completed as ofacquisition date: 60%Estimated costs to complete technology at acquisition date: $125Risk-adjusted discount rate: 22%First period expected revenue: calendar year 2004

*Synchrologic*

Project names:Version upgrade of Data Sync, File Sync, E-mail accelerator andSystems Management products

Percent completed as ofacquisition date: 60%-70%Estimated costs to complete technology at acquisition date: $3,000Risk-adjusted discount rate: 22%First period expected revenue: calendar year 2004

*Identity Systems*

Project names: SSA-NAME3Version 3.0 and IDS Version 3.0Percent completed as of acquisition date: 10%Estimated costs to complete technology at acquisition date: $600Risk-adjusted discount rate: 25%First period expected revenue: June 2005

*Starfish*

Project name: Mercury platform technologyPercent completed as of acquisition date: 70%Estimated costs to complete technology at acquisition date: $375Risk-adjusted discount rate: 30%First period expected revenue: calendar year 2004

The development of the above technology remains highlydependent on the remaining efforts to achieve technical viability, rapidlychanging customer markets, uncertain standards for a new product, andsignificant competitive threats from several companies. The nature of theefforts to develop this technology into a commercially viable product consistsprimarily of planning, designing, experimenting, and testing activitiesnecessary to determine that the technology can meet market expectations,including functionality and technical requirements. Failure to bring theproduct to market in a timely manner could result in a loss of market share ora lost opportunity to capitalize on emerging markets, and could have a materialadverse impact on our business and operating results.

Subsequent to theacquisition of Spontaneous Technology, Synchrologic, Identity Systems andStarfish, there had been no significant developments related to the currentstatus of the acquired in-process research and development projects thatwould result in material changes to the assumptions.

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*Amortization of Other Intangibles*

| ** **                         | ** ** | **Year Ended July 31,**           | ** ** |
|------------------------------------|------------|--------------------------------------------------|------------|
| ** **                         | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(In thousands,  except percentage)** | ** ** |
| Amortization of  other intangibles |       | $                                                | 1,959      |   | 2318.5 | % | $ | 81 |   |
| As percentage of total  revenue    |       | 4.6                                              | %          |   |   | 0.4 | % |
|                                    |            |                                                  |            |  |  |  |  |  |  |

 

Other intangible assets,excluding developed and core technology, amounted to $13,961,000 and $814,000,net of accumulated amortization, as of July 31, 2004 and 2003,respectively. We continue to amortize other intangible assets, review suchassets for impairment under SFAS No. 144, reassess their useful lives andmake any necessary adjustments. The increase in the amortization of otherintangible assets in fiscal 2004 was primarily due to the impact of recentlyacquired intangibles from Starfish, Loudfire, Spontaneous Technology,Synchrologic and Identity Systems.

*Restructuring and Other Charges.*

| ** **                               | ** ** | **Year Ended July 31,**           | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                               | ** ** | **(In thousands,  except percentage)** | ** ** |
| Restructuring charges:                   |       |                                             |       |   |   |   |   |   |   |
| Severance costs                          |       | $                                                | 253        |   |   |   |   |   | $ | 257 |   |
| Facilities costs                         |       | 600                                              |       |   |   |   |   | 159 |   |
| Restructuring charges                    |       | 853                                              |       |   |   |   |   | 416 |   |
| Other charges:                           |       |                                             |       |   |   |   |   |   |   |
| Costs relating to potential acquisitions |       | 76                                               |       |   |   |   |   | 379 |   |
| Restructuring and other charges          |       | $                                                | 929        |   |   | 16.9 | % |   | $ | 795 |   |
| As percentage of total  revenue          |       | 2.2                                              | %          |   |   |   |   | 3.2 | % |

 

·       *Restructuring Charges and Accrual.  *During fiscal 2004and 2003, we implemented a number of cost-reduction plans aimed at reducingcosts that were not integral to our overall strategy and better aligning our expenselevels with current revenue levels. These initiatives included a reduction inworkforce and facilities consolidation.

During the third quarterof fiscal 2004, we implemented a reduction in workforce affecting 17 employeesin various business functions (nine in research and development and eight insales and marketing). The program was completed by the end of April 2004,and the associated severance costs incurred were approximately $253,000, noneof which remained unused as of July 31, 2004.

Duringthe second quarter of fiscal 2004, as a result of vacating our remaining office space in SantaCruz, California and the difficulties in subletting such facilitybecause of the continuing deterioration of the real estate market in thislocation, we determined that additional charges were needed for adjustments inour expected future sublease rates and brokerage fees. We therefore recorded total facilities costs of $600,000, inclusive ofthe costs of $250,000 for vacating a floor of our office facility in San Jose,California.

In fiscal 2003, weincurred approximately $257,000 for severance and separation costs relating torecent termination of 19 of our engineering and product management employees. Wealso incurred a charge of approximately $159,000 for a revised estimated leaseexit cost due to additional time 

60

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required to sublease thefacilities. This revision was attributable to the high vacancy rates in thecorporate real estate market in Northern California.

Thefollowing table sets forth the activities in the restructuring accrual accountfor the periods presented (in thousands):

| ** **                         | ** ** | **Workforce  Reduction** | ** ** | **Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| **Balance  at July 31, 2002** |       |                     | $          | 43                                            |       |      |       | $ | 3,076 |   |   | $ | 3,119 |   |
| Restructuring  provision           |       |                     | 257        |                                          |       |      | —     |   |   | 257 |   |
| Adjustment                         |       |                     | —     |                                          |       |      | 159        |   |   | 159 |   |
| Non-cash charges                   |       |                     | —     |                                          |       |      | —     |   |   | — |   |
| Cash payments                      |       |                     | (300       | )                                             |       |      | (1,469     | ) |   | (1,769 | ) |
| **Balance  at July 31, 2003** |       |                     | $          | —                                        |       |      |       | $ | 1,766 |   |   | $ | 1,766 |   |
| Restructuring  provision           |       |                     | 253        |                                          |       |      | 250        |   |   | 503 |   |
| Adjustment                         |       |                     | —     |                                          |       |      | 350        |   |   | 350 |   |
| Cash payments                      |       |                     | (253       | )                                             |       |      | (1,286     | ) |   | (1,539 | ) |
| **Balance at July 31, 2004**  |       |                     | $          | —                                        |       |      |       | $ | 1,080 |   |   | $ | 1,080 |   |

 

The remaining unpaidamount as of July 31, 2004 of $1,080,000 related to the net lease expensedue to the consolidation of excess facilities, will be paid over the respectivelease terms through June 2006 using cash from operations.

The current and long-termportions of the restructuring accrual of $820,000 and $260,000 are classifiedas “Accrued Liabilities” and “Other Liabilities,” respectively, in theconsolidated balance sheet as of July 31, 2004.

Referto the discussion under the caption “*FiscalYear Ended July 31, 2005 as Compared to Fiscal Year Ended July 31,2004*” set forth above for the remaining unpaid amount as of July 31,2005 and other details associated with the restructuring accrual.

·       *Costs Relating To Potential Acquisitions.  *Duringfiscal 2004 and 2003, we incurred residual costs of approximately $76,000 and$379,000 for operating expenses, mainly legal and accounting, relating topotential acquisitions that we ceased pursuing.

*Interest Income*

| ** **                      | ** ** | **Year Ended July 31,**           | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands,  except percentage)** | ** ** |
| Interest income                 |       | $                                                | 620        |   |   | (23.6 | )% |   | $ | 811 |   |
| As percentage of total  revenue |       | 1.5                                              | %          |   |   |   |   | 3.3 | % |
|                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

The decrease in netinterest income for fiscal 2004 was due to lower rate of interest on reducedbalances of cash and investments, particularly during the first two quarters offiscal 2004.

61

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*Interest Expense*

| ** **                      | ** ** | **Year Ended July 31,**           | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands,  except percentage)** | ** ** |
| Interest expense                |       | $                                                | (249       | ) | (3012.5 | )% |   | $ | (8 | ) |   |
| As percentage of total  revenue |       | (0.6                                             | )%         |   |   |   | — | % |   |
|                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

Interest expense forfiscal 2004 reflects interest charge associated with the convertible seniornotes we issued in March 2004.

*Litigation Settlement Gain, Net*

| ** **                       | ** ** | **Year Ended July 31,**           | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                       | ** ** | **(In thousands,  except percentage)** | ** ** |
| Litigation  settlement gain, net |       | $                                                | 1,576      |   |   | N/A |   |   |   | $ | — |   |   |
| As percentage of total  revenue  |       | 3.7                                              | %          |   |   |   |   |   | — | % |   |
|                                  |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

The gain of $1,576,000,net of $424,000 related expenses incurred, in the third quarter of fiscal 2004resulted from the settlement of litigation against Extended Systems.

*Other, Net*

| ** **                      | ** ** | **Year Ended July 31,**           | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands,  except percentage)** | ** ** |
| Other, net                      |       | $                                                | (327       | ) |   | 403.1 | % |   | $ | (65 | ) |
| As percentage of total  revenue |       | (0.8                                             | )%         |   |   |   |   | (0.3 | )% |
|                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

Other, net, for fiscal2004 reflects $242,000 of debt issuance costs amortization expense associatedwith the convertible senior notes we issued in March 2004 and $87,000 ofbank charges and investment management fees, net realized gain on foreignexchange and other expenses. Other, net for fiscal 2003 reflects mainly bankcharges and investment management fees.

*Other-Than-Temporary Impairment of Investments*

| ** **                                      | ** ** | **Year Ended July 31,**           | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(In thousands,  except percentage)** | ** ** |
| Other-than-temporary  impairment of investments |       |                                             | $          | — |   |   |   | N/A |   |   | $ | (2,394 | ) |
| As percentage of total  revenue                 |       |                                             | —     | % |   |   |   |   |   | (9.6 | )% |
|                                                 |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |

 

During fiscal 2003, wedisposed our limited partnership interest in Azure Venture Partners, LLP, aventure capital fund. The disposal of the interest allowed us to avoidcommitments for further investments in equity instruments of variousprivately-held companies made through Azure, many of which had not generatedadequate returns. In addition, the disposal was in line with our strategy offocusing resources and efforts more on our core operations. Consequently, werecorded an other-than-temporary impairment 

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chargeof $2,394,000. Total proceeds of $75,000 from the sale of the interest werereceived in May 2003, which approximated the carrying value of theinvestment after the writedown.

*Provision for Income Taxes*

| ** **                      | ** ** | **Year Ended July 31,**           | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| ** **                      | ** ** | **2004**                                         | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(In thousands,  except percentage)** | ** ** |
| Provision for  income taxes     |       | $                                                | (481       | ) |   | 68.2 | % |   | $ | (286 | ) |
| As percentage of total  revenue |       | (1.1                                             | )%         |   |   |   |   | (1.2 | )% |
|                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

The increase in theprovision for income taxes for fiscal 2004 was due to increase in royaltyrevenue received from international OEM customers, as well as accrued incomeand various taxes for our newly acquired foreign subsidiaries.

**Recently IssuedAccounting Pronouncements**

*The Effect ofContingently Convertible Debt on Diluted Earnings per Share*

In October 2004, theEmerging Issues Task Force (EITF) reached a consensus on EITF No. 04-8“*The Effect of Contingently Convertible Debt onDiluted Earnings per Share,*” that the dilutive effect of contingentconvertible debt instruments (“CoCo’s”) must be included in diluted earningsper share regardless of whether the triggering contingency has been satisfied,if dilutive. Adoption of EITF No. 04-08 would be on a retroactivebasis and would require restatement of prior period diluted earnings per share,subject to certain transition provisions. It is effective for all periodsending after December 15, 2004. Due to the losses we incurred for fiscal2005, diluted net loss per share does not differ from basic net loss per share,since potential shares of common stock issuable upon the conversion of theconvertible debt are anti-dilutive for all periods presented. EITF No. 04-8could have a future impact on our results of operations in the event that thepotential shares of common stock issuable upon conversion of the convertibledebt were included in the diluted earnings per share calculation.

*Share-Based Payment*

In December 2004, the FASB issued SFASNo. 123R, *“Share-Based Payment, anamendment of FASB Statements No. 123 and 95.”* Theprincipal effect of SFAS No. 123R will be to require the inclusion in theearnings of a compensation expense for stock option grants and employee stockplan purchases that previously was only reported as a disclosure in a note toour consolidated financial statements. We are required to adopt the provisionsof SFAS No. 123R in the first quarter of fiscal 2006 endingOctober 31, 2005. We are presently studying SFAS No. 123R and havenot yet determined which method we will select for our adoption ofSFAS No. 123R. We expect that the adoption of SFAS No. 123R willhave a material impact on our annual earnings.

StaffAccounting Bulletin (SAB) No. 107,*“Share-BasedPayment.”*On March 29, 2005, the Securities and ExchangeCommission, or the SEC, staff issued SAB No. 107 to express the views ofthe staff regarding the interaction between SFAS No. 123R and certain SECrules and regulations and to provide the staff’s views regarding thevaluation of share-based payment arrangements for public companies. We arecurrently in the process of implementing SFAS No. 123R, effective as ofthe first quarter of fiscal 2006, and will take into consideration the additionalguidance provided by SAB No. 107 in connection with the implementation ofSFAS No. 123R.

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*Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004*

In December 2004, theFASB issued FSP No. 109-2, “Accounting and Disclosure Guidance forthe Foreign Earnings Repatriation Provision within the American Jobs CreationAct of 2004”. The American Jobs Creation Act introduces a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (repatriation provision), provided certain criteria are met.This position provides accounting and disclosure guidance for the repatriationprovision. We do not believe the Foreign Earnings Repatriation Provision withinthe American Jobs Creation Act of 2004 nor the FSP will have a material impacton our financial condition or results of operations.

*Accounting forConditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143*

In March 2005, theFASB issued Interpretation (FIN) No. 47, *“Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASB StatementNo. 143*.” FIN No. 47 clarifies when an entity would berequired to recognize a liability for the fair value of an asset retirementobligation that is conditional on a future event if the liability’s fair valuecan be reasonably estimated. Uncertainty surrounding the timing and method ofsettlement that may be conditional on events occurring in the future would befactored into the measurement of the liability rather than the recognition ofthe liability. FIN No. 47 is effective for fiscal years ending after December 15,2005. We are currently assessing the impact that the interpretation may have onour consolidated financial position and results of operations.

*Accounting Changesand Error Corrections*

In June 2005, theFASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” which replaces APB Opinion No. 20,“*Accounting Changes*,” and SFAS No. 3,“*Reporting Accounting Changes in InterimFinancial Statements*.” SFAS No. 154 changes the requirementsfor the accounting and reporting of a change in accounting principle. APBOpinion No. 20 previously required that most voluntary changes in anaccounting principle be recognized by including the cumulative effect of thenew accounting principle in net income of the period of the change. SFAS No. 154now requires retrospective application of changes in an accounting principle toprior period financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change. TheStatement is effective for fiscal years beginning after December 15, 2005.We do not expect the adoption of this statement will have a material impact onour financial statements.

*Other-Than-TemporaryImpairment*

In June 2005, theFASB decided not to provide additional guidance on the meaning of other-than-temporaryimpairment, and directed the staff to issue proposed FSP EITF 03-1-a,“*Implementation Guidance for the Applicationof Paragraph 16 of EITF Issue No. 03-1*,” as final. Thefinal FSP will supersede EITF Issue No. 03-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*,” and EITF Topic No. D-44,“*Recognition of Other-Than-TemporaryImpairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value*.”The final FSP (retitled FSP FAS No. 115-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments”*) will replace the guidanceset forth in paragraphs 10-18 of EITF No. 03-1 with referencesto existing other-than-temporary impairment guidance, such as SFAS No. 115,“*Accounting for Certain Investments in Debtand Equity Securities*,” SEC Staff Accounting Bulletin No. 59, “*Accounting for Noncurrent Marketable EquitySecurities*,” and APB Opinion No. 18, “*The Equity Method of Accounting for Investmentsin Common Stock.”*FSP FAS No. 115-1 will codify theguidance set forth in EITF Topic D-44 and clarify that an investor shouldrecognize an impairment loss no later than when the impairment is deemed otherthan temporary, even if a decision to sell has not been made. FSP FAS No. 115-1will be effective for other-than-temporary impairment analysis conducted inperiods beginning after 

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September 15,2005. We do not believe the adoption of FSP FAS No. 115-1 will havea significant impact on our consolidated results of operations or financialposition.

*Amortization Periodfor Leasehold Improvements*

In June 2005, theEITF reached a consensus on Issue No. 05-06, “*Determiningthe Amortization Period for Leasehold Improvements.*” The guidancerequires that leasehold improvements acquired in a business combination orpurchased subsequent to the inception of a lease be amortized over the lesserof the useful life of the assets or a term that includes renewals that arereasonably assured at the date of the business combination or purchase. Theguidance is effective for periods beginning after June 29, 2005. Theadoption of EITF No. 05-06 is not expected to have an impact on ourfinancial position, results of operations or cash flows.

**Liquidity and Capital Resources**

*Working Capital*

Thefollowing summarizes our cash and cash equivalents, short-term investments andworking capital:

| ** **                | ** ** | **Year Ended July 31,**                                     | ** ** |
|---------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                | ** ** | **2005**                                                                   | ** ** | **Percent  Change** | ** ** | **2004** | ** ** | **Percent  Change** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(In thousands, except percentages and ratios)** | ** ** |
| Cash and cash equivalents |       | $                                                                          | 19,533     |   |   | 50.4 | % |   | $ | 12,991 |   |   | 65.7 | % |   | $ | 7,842 |   |
| Short-term  investments   |       | $                                                                          | 19,319     |   |   | (52.5 | )% |   | $ | 40,657 |   |   | 110.5 | % |   | $ | 19,317 |   |
| Working capital           |       | $                                                                          | 38,068     |   |   | (26.6 | )% |   | $ | 51,848 |   |   | 105.4 | % |   | $ | 25,173 |   |
| Current ratio             |       | 3.2                                                                        |       |   | (28.9 | )% |   | 4.5 |   |   | 12.5 | % |   | 4.0 |   |

 

We invest excess cash in fixed income securities thatare highly liquid, of high-quality investment grade. We intend to make suchfunds readily available for operating purposes, if needed. In addition to theabove cash, cash equivalents and short-term investments at July 31, 2005,we have a total of $4,503,000 restricted cash that is pledged as collateral forcertain stand-by letters of credit issued by certain financial institutions andcollateral to match any unfavorable mark-to-market exposure on an interest swapagreement. Refer to the discussion under the caption “*RestrictedCash*” set forth below for more information.

The significant factors underlying the net decrease incash, cash equivalents and investments during fiscal 2005 were the acquisitionsof Tourmaline and PDAapps for $8,048,000, net cash flow used in operations of$4,602,000 and capital acquisitions of $2,426,000. This net decrease in cash,cash equivalents and short-term investments, as well as the increase inaccounts payable and deferred revenue at July 31, 2005, resulted in adecrease in working capital and current ratio.

The significant factorunderlying the increase in cash, cash equivalents and investments during fiscal2004 was the net proceeds from issuance of convertible senior notes of$57,052,000, offset by acquisitions of $18,939,000 and net cash flow used inoperations of $7,546,000. This increase in cash, cash equivalents andshort-term investments resulted in an increase in working capital and currentratio.

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*Cash Flows*

*Operating Activities.**  *Significant items included in cash flows fromoperating activities are as follows (inthousands):

| ** **                             | ** ** | **Year Ended July 31,** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|
| ** **                             | ** ** | **2005**                               | ** ** | **Change** | ** ** | **2004** | ** ** | **Change** | ** ** | **2003** | ** ** |
| Net cash used in  operating activities |       | $                                      | (4,602     | ) | $ | 2,944 |   | $ | (7,546 | ) | $ | (2,737 | ) | $ | (4,809 | ) |
|                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The majority of cash applied to working capital forthe current fiscal year resulted from increases in accounts receivable of$2,963,000 and other current and long-term assets of $975,000, as well as froma net decrease in accounts payable and accrued liabilities of $236,000. Offsettingthe net decrease in working capital was an increase in deferred revenue of$1,830,000. We have not experienced any significant trends in accountsreceivable other than changes relative to the increase in our revenue. Fluctuationsin accounts receivable from period to period relative to changes in revenue area result of timing of customer invoicing and receipt of payments from customers.Days sales outstanding (average collection period) increased to 78 days infiscal 2005 compared with 70 days in fiscal 2004.

The majority of cash applied to working capital forfiscal 2004 resulted from increases in accounts receivable of $2,847,000(generally consistent with our revenue growth and effected by recentacquisitions) and other current assets of $1,372,000, offset by all otherassets of $111,000. Accounts payable and accrued liabilities also decreased byapproximately $5,274,000 due to timing of payments particularly of litigationcosts and other expenses associated with our acquisitions during fiscal 2004. Offsettingthe net decrease in working capital was an increase in deferred revenue of$632,000.

*Investing Activities.**  *Significant items included in cash flows frominvesting activities are as follows (inthousands):

| ** **                                                | ** ** | **Year Ended July 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **2005**                               | ** ** | **Change** | ** ** | **2004** | ** ** | **Change** | ** ** | **2003** | ** ** |
| Net  sale/maturities (purchase) of short-term investments |       | $                                      | 21,316     |   | $ | 42,782 |   | $ | (21,466 | ) | $ | (32,127 | ) | $ | 10,661 |   |
| Acquisitions                                              |       | (8,048                                 | )          | 11,091 |   | (19,139 | ) | (16,711 | ) | (2,428 | ) |
| Capital  expenditures                                     |       | (2,426                                 | )          | (1,667 | ) | (759 | ) | (308 | ) | (451 | ) |
| Increase in  restricted cash                              |       | (445                                   | )          | 3,234 |   | (3,679 | ) | (3,679 | ) | — |   |
| Net cash provided  by (used in) investing activities      |       | $                                      | 10,397     |   | $ | 55,440 |   | $ | (45,043 | ) | $ | (52,825 | ) | $ | 7,782 |   |

 

The net cash flows provided in investing activitiesduring fiscal 2005 were due primarily to cash movement between investments andcash and cash equivalents, partially offset by Tourmaline and PDAappsacquisitions, capital expenditures and the increase in restricted cashassociated with a collateral under an interest rate swap agreement.

The net cash flows used in investing activities duringfiscal 2004 were due primarily to cash movement between investments and cashand cash equivalents and acquisitions of Spontaneous Technology, Synchrologicand Identity Systems and the increase in restricted cash associated with acollateral under an interest rate swap agreement.

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*Financing Activities.**  *Significant items included in cash flows fromfinancing activities are as follows (inthousands):

| ** **                                 | ** ** | **Year Ended July 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2005**                               | ** ** | **Change** | ** ** | **2004** | ** ** | **Change** | ** ** | **2003** | ** ** |
| Proceeds from  stock option exercises      |       | $                                      | 1,208      |   | $ | (924 | ) | $ | 2,132 |   | $ | (76 | ) | $ | 2,208 |   |
| Net proceeds from  long term debt          |       | —                                 |       | (57,052 | ) | 57,052 |   | 57,052 |   | — |   |
| Payments on  borrowings                    |       | —                                 |       | 1,764 |   | (1,764 | ) | 236 |   | (2,000 | ) |
| Other                                      |       | (369                                   | )          | (643 | ) | 274 |   | (56 | ) | 330 |   |
| Net cash provided  by financing activities |       | $                                      | 839        |   | $ | (56,855 | ) | $ | 57,694 |   | $ | 57,156 |   | $ | 538 |   |

 

During fiscal 2005, cash flow generated from financingactivities was primarily from stock option exercises. Our future cash flowsfrom stock options are difficult to project as such amounts are a function ofour stock price, the number of options outstanding, and the decisions byemployees to exercise stock options. In general, we expect proceeds from stockoption exercises to increase during periods in which our stock price hasincreased relative to historical levels.

During fiscal 2004, cash flow generated from financingactivities includes $57,052,000 in proceeds, net of debt issuance costs, fromour senior notes offering. We repaid $1,764,000 of debt acquired fromSynchrologic in fiscal 2004.

Refer to the caption *“Commitments”* below for more details on the convertiblesenior notes issued in fiscal 2004.

*Acquisitions*

In June 2005, we completed our acquisition of allof the issued and outstanding stock of PDAapps. Under the terms of an Agreementand Plan of Merger, dated as of June 23, 2005, the outstanding shares ofPDAapps common stock were converted into the right to receive (i) anaggregate of approximately $4,000,000 in aggregate initial cash considerationand (ii) an aggregate of up to $2,600,000 in cash earnout consideration(based on future revenue we generate from the former PDAapps client base),subject to the deposit of $1,000,000 in escrow to be available to compensateIntellisync pursuant to the indemnification obligations of the holders ofPDAapps common stock. The earnout consideration, if achieved, is due andpayable shortly following the first anniversary of the acquisition. As of July 31,2005, the Company has not accrued the contingent earnout payment amount. Anyearnout consideration paid will be recorded as additional goodwill.

In March 2005, we completed our acquisition ofall of the issued and outstanding stock of Tourmaline. Under the terms of anAgreement and Plan of Merger, dated as of February 9, 2005, theoutstanding shares of Tourmaline common stock were converted into the right toreceive (i) an aggregate of approximately $4,118,000 in aggregate initialcash consideration and (ii) an aggregate of up to $2,881,918 in cashearnout consideration (based on future revenue we generate from the formerTourmaline client base), based upon achievement of certain milestones, subjectto the deposit of a certain portion of the initial cash consideration andearnout consideration in escrow to be available to compensate Intellisyncpursuant to the indemnification obligations of the holders of Tourmaline commonstock. The earnout consideration, if achieved, is due and payable shortlyfollowing the first anniversary of the acquisition. As of July 31, 2005,the Company has not accrued the contingent earnout payment amount. Any earnoutconsideration paid will be recorded as additional goodwill.

In June 2004, we acquired (through a transfer) 91employees from SoftVision SRL pursuant to an Employee Transfer Agreement datedas of February 5, 2004. Under the terms of the agreement, we paid cash ofapproximately $693,000 and assumed certain employee-related liabilities ofapproximately $31,000. The SoftVision’s workforce acquisition was accounted foras an asset purchase. The consolidated financial 

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statements include theeffect of additional employees we acquired from SoftVision since the date ofacquisition.

In March 2004, we completed our acquisition ofall of the issued and outstanding stock of Identity Systems and paid cash of$19,986,000, net of $2,143,000 cash acquired, under the terms of the purchaseagreement.

In December 2003, we completed our acquisition ofall of the issued and outstanding stock of Synchrologic. In the merger, alloutstanding shares of Synchrologic common stock and preferred stock wereconverted into the right to receive a total of 15,130,171 shares of our commonstock valued at approximately $62,125,000. In addition, all outstanding optionsto purchase Synchrologic common stock were converted into options to purchase atotal of 1,018,952 shares of our common stock and were valued at approximately$4,123,000.

In September 2003, we acquired SpontaneousTechnology and issued a total of 869,259 shares of our common stock valued atapproximately $2,999,000 under the terms of the acquisition agreement. Therewere 224,417 additional shares held in escrow that were contingently issuableupon satisfaction of a pre-acquisition clause. Later during fiscal 2004,the contingency was resolved and we paid cash of approximately $752,000. Thecontingent consideration shares in escrow were therefore returned to usaccordingly. Additionally, depending upon our revenues associated with sales ofour products including certain technology of Spontaneous Technology during theperiod ending September 30, 2004, we may be required to pay SpontaneousTechnology additional consideration of up to $7,000,000 in shares of our commonstock. The earnout period ended on September 30, 2004 with our aggregaterevenue on products associated with Spontaneous Technology amounting to lessthan the given earnout threshold. Consequently, no additional consideration waspaid to Spontaneous Technology.

We believe the acquisition of PDAapps, Tourmaline, IdentitySystems, Synchrologic and Spontaneous Technology has brought and may continueto bring modest improvement in our cash flows from operating activitieswith the realization of synergistic benefits and revenue opportunities.

*Effects ofInflation*

We believe that ourfinancial results have not been significantly impacted by inflation and pricechanges during fiscal 2005, 2004 and 2003.

*Commitments*

*CapitalLeases.**  *Duringthe first quarter of fiscal 2005, we entered into a capital lease agreement forcomputer peripherals, which expires in September 2007. In addition, duringfiscal 2004, we entered into a capital lease agreement for a phone system,which expires in February 2008. The agreements resulted in capitalizedcosts of $296,000 and $231,000 during fiscal 2005 and 2004, respectively. Currentand long-term portions of the capital leases amounted to $153,000 and $206,000,respectively, at July 31, 2005.

*OperatingLeases.*   We lease our facilities under operatingleases that expire at various dates through December 2008. The leasesprovide for escalating lease payments.

*3%Convertible Senior Notes.**  *Duringfiscal 2004, we completed the offering of $60,000,000 of convertible seniornotes to qualified institutional buyers in reliance on Rule 144A under theSecurities Act. The notes are convertible into shares of our common stock atthe holders option any time prior to the close of business on the finalmaturity date of the notes, subject to prior redemption of the notes. Theinitial conversion rate is 250.0000 shares per each $1,000 principal amount ofnotes which represents an initial conversion price of $4.00 per share. Theconversion rate is subject to adjustment for certain events, including thepayment of dividends, and other events specified in the indenture. Holders ofthe notes may require us to redeem all or any portion of the notes upon theoccurrence of certain designated events 

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which generally involve atransaction with respect to our common stock. The notes are redeemable at aredemption price equal to 100% of the principal amount of the notes to beredeemed plus accrued interest to, but excluding, the redemption date. Thenotes bear interest at a rate of 3% per annum. Interest on the notes is paid onMarch 1 and on September 1 of each year.

*InterestRate Swap.**  *Duringfiscal 2004, we entered into two interest rate swap agreements with a financialinstitution on a total notional amount of $60,000,000, whereby we receive fixed-rateinterest of 3% in exchange for variable interest payments. The interest rateswaps expire upon the maturity of the $60,000,000, 3% convertible senior notesin March 2009, and effectively convert fixed-rate notes into variable-rateborrowings. The interest rate is reset semi-annually and is equal to the 6-monthLIBOR rate less a rate spread. The total variable interest rate, approximately2.9% at July 31, 2005, resulted in interest expense savings relative tofixed rates of approximately $499,000 for fiscal 2005. Under the provisions ofSFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” as amended, this arrangementhas been designated and qualifies as an effective fair value hedge of interestrate risk related to the $60,000,000 convertible senior notes. As the terms ofthe swaps match those of the underlying hedged debt, the changes in the fairvalue of these swaps are offset by corresponding changes in the carrying valueof the hedged debt, and therefore does not impact our net earnings. As of July 31,2005, the fair value of the interest rate swaps was approximately $2,469,000and recorded in “Other Liabilities” with an equal adjustment recorded to thecarrying value of the $60,000,000 convertible senior notes.

Thefollowing table summarizes our material obligations and commitments to makefuture payments, for which we anticipate using cash from operations, undercertain contracts, including long-term debt obligations and operating leases as of July 31, 2005 (in thousands):

| ** **                  | ** ** | ** ** | ** ** | **Fiscal year ending July 31,** | ** ** |
|-----------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **Total**  | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
| Long-term debt(1):          |       |       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Principal                   |       | $          | 60,000     |                                                | $          | — |   | $ | — |   | $ | — |   | $ | 60,000 |   |   | $ | — |   |   |
| Interest                    |       | 9,761      |       | 2,022                                               |       | 2,531 |   | 2,585 |   | 2,623 |   |   | — |   |   |
| Capital lease obligation(2) |       | 393        |       | 177                                                 |       | 177 |   | 39 |   | — |   |   | — |   |   |
| Operating leases:           |       |       |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Operating leases            |       | 5,420      |       | 3,103                                               |       | 1,099 |   | 849 |   | 369 |   |   | — |   |   |
| Proceeds from subleases     |       | (46        | )          | (46                                                 | )          | — |   | — |   | — |   |   | — |   |   |
| Net operating leases        |       | 5,374      |       | 3,057                                               |       | 1,099 |   | 849 |   | 369 |   |   | — |   |   |
| Total                       |       | $          | 75,528     |                                                | $          | 5,256 |   | $ | 3,807 |   | $ | 3,473 |   | $ | 62,992 |   |   | $ | — |   |   |

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(1)          Represents our 3% convertible senior notesand the associated interest rate swap. Interest on the senior notes andinterest rate swap is payable in cash on March 1 and September 1 ofeach year. The senior notes mature on March 1, 2009.

(2)          Includes interest payments due.

*ContingentEarnout Consideration.**  *Referto discussion above, under Acquisitions, regarding cash earnout considerationof up to $2,600,000 and $2,881,918 associated with the acquisitions of PDAappsand Tourmaline, respectively.

*Other.**  *In the event of early termination of our serviceagreement with eˆdeltacom, a division of ITC^DeltaCom, Inc. and a managedservice provider, we may be required to pay eˆdeltacom a penalty fee of up toapproximately $45,000.

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*CapitalExpenditures*

We expect total capitalexpenditures of approximately $4,500,000 for fiscal 2006 principally forsupport of the hosting operations and purchase of computers and other varioussystem upgrades.

*Officers’Resignations*

On August 29, 2005, we entered into a severanceagreement and mutual release with our Chief Strategy Officer, Steve Goldberg,in connection with Mr. Goldberg’s resignation from employment byIntellisync effective August 31, 2005. Pursuant to the terms of theagreement, Mr. Goldberg will receive, among other items, a lump sumpayment of $110,000, twelve months of accelerated vesting of his options topurchase registrant’s common stock, the right to exercise his vested optionsuntil six months following his termination date and six months of COBRApremiums paid by Intellisync. The agreement includes a general mutual releaseby Intellisync and Mr. Goldberg and a non-solicitation agreement by Mr. Goldbergfor twelve months following the effective date of the agreement.

On October 15, 2005,we entered into a severance agreement and mutual release with our Chief TechnologyOfficer, Said Mohammadioun, in connection with Mr. Mohammadioun’sresignation from employment by Intellisync effective October 15, 2005.Pursuant to the terms of the agreement, Mr. Mohammadioun will receive,among other items, a lump sum payment of $46,875, two and a half months ofaccelerated vesting of his options to purchase registrant’s common stock, theright to exercise his vested options until six months following his terminationdate and two and a half months of COBRA premiums paid by Intellisync. Theagreement includes a general mutual release by Intellisync and Mr. Mohammadiounand a non-solicitation agreement by Mr. Mohammadioun for twelve monthsfollowing the effective date of the agreement.

*Restricted Cash*

We have three letters of credit that collateralizecertain operating lease obligations and total approximately $321,000 and$397,000 at July 31, 2005 and 2004, respectively. We collateralize these letters of credit with cash deposits madewith two of our financial institutions and have classified the short-term andthe long-term portions of approximately $196,000 and $125,000 at July 31,2005, and $101,000 and $296,000 at July 31, 2004 as “Other Current Assets”and “Restricted Cash,” respectively, in the consolidated balance sheets. The holdersof the letters of credit are able to draw on each respective letter of creditin the event that we are found to be in default of our obligations under eachof our operating leases.

Under the terms of theinterest rate swap agreement into which we entered during fiscal 2004, we mustprovide collateral to match any unfavorable mark-to-market exposure (fairvalue) on the swap. The amount of collateral required totals a minimum of$1,800,000 plus an amount equal to the unfavorable mark-to-market exposure onthe swap. Generally, the required collateral will rise as interest rates rise. Asof July 31, 2005, we have posted approximately $4,181,000 of collateralunder this swap agreement which is included in “Restricted Cash” in ourconsolidated balance sheet.

*Litigation*

In August 2004, a patent-infringement claim wasfiled against Intellisync by NCR Corporation in the U.S. District Court for theSouthern District of Ohio. In the complaint, NCR alleged certain of ourproducts infringe three of its patents which allegedly cover technology forsynchronizing databases between personal digital assistants and host computers.On July 5, 2005, the case was dismissed pursuant to a settlement betweenIntellisync and NCR whereby we paid NCR $600,000. This amount is amortized overthe license period of certain NCR patents determined to be between January 2002and December 2010 based on the greater of straight line amortization or inproportion to volume of the deployed licenses. As a 

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result, approximately$239,000 was expensed during the fourth quarter of fiscal 2005. The remaining$361,000 was recorded as “Other Assets” in the consolidated balance sheet as ofJuly 31, 2005.

We are also involved in various litigation and claimsarising in the normal course of business. In management’s opinion, thesematters are not expected to have a material impact on our consolidated resultsof operations or financial condition.

We believe that our current cash, cash equivalents andshort-term investment balances, including cash generated from operations, ifany, will be sufficient to meet our working capital and other cash requirementsfor at least the next 12 months. Beyond the next 12 months, we expect our cashflow from operations and the remaining proceeds from the convertible seniornotes we issued in fiscal 2004 to remain sufficient to fund any ongoinginvestments in capital equipment and interest payments on our senior notes. Weexpect to have available to us enough cash from operations to also pay theprincipal of our notes. There are no arrangements and other relationships withunconsolidated entities or other persons that are reasonably likely tomaterially affect liquidity or the availability of our requirements forcapital.

We believe that the most strategic uses of our cashresources include strategic investments to gain access to new technologies,acquisitions, financing activities, and working capital. Therefore, from time-to-time,we may consider additional acquisitions and a wide range of other businessopportunities. To the extent that our current cash, cash equivalents andshort-term investment balances and cash flow from operations are insufficientto fund any new acquisition, business opportunity or venture, as well as tofund future operating requirements, we may seek to raise cash through furtherissuance of debt or equity securities. We cannot be certain that such financingwould be available to us at all, or on terms favorable to us.

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**ITEM7A.**        QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to avariety of risks, including changes in interest rates and foreign currencyfluctuations, which could impact our results of operations and financialcondition.

*Interest Rate Risk*

In addition to our cash holdings of $11,336,000, at July 31,2005, we had an investment portfolio of mostly fixed income securities,including those classified as cash equivalents and securitiesavailable-for-sale, of $27,516,000. These securities, like all fixed incomeinstruments, are subject to interest rate risk and will fall in value if marketinterest rates increase. If market interest rates were to increase immediatelyand uniformly by 10% from levels as of July 31, 2005, the decline of thefair value of the portfolio would be immaterial. We attempt to mitigate risk byholding our fixed income investments until maturity to avoid recognizing anadverse impact in income or cash flows in the event of an increase in marketinterest rates, but an increase in our liquidity needs may require us to sellfixed-rate securities prior to maturity.

Thetable below presents the carrying value (which approximates fair value) andrelated weighted average coupon interest rates for our investment portfolio at July 31,2005 (in thousands, except interest rates).

| ** **                                                           | ** ** | **Carrying  Amount** | ** ** | **Average Coupon  Interest Rate** | ** ** |
|----------------------------------------------------------------------|------------|----------------------|------------|---------------------------------------------|------------|
| Cash equivalents                                                     |       | $                    | 8,197      |                                        |       | 3.2 | % |   |
| Securities due  within one year or less                              |       | 9,115                |       |                                        | 2.8        | % |   |
| Auction rate  receipts due after 25 years through 40 years           |       | 4,700                |       |                                        | 3.4        | % |   |
| Annuities,  auction rate preferred stock and other, with no maturity |       | 5,504                |       |                                        | 3.0        | % |   |
| Total portfolio                                                      |       | $                    | 27,516     |                                        |       | 3.1 | % |   |

 

*Debt and Interest Expense.**  *We incurred $60,000,000 of principal indebtednessfrom the issuance of convertible senior notes in March 2004. The fairmarket value of these 3% convertible senior notes is sensitive to changes ininterest rates and to the prices of our common stock into which it can beconverted as well as our financial stability. In order to manage interest costsand risk, we entered into an interest rate swap agreement during fiscal 2004with a financial institution on a total notional amount of $50,000,000 and$10,000,000, whereby we receive fixed-rate interest of 3% in exchange forvariable interest payments. The interest rate swaps expire upon the maturity ofour $60,000,000, 3% convertible senior notes in March 2009, andeffectively converts those fixed-rate notes into variable-rate borrowings. Theinterest rate is reset semi-annually and is equal to the 6-month LIBORrate less a rate spread. The total variable interest rate, approximately 2.9%at July 31, 2005, resulted in interest expense savings relative to fixedrates of approximately $499,000 for fiscal 2005. Under the provisions of SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities*,” as amended, this arrangement has been designated andqualifies as an effective fair value hedge of interest rate risk related to the$60,000,000 convertible senior notes. As the terms of the swaps match those ofthe underlying hedged debt, the changes in the fair value of these swaps areoffset by corresponding changes in the carrying value of the hedged debt, andtherefore does not impact our net earnings. As of July 31, 2005, the fairvalue of the interest rate swaps was approximately $2,469,000 with an equaladjustment recorded to the carrying value of the $60,000,000 convertible seniornotes. Assuming a one percentage point increase in the prevailing LIBOR rate,holding other terms of the swap constant, the fair value of the interest rateswap and the underlying senior notes would change by approximately $1,960,000.

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*Foreign CurrencyRisk*

With our acquisitions of Synchrologic and IdentitySystems in fiscal 2004, more of our product and service revenue has beenderived from international markets and denominated in the currency of theapplicable market. As we increasingly pursue business opportunities in foreigncountries, our foreign revenue and operating results may become subject tosignificant currency fluctuations based upon changes in exchange rates ofcertain currencies in relation to the United States dollar.

We are also exposed to foreign currency exchange ratefluctuations as the financial statements of foreign subsidiaries are translatedinto United States dollar in consolidation. As exchange rates vary, theseresults, when translated, may vary from expectations and adversely impactoverall expected profitability. Assets and liabilities of most of oursubsidiaries are translated into U.S. dollars at exchange rates in effect as ofthe applicable balance sheet date and any resulting translation adjustments areincluded as an adjustment to stockholders’ equity. Revenue and expensesgenerated from these subsidiaries are translated at average monthly exchangerates during the quarter the transactions occur. Gains and losses from thesecurrency transactions are included in net earnings. Recently, we haveincreasingly generated a portion of our revenue and incurred a portion of ourexpenses in euros, British pounds, the Japanese yen and Australian dollars.

We currently do not have any hedging or similarforeign currency contracts to mitigate our exposure to the risk of changes inforeign currency rates. Although we may begin to hedge in the future, we cannotbe sure that any hedging techniques we may implement will be successful or thatour business, results of operations, financial condition or cash flows will notbe adversely affected by exchange rate fluctuations.

We may continue to expandinternationally in the future and become increasingly subject to other risks ofdoing business internationally including, but not limited to, differingeconomic conditions, changes in political climate, differing tax structures,and other regulations and restrictions. We will also be exposed to increasedrisk of non-payment by our customers in foreign countries, especially those ofhighly inflationary economies. Accordingly, our future results could bematerially adversely impacted by changes in these and other factors.Furthermore, to the extent that we engage in international sales denominated inUnited States dollars, an increase in the value of the United States dollarrelative to foreign currencies could make our products and services lesscompetitive in international markets.

**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The financial statements,together with the report thereon of PricewaterhouseCoopers LLP dated October 28,2005 are hereby incorporated by reference to Part IV of this Annual Reporton Form 10-K.

**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM9A.**        CONTROLS AND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures.**

Based on our management’sevaluation (with the participation of our principal executive officer andprincipal financial officer), as of the end of the period covered by thisAnnual Report on Form 10-K, our principal executive officer andprincipal financial officer have concluded that our disclosure controls andprocedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, or the Exchange Act) areaccumulated and communicated to management on a timely basis to allow timelydecisions regarding appropriate disclosure and are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, 

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processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

**Reports ofManagement**

*Statement ofManagement’s Responsibility*

Intellisync’s management has always assumed fullaccountability for maintaining compliance with our established financialaccounting policies and for reporting our results with objectivity and thehighest degree of integrity. It is critical for investors and other users ofthe consolidated financial statements to have confidence that the financialinformation that we provide is timely, complete, relevant, and accurate.Management is responsible for the fair presentation of Intellisync’sconsolidated financial statements, prepared in accordance with accountingprinciples generally accepted in the United States of America (GAAP), and hasfull responsibility for their integrity and accuracy.

Management, with oversight by Intellisync’s Board ofDirectors, has established and maintains a strong ethical climate so that ouraffairs are conducted to the highest standards of personal and corporateconduct. Intellisync’s governance initiatives are designed to assure compliancewith the listing requirements of NASDAQ and the corporate governancerequirements of the Sarbanes-Oxley Act of 2002.

We are committed toenhancing shareholder value and fully understand and embrace our fiduciaryoversight responsibilities. We are dedicated to ensuring that our highstandards of financial accounting and reporting are maintained. Our culturedemands integrity and we have the highest confidence in our processes, ourinternal controls, and our people, who are objective in their responsibilitiesand who operate under the highest level of ethical standards.

*Management’s AnnualReport on Internal Control Over Financial Reporting*

Management is responsible for establishing andmaintaining adequate internal control over financial reporting for Intellisync.Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. Internal control over financialreporting includes those policies and procedures that: (i) pertain to themaintenance of records that in reasonable detail accurately and fairly reflectthe transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (iii) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

Management (with theparticipation of the principal executive officer and principal financialofficer) conducted an evaluation of the effectiveness of Intellisync’s internalcontrol over financial reporting based on the framework in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission. Basedon this evaluation, management concluded that Intellisync’s internal controlover financial reporting was effective as of July 31, 2005. Management’sassessment of the effectiveness of Intellisync’s internal control overfinancial reporting as of July 31, 2005 

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has beenaudited by PricewaterhouseCoopers LLP, an independent registered publicaccounting firm, as stated in their report which is included herein on page F-2.

**Changes in InternalControl Over Financial Reporting.**

We generate a significant portion of our revenue inremote sales offices throughout the world, where we transact business inmultiple languages and often employ personnel that are not as familiar withU.S. GAAP as are our personnel in the United States. In the fourth quarterof fiscal 2005, we completed the process of centralizing certain processes andcontrols and extending headquarters-based enterprise accounting and revenuesystems to certain of our remote offices. These changes were designed toestablish consistent information systems and internal controls over financialreporting throughout the company and to ensure a centralized review in theUnited States of significant contracts from foreign jurisdictions.

There were no otherchanges in our internal control over financial reporting during the fourthquarter of fiscal 2005 that have materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

**ITEM9B.**       OTHER INFORMATION

None.

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**PART III**

**ITEM10.**         DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT

Information relating to the directors and executiveofficers of Intellisync is set forth in Part I, Item 1 of this AnnualReport under the caption “*Executive Officers andDirectors of the Registrant*.” Information relating to directors,audit committee, financial expert and compliance with Section 16(a) ofthe Exchange Act is incorporated by reference to the definitive proxy statementfor Intellisync’s 2005 Annual Meeting of Stockholders to be filed with the SECpursuant to Regulation 14A, or Proxy Statement, no later than 120 days afterthe end of the fiscal year covered by this form, or the Proxy Statement, underthe captions “*Board Meetings and Committees*”and “*Section 16(a) Beneficial OwnershipReporting Compliance*.”

Pursuant to General Instruction G(3) of Form 10-K,the information required by this item relating to our executive officers isincluded under the caption “Executive Officers of the Registrant” in Part Iof this report.

We have adopted the Codeof Ethics for Principal Officers and Financial Professionals of IntellisyncCorporation, a code of ethics that applies to our Chief Executive Officer,Chief Financial Officer and other finance organization employees. The Code ofEthics for Principal Officers and Financial Professionals of IntellisyncCorporation is publicly available on our Website at *www.intellisync.com*.The code of ethics may be found from our main Web page by clicking firston “Company” and then on “Investors,” and finally on “Corporate Governance.” Ifwe make any substantive amendments to this code of ethics or grant any waiver,including any implicit waiver, from a provision of the code to our ChiefExecutive Officer or Chief Financial Officer, we will disclose the nature ofsuch amendment or waiver on that Website or in a report on Form 8-K.

**ITEM11.**         EXECUTIVE COMPENSATION

The information requiredby Item 11 is incorporated by reference to the Proxy Statement under thecaption “*Executive Compensation and Other Matters*.”

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information requiredby Item 12 is incorporated by reference to the Proxy Statement under thecaption “*Stock Ownership of Certain Beneficial Owners andManagement and Related Stockholder Matters*.”

**ITEM13.**         CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

The information requiredby Item 13 is incorporated by reference to the Proxy Statement under thecaption “*Certain Transactions*.”

**ITEM14.**         PRINCIPAL ACCOUNTANT FEESAND SERVICES

The information required by Item 14 is incorporated byreference to the Proxy Statement under the caption *“PrincipalAccountant Fees and Services*.”

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**PART IV**

**ITEM15.**         EXHIBITS, FINANCIALSTATEMENT SCHEDULES

(a)   1.   FinancialStatements

The following consolidated financial statements ofIntellisync Corporation are filed as part of this Annual Report on Form 10-K:

·       Reportof Independent Registered Public Accounting Firm (F-2)

·       ConsolidatedBalance Sheets at July 31, 2005 and 2004 (F-4)

·       ConsolidatedStatements of Operations for the fiscal years ended July 31, 2005, 2004and 2003 (F-5)

·       ConsolidatedStatements of Stockholders’ Equity and Comprehensive Loss for the fiscal yearsended July 31, 2005, 2004 and 2003 (F-6)

·       ConsolidatedStatements of Cash Flows for the fiscal years ended July 31, 2005, 2004and 2003 (F-8)

·       Notes to ConsolidatedFinancial Statements (F-9)

2.      SupplementalSchedule

Financial StatementSchedules have been omitted because the required information is contained inthe consolidated financial statements and the notes thereto, or because suchschedules are not required or applicable.

3.      Exhibits

The exhibits listed on theaccompanying index to exhibits immediately preceding the financial statementschedules are filed as part of, or incorporated by reference into, this AnnualReport on Form 10-K.

(c)        Exhibits

| Exhibit Number | ** ** | ** **                                                                                                                                                                                                                                                                                                      | ** ** | **Exhibit Title** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|
| 2.1(1)              |       | Stock Purchase Agreement between Pumatech, Inc.  and Motorola, Inc. dated March 27, 2003.                                                                                                                                                                                                        |
| 2.2(2)              |       | Asset Purchase Agreement by and among  Pumatech, Inc., Loudfire, Inc. and Craig Johnson. dated  July 2, 2003.                                                                                                                                                                               |
| 2.3(2)              |       | First Amendment to the Asset Purchase Agreement by  and among Pumatech, Inc., Loudfire, Inc. and Craig Johnson dated  July 22, 2003.                                                                                                                                                             |
| 2.4(3)              |       | Asset Purchase Agreement between Pumatech, Inc.  and Spontaneous Technology, Inc. dated July 30, 2003 and Amendment  No. 1 thereto dated September 17, 2003.                                                                                                                           |
| 2.5(4)              |       | Stock Purchase Agreement by and among Intellisync  Corporation, Intellisync Australia Pty. Ltd., SPL WorldGroup, Inc., SPL  WorldGroup B.V., SPL WorldGroup Holdings Pty. Ltd., SPL WorldGroup Software  Inc., SPL WorldGroup Limited and Search Software America Pty. Ltd. dated  February 24, 2004. |
| 2.6(21)             |       | Agreement and  Plan of Merger among Pumatech, Inc., Homerun Acquisition Corporation,  and Synchrologic, Inc. dated September 14, 2003.                                                                                                                                                           |

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| 2.7(24)   |   | Employee Transfer Agreement by and between  Intellisync Corporation, SoftVision SRL and Laurentiu Russo dated  March 5, 2004.                                                                                                                                                                               |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.8(25)   |   | Agreement and Plan of Merger by and among  Intellisync Corporation, TNI Acquisition Corporation, and Tourmaline  Networks, Inc. dated February 9, 2005.                                                                                                                                                |
| 3.1(5)    |   | Certificate of Incorporation of Puma Technology, Inc.,  a Delaware corporation.                                                                                                                                                                                                                             |
| 3.2(6)    |   | Amended and Restated Bylaws of Pumatech, Inc.,  a Delaware corporation.                                                                                                                                                                                                                                     |
| 3.3(7)    |   | Certificate of Amendment of Restated Certificate of  Incorporation dated December 19, 2000.                                                                                                                                                                                                                 |
| 3.4(8)    |   | Certificate of Amendment of Restated Certificate of  Incorporation filed on October 18, 2002.                                                                                                                                                                                                               |
| 3.5(9)    |   | Certificate of designations of rights, preferences  and privileges of Series A Participating Preferred Stock of  Pumatech, Inc. dated January 15, 2003.                                                                                                                                           |
| 3.6(10)   |   | Certificate of Amendment of Certificate of  Incorporation as filed with the Secretary of State of the State of Delaware  on February 3, 2004.                                                                                                                                                               |
| 3.7(11)   |   | Certificate of Ownership and Merger merging a  wholly-owned subsidiary into Pumatech, Inc., dated February 17,  2004, pursuant to Section 253 of the General Corporation Law of the  State of Delaware.                                                                                           |
| 4.1(9)    |   | Preferred Shares Rights Agreement between  Pumatech, Inc. and Computershare Investor Services LLC as Rights Agent  dated January 13, 2003 (includes Form of Certificate of Designations  of Series A Participating Preferred Stock, Form of Rights  Certificate and Summary of Rights). |
| 4.2(10)   |   | Indenture dated as of March 3, 2004, between  Intellisync Corporation and U.S. Bank National Association, as Trustee, and  Form of Note                                                                                                                                                                |
| 4.3(10)   |   | Registration Rights Agreement, dated March 3,  2004, among Intellisync Corporation, as issuer and Morgan Stanley &  Co. Incorporated, CIBC World Markets and Needham &  Company, Inc.                                                                                                |
| 10.1*(12) |   | Puma Technology, Inc. 1998 Employee Stock  Purchase Plan, as amended through April 23, 2002.                                                                                                                                                                                                           |
| 10.2*(13) |   | Form of notice of exercised used under Puma  Technology, Inc. 1998 Employee Stock Purchase Plan.                                                                                                                                                                                                       |
| 10.3*(5)  |   | Form of Indemnity Agreement for directors and  officers.                                                                                                                                                                                                                                                    |
| 10.4*(14) |   | ProxiNet 1997 Stock Plan.                                                                                                                                                                                                                                                                                        |
| 10.5*(15) |   | NetMind Technologies, Inc. 1997 Stock Plan.                                                                                                                                                                                                                                                                 |
| 10.6*(16) |   | Puma Technology, Inc. 2000 Supplemental Stock  Option Plan and Related Form of Non-statutory Stock Option Agreement  initially established as of March 29, 2000 and as amended through  August 22, 2000.                                                                                     |
| 10.7*(17) |   | Pumatech, Inc. Amended and Restated 1993 Stock  Option Plan dated December 6, 2000.                                                                                                                                                                                                                    |
| 10.8(18)  |   | Loan and Security Agreement dated March 29,  2001, by and between Imperial Bank and Pumatech, Inc.                                                                                                                                                                                                     |
| 10.9(19)  |   | Sublease Agreement dated as of February 4,  2002, between the Company and AlphaSmart, Inc.                                                                                                                                                                                                             |

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| 10.10*(6)   |   | Employment Agreement dated as of June 14, 2002,  between the Company and Woodson M. Hobbs.                                                                                                                                                                                                                                   |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11*(26)  |   | First Amendment to Employment Agreement dated as of  August 24, 2005 between the Company and Woodson M. Hobbs.                                                                                                                                                                                                               |
| 10.12*(6)   |   | Restricted Stock Option Agreement dated as of  June 14, 2002, between the Company and Woodson M. Hobbs.                                                                                                                                                                                                                      |
| 10.13*(6)   |   | $309,750 Promissory Note dated as of June 14,  2002, payable by Woodson M. Hobbs to Pumatech, Inc.                                                                                                                                                                                                                      |
| 10.14*(8)   |   | Intellisync  Corporation 2002 Stock Option Plan, As Amended dated August 25, 2004.                                                                                                                                                                                                                                           |
| 10.15*(26)  |   | 2005 Retention Stock Option Agreement                                                                                                                                                                                                                                                                                             |
| 10.16+(20)  |   | Distribution Agreement by and between Ingram  Micro, Inc. and Puma Technology, Inc. dated as of July 14,  1997 and Addendum thereto dated January 30, 2001.                                                                                                                                                   |
| 10.17*(21)  |   | Employment offer letter dated September 5,  2002, to Clyde Foster, Senior Vice President of Sales and Marketing.                                                                                                                                                                                                             |
| 10.18*(26)  |   | Employment offer letter dated September 15,  2005, to David Eichler, Chief Financial Officer                                                                                                                                                                                                                                 |
| 10.19*+(26) |   | Severance Agreement and Mutual Release Recitals  dated August 29, 2005, by and between Steve Goldberg and Intellisync  Corporation                                                                                                                                                                                           |
| 10.20*(26)  |   | Severance Agreement and Mutual Release Recitals  dated October 15, 2005, by and between Said Mohammadioun and Intellisync  Corporation                                                                                                                                                                                       |
| 10.21*(26)  |   | Change of Control  Agreement with Keith Kitchen dated August 24, 2005.                                                                                                                                                                                                                                                       |
| 10.22*(26)  |   | Change of Control  Agreement with Clyde Foster, dated August 24, 2005.                                                                                                                                                                                                                                                       |
| 10.23*(26)  |   | Change of Control  Agreement with Rip Gerber, dated August 24, 2005.                                                                                                                                                                                                                                                         |
| 10.24*(26)  |   | Change of Control  Agreement with David Eichler, dated October 5, 2005.                                                                                                                                                                                                                                                      |
| 10.25*(26)  |   | Change of Control  Agreement with Blair Hankins, dated October 25, 2005.                                                                                                                                                                                                                                                     |
| 10.26*(26)  |   | Change of Control  Agreement with Scott Hrastar, dated October 25, 2005.                                                                                                                                                                                                                                                     |
| 10.27*(21)  |   | Compensation for Board Service and Change of Control  Agreement for Michael M. Clair, dated October 20, 2003.                                                                                                                                                                                                                |
| 10.28*(21)  |   | Compensation for Board Service and Change of Control  Agreement for Michael Praisner, dated October 20, 2003.                                                                                                                                                                                                                |
| 10.29*(21)  |   | Compensation for Board Service and Change of Control  Agreement for Kirsten Berg-Painter, dated October 20, 2003.                                                                                                                                                                                                            |
| 10.30+(22)  |   | Intellisync Software Developers’ Kit and Bundling  License Agreement by and between Puma Technology, Inc. and Research In  Motion Limited as of April 29, 1998, and Amendments thereto dated  September 14, 1999, April 29, 2000, August 15, 2000,  April 30, 2002, and October 31, 2003. |
| 10.31*(23)  |   | Synchrologic, Inc.  Amended and Restated 1995 Stock Option Plan.                                                                                                                                                                                                                                                             |
| 10.32*(23)  |   | Synchrologic, Inc.  2001 Stock Incentive Plan.                                                                                                                                                                                                                                                                               |
| 10.33(4)    |   | Settlement and License Agreement, dated  March 4, 2004, by and between Intellisync Corporation and Extended  Systems Incorporated.                                                                                                                                                                                           |

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| 10.34+(24) |   | Master Software License, Software Development  Agreement, Maintenance and Services Agreement and Reseller Agreement dated  July 2, 2004 by and between Intellisync Corporation and Cellco Partnership  d/b/a Verizon Wireless. |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.35*(24) |   | Change of Control  Agreement with Steven Goldberg dated February 10, 2004.                                                                                                                                                |
| 10.36*(26) |   | Compensation for Board Service and Change of Control  Agreement for Terrence Valeski, dated September 1, 2005.                                                                                                            |
| 10.37*(26) |   | Compensation for Board Service and Change of Control  Agreement for Richard Arnold, dated August 24, 2005.                                                                                                                |
| 10.38*(26) |   | Compensation for Board Service and Change of Control  Agreement for Keith Cornell, dated August 24, 2005.                                                                                                                 |
| 10.39*(26) |   | Amendment No. 1, dated August 29, 2005, to  Compensation for Board Service and Change of Control Agreement for Kirsten  Berg-Painter.                                                                                |
| 10.40*(26) |   | Amendment No. 1, dated August 29, 2005, to  Compensation for Board Service and Change of Control Agreement for Michael  Clair.                                                                                       |
| 10.41*(26) |   | Intellisync Corporation Summary of Executive Officer  Bonus Plan                                                                                                                                                               |
| 21.1(26)   |   | Subsidiaries of  the Registrant.                                                                                                                                                                                               |
| 23.1(26)   |   | Consent of PricewaterhouseCoopers LLP, Independent  Registered Public Accounting Firm.                                                                                                                                         |
| 24.1(26)   |   | Power of Attorney  (reference page 83 of this Form 10-K).                                                                                                                                                            |
| 31.1(26)   |   | Certifications of Principal Executive Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                 |
| 31.2(26)   |   | Certifications of Principal Financial Officer  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                 |
| 32.1(26)   |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                              |
| 32.2(26)   |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                              |

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*                    Managementcontract or compensatory plan or arrangement.

+                Confidentialtreatment has been granted or requested for portions of this exhibit.

(1)          Incorporated byreference to the Company’s Report on Form 8-K filed onApril 11, 2003.

(2)          Incorporated byreference to the Company’s Report on Form 8-K filed onAugust 6, 2003.

(3)          Incorporated byreference to the Company’s Report on Form 8-K filed onOctober 2, 2003.

(4)          Incorporated byreference to the Company’s Report on Form 10-Q for the quarterlyperiod ended April 30, 2004 filed on June 14, 2004.

(5)          Incorporated byreference to the Company’s Registration Statement on Form S-1(No. 333-011445).

(6)          Incorporated byreference to the Company’s Annual Report on Form 10-K for fiscalyear ended July 31, 2002 filed on October 17, 2002.

(7)          Incorporated byreference to the Company’s Report on Form 10-Q for the quarterlyperiod ended January 31, 2001 filed on March 19, 2001.

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(8)          Incorporated byreference to the Company’s Report on Form S-8 filed onDecember 3, 2004.

(9)          Incorporated byreference to the Company’s Report on Form 8-A12G filed onJanuary 15, 2003.

(10)   Incorporated by reference tothe Company’s Report on Form S-3 filed on June 3, 2004.

(11)   Incorporated by reference tothe Company’s Report on Form 8-K filed on February 18, 2004.

(12)   Incorporated by reference tothe Company’s Report on Form S-8 filed on August 27, 2002.

(13)   Incorporated by reference tothe Company’s Annual Report on Form 10-K for fiscal year endedJuly 31, 1999 filed on October 29, 1999.

(14)   Incorporated by reference tothe Company’s Report on Form S-8 filed on November 1, 1999.

(15)   Incorporated by reference tothe Company’s Report on Form S-8 filed on February 24, 2000.

(16)   Incorporated by reference tothe Company’s Report on Form S-8 filed on October 27, 2000.

(17)   Incorporated by reference tothe Company’s Report on Form S-8 filed on February 6, 2001.

(18)   Incorporated by reference tothe Company’s Report on Form 10-Q for the quarterly period endedApril 30, 2001 filed on June 16, 2001.

(19)   Incorporated by reference tothe Company’s Report on Form 10-Q for the quarterly period endedApril 30, 2002 filed on June 13, 2002.

(20)   Incorporated by reference tothe Company’s Report on Form 10-Q for the quarterly period endedOctober 31, 2002 filed on December 16, 2002.

(21)   Incorporated by reference tothe Company’s Annual Report on Form 10-K for fiscal year endedJuly 31, 2003 filed on October 21, 2003.

(22)   Incorporated by reference tothe Company’s Report on Form 10-Q/A for the quarterly period endedOctober 31, 2003 filed on March 19, 2004.

(23)   Incorporated by reference tothe Company’s Report on Form 10-Q for the quarterly period endedJanuary 31, 2004 filed on March 15, 2004.

(24)   Incorporated by reference tothe Company’s Annual Report on Form 10-K for fiscal year ended July 31,2004 filed on October 14, 2004.

(25)   Incorporated by reference tothe Company’s Report on Form 8-K filed on April 1, 2005.

(26)   Filedherewith.

(b)   FinancialStatement Schedules.

Refer to Item 15 (a) above.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this Form 10-K to besigned on its behalf by the undersigned thereunto duly authorized, on this 28thday of October 2005.
|                              | INTELLISYNC CORPORATION |
|------------------------------|-------------------------|
| Date: October 28,  2005 | By:                     | /s/ J. KEITH KITCHEN |
| ** **                   | ** **              | **J.  Keith Kitchen** |
|                         | * *                | *Chief  Accounting Officer and  Principal Accounting Officer* |

 

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**POWEROF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below hereby constitutes and appoints Woodson Hobbs andDavid P. Eichler, and each of them acting individually, as hisattorney-in-fact, each with full power of substitution, for him in any and allcapacities, to sign any and all amendments to this Form 10-K, and tofile the same, with exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, hereby ratifying and confirmingall that each said attorneys-in-fact or his substitute or substitutes, may door cause to be done by virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this Form 10-Khas been signed below by the following persons in the capacities and on thedates indicated:
| ** **                | **Signature** | ** **                              | ** ** |                        | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|---------------------------|---------------|-----------------------------------------|------------|------------------------|-----------|------------|------------|--|----------|------------|
| /s/ WOODSON HOBBS         |          | President, Chief  Executive Officer and |       | October 28, 2005  |
| Woodson  Hobbs            |          | Director (Principal Executive Officer)  |       |                   |
| /s/ DAVID P. EICHLER      |          | Chief Financial  Officer                |       | October 28,  2005 |
| David  P. Eichler         |          |                                    |       |                   |
| /s/ J. KEITH  KITCHEN     |          | Chief Accounting  Officer (Principal    |       | October 28,  2005 |
| J.  Keith Kitchen         |          | Accounting Officer)                     |       |                   |
| /s/ MICHAEL  M. CLAIR     |          | Chairman of the  Board                  |       | October 28,  2005 |
| Michael  M. Clair         |          |                                    |       |                   |
| /s/ RICHARD  ARNOLD       |          | Director                                |       | October 28,  2005 |
| Richard  Arnold           |          |                                    |       |                   |
| /s/ KIRSTEN  BERG-PAINTER |          | Director                                |       | October 28,  2005 |
| Kirsten  Berg-Painter     |          |                                    |       |                   |
| /s/ KEITH A.  CORNELL     |          | Director                                |       | October 28,  2005 |
| Keith  A. Cornell         |          |                                    |       |                   |
| /s/ SAID  MOHAMMADIOUN    |          | Director                                |       | October 28,  2005 |
| Said  Mohammadioun        |          |                                    |       |                   |
| /s/ TERRENCE  VALESKI     |          | Director                                |       | October 28,  2005 |
| Terrence E.  Valeski      |          |                                    |       |                   |

 

83

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**INDEX TO FINANCIALSTATEMENTS**

|                                                                                                                                            | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent  Registered Public Accounting Firm                                                                                   |       | F-2      |
| Consolidated  Balance Sheets at July 31, 2005 and 2004                                                                                |       | F-4      |
| Consolidated  Statements of Operations for the fiscal years ended July 31, 2005, 2004  and 2003                                       |       | F-5      |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Loss for the fiscal  years ended July 31, 2005, 2004 and 2003 |       | F-6      |
| Consolidated Statements of Cash Flows for the fiscal years ended July 31, 2005,  2004 and 2003                                        |       | F-8      |
| Notes to Consolidated Financial  Statements                                                                                                |       | F-9      |

 

F-1

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholdersof Intellisync Corporation:

We have completed anintegrated audit of Intellisync Corporation’s 2005 consolidated financialstatements and of its internal control over financial reporting as of July 31,2005 and audits of its 2004 and 2003 consolidated financial statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Our opinions, based on our audits, are presented below.

*Consolidated financial statements*

In our opinion, theconsolidated financial statements listed in the index appearing under Item 15(a)(1) presentfairly, in all material respects, the financial position of IntellisyncCorporation and its subsidiaries at July 31, 2005 and 2004, and theresults of their operations and their cash flows for each of the three years inthe period ended July 31, 2005 in conformity with accounting principlesgenerally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits. Weconducted our audits of these statements in accordance with the standards ofthe Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit offinancial statements includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

*Internal controlover financial reporting*

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of July 31, 2005 based on criteria establishedin *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO), is fairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of July 31, 2005, based oncriteria established in *Internal Control—IntegratedFramework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control overfinancial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance 

F-2

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of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

SanJose, CaliforniaOctober 28, 2005

F-3

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**INTELLISYNC CORPORATIONCONSOLIDATED BALANCE SHEETS(In thousands, except per common share data)**

| ** **                                                                                                                                  | ** ** | **July 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**          | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                  |       |              |       |   |   |
| Current  assets:                                                                                                                            |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                   |       | $                 | 19,533     |   | $ | 12,991 |   |
| Short-term investments                                                                                                                      |       | 19,319            |       | 40,657 |   |
| Accounts receivable, net                                                                                                                    |       | 13,682            |       | 10,380 |   |
| Inventories                                                                                                                                 |       | 46                |       | 69 |   |
| Other current assets                                                                                                                        |       | 3,190             |       | 2,485 |   |
| Total current assets                                                                                                                        |       | 55,770            |       | 66,582 |   |
| Property and equipment, net                                                                                                                 |       | 3,028             |       | 1,540 |   |
| Goodwill                                                                                                                                    |       | 68,474            |       | 65,288 |   |
| Other intangible assets, net                                                                                                                |       | 25,946            |       | 29,828 |   |
| Restricted cash                                                                                                                             |       | 4,306             |       | 4,032 |   |
| Other assets                                                                                                                                |       | 3,269             |       | 3,084 |   |
| Total assets                                                                                                                                |       | $                 | 160,793    |   | $ | 170,354 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                               |       |              |       |   |   |
| Current  liabilities:                                                                                                                       |       |              |       |   |   |
| Accounts payable                                                                                                                            |       | $                 | 2,584      |   | $ | 1,562 |   |
| Accrued liabilities                                                                                                                         |       | 7,569             |       | 7,482 |   |
| Current portion of obligations  under capital lease                                                                                         |       | 153               |       | 51 |   |
| Deferred revenue                                                                                                                            |       | 7,396             |       | 5,639 |   |
| Total current liabilities                                                                                                                   |       | 17,702            |       | 14,734 |   |
| Obligations under capital lease                                                                                                             |       | 206               |       | 144 |   |
| Long-term deferred revenue                                                                                                                  |       | 228               |       | 155 |   |
| Convertible senior notes                                                                                                                    |       | 57,531            |       | 58,443 |   |
| Other liabilities                                                                                                                           |       | 2,915             |       | 2,487 |   |
| Total liabilities                                                                                                                           |       | 78,582            |       | 75,963 |   |
| Commitments and contingencies (Note 9)                                                                                                      |       |              |       |   |   |
| Stockholders’ equity:                                                                                                                  |       |              |       |   |   |
| Preferred stock, $0.001 par  value; 2,000 shares authorized and none issued and outstanding at  July 31, 2005 and 2004                 |       | —            |       | — |   |
| Common stock, $0.001 par  value; 160,000 shares authorized; 66,639 and 65,592 shares issued and  outstanding at July 31, 2005 and 2004 |       | 67                |       | 66 |   |
| Additional paid-in capital                                                                                                                  |       | 227,014           |       | 225,832 |   |
| Accumulated deficit                                                                                                                         |       | (144,530          | )          | (131,116 | ) |
| Accumulated other  comprehensive loss                                                                                                       |       | (340              | )          | (391 | ) |
| Total stockholders’ equity                                                                                                             |       | 82,211            |       | 94,391 |   |
| Total liabilities and stockholders’ equity                                                                                             |       | $                 | 160,793    |   | $ | 170,354 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-4

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**INTELLISYNC CORPORATIONCONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per common share data)**

| ** **                                                                                | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue:                                                                                  |       |                                   |       |   |   |   |   |
| License                                                                                   |       | $                                      | 39,244     |   | $ | 28,292 |   | $ | 19,169 |   |
| Services                                                                                  |       | 20,254                                 |       | 14,016 |   | 5,691 |   |
| Total revenue                                                                             |       | 59,498                                 |       | 42,308 |   | 24,860 |   |
| Cost of revenue:                                                                          |       |                                   |       |   |   |   |   |
| Cost of license revenue                                                                   |       | 1,585                                  |       | 2,059 |   | 1,182 |   |
| Cost of services revenue  (includes non-cash stock compensation of $(19), $14 and $86)    |       | 8,478                                  |       | 5,949 |   | 2,912 |   |
| Amortization of developed and core technology                                             |       | 4,683                                  |       | 2,693 |   | 628 |   |
| Total cost of revenue                                                                     |       | 14,746                                 |       | 10,701 |   | 4,722 |   |
| Gross profit                                                                              |       | 44,752                                 |       | 31,607 |   | 20,138 |   |
| Operating expenses:                                                                       |       |                                   |       |   |   |   |   |
| Research and development  (includes non-cash stock compensation of $0, $38 and $99)       |       | 14,604                                 |       | 11,467 |   | 7,389 |   |
| Sales and marketing (includes  non-cash stock compensation of $(6), $18 and $138)    |       | 27,551                                 |       | 16,540 |   | 11,468 |   |
| General and administrative  (includes non-cash stock compensation of $0, $675 and $1,419) |       | 9,036                                  |       | 7,639 |   | 5,793 |   |
| In-process research and  development                                                      |       | 220                                    |       | 3,667 |   | 406 |   |
| Amortization of other  intangible assets                                                  |       | 4,239                                  |       | 1,959 |   | 81 |   |
| Restructuring and other  charges                                                          |       | 505                                    |       | 929 |   | 795 |   |
| Total operating expenses                                                                  |       | 56,155                                 |       | 42,201 |   | 25,932 |   |
| Operating loss                                                                            |       | (11,403                                | )          | (10,594 | ) | (5,794 | ) |
| Non-operating expense, net:                                                               |       |                                   |       |   |   |   |   |
| Interest income                                                                           |       | 1,065                                  |       | 620 |   | 811 |   |
| Interest expense                                                                          |       | (1,352                                 | )          | (249 | ) | (8 | ) |
| Litigation settlement gain, net                                                           |       | —                                 |       | 1,576 |   | — |   |
| Other, net                                                                                |       | (919                                   | )          | (327 | ) | (65 | ) |
| Other-than-temporary  impairment of investments                                           |       | —                                 |       | — |   | (2,394 | ) |
| Total non-operating expense,  net                                                         |       | (1,206                                 | )          | (1,620 | ) | (1,656 | ) |
| Loss before income taxes                                                                  |       | (12,609                                | )          | (8,974 | ) | (7,450 | ) |
| Provision for income taxes                                                                |       | 805                                    |       | 481 |   | 286 |   |
| Net loss                                                                                  |       | $                                      | (13,414    | ) | $ | (9,455 | ) | $ | (7,736 | ) |
| Basic and diluted net loss per  common share                                              |       | $                                      | (0.20      | ) | $ | (0.16 | ) | $ | (0.17 | ) |
| Shares used in computing basic and diluted net loss  per common share                |       | 65,750                                 |       | 57,732 |   | 46,222 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

----

**INTELLISYNC CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS**

**(In thousands)**

| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** **     | ** **        | ** ** | **Accumulated**        | ** **  | ** **        | ** ** | ** ** | ** **  |
|----------------------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|----------------|-------------------|------------|------------------------|-------------|-------------------|------------|------------|-------------|
| ** **                                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Receivable**   | ** ** | **Deferred**     | ** **     | ** **        | ** ** | **Other**              | ** **  | ** **        | ** ** | ** ** | ** **  |
| ** **                                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **From**       | ** ** | **Stock**        | ** ** | **Accumulated**  | ** **     | **Comprehensive** | ** ** | **Stockholders’** | ** **  | **Comprehensive** | ** ** |
| ** **                                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stockholders** | ** ** | **Compensation** | ** **     | **Deficit**       | ** ** | **Income (Loss)** | ** **  | **Equity**        | ** ** | **Loss**   | ** **  |
| **Balance  at July 31, 2002**                                               |       |                  | 45,851     |        |       |           | $ 46  |             |       |             | $ 149,193 |              |       |                   | $ (330 | )                 |       |       | $ (226 | ) |   |   | $ (113,925 | ) |   |   | $ 126 |   |   |   | $ 34,884 |   |   |   |   |   |   |
| Issuance of common  stock upon exercise of stock options                         |       |                  | 1,374      |        |       |           | 1          |             |       |             | 2,042          |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 2,043 |   |   |   | $      — |   |   |
| Issuance of common  stock under Employee Stock Purchase Plan                     |       |                  | 522        |        |       |           | 1          |             |       |             | 164            |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 165 |   |   |   | — |   |   |
| Unrealized loss on  securities available-for-  sale                              |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | (159 | ) |   |   | (159 | ) |   |   | (159 | ) |   |
| Realized loss on  securities available- for-  sale                               |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | 43 |   |   |   | 43 |   |   |   | 43 |   |   |
| Currency  translation adjustment                                                 |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | (16 | ) |   |   | (16 | ) |   |   | (16 | ) |   |
| Issuance of common  stock in connection with acquisitions                        |       |                  | 134        |        |       |           | —     |             |       |             | 500            |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 500 |   |   |   | — |   |   |
| Cancellation of  common stock in connection with Windward acquisition            |       |                  | (128       | )           |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Repayments by  stockholders                                                      |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | 330         |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 330 |   |   |   | — |   |   |
| Reclassification  of vested common stock under Restricted Stock Option Plan |       |                  | —     |        |       |           | —     |             |       |             | 112            |              |       |                   | (112        | )                 |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Reversal of  stock-based compensation on termination of employees                |       |                  | —     |        |       |           | —     |             |       |             | (69            | )                 |       |                   | —      |              |       |       | 69          |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Deferred  compensation, net                                                      |       |                  | —     |        |       |           | —     |             |       |             | 2,044          |              |       |                   | —      |              |       |       | (2,044      | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of  deferred compensation                                           |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | 1,742       |   |   |   | — |   |   |   | — |   |   |   | 1,742 |   |   |   | — |   |   |
| Net loss                                                                         |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | (7,736 | ) |   |   | — |   |   |   | (7,736 | ) |   |   | (7,736 | ) |   |
| **Balance  at July 31, 2003**                                               |       |                  | 47,753     |        |       |           | 48         |             |       |             | 153,986        |              |       |                   | (112        | )                 |       |       | (459        | ) |   |   | (121,661 | ) |   |   | (6 | ) |   |   | 31,796 |   |   |   | $ (7,868 | ) |   |
| Issuance of common  stock upon exercise of stock options                         |       |                  | 1,561      |        |       |           | 2          |             |       |             | 1,793          |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 1,795 |   |   |   | $      — |   |   |
| Issuance of common  stock under Employee Stock Purchase Plan                     |       |                  | 279        |        |       |           |       |             |       |             | 337            |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 337 |   |   |   | — |   |   |
| Unrealized loss on  securities available-for-  sale                              |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | (126 | ) |   |   | (126 | ) |   |   | (126 | ) |   |
| Currency  translation adjustment                                                 |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | (259 | ) |   |   | (259 | ) |   |   | (259 | ) |   |
| Issuance of common  stock in connection with acquisitions                        |       |                  | 15,999     |        |       |           | 16         |             |       |             | 69,230         |              |       |                   | —      |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 69,246 |   |   |   | — |   |   |
| Reclassification  of vested common stock under Restricted Stock Option Plan |       |                  | —     |        |       |           | —     |             |       |             | 198            |              |       |                   | (198        | )                 |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Repayments by  stockholders                                                      |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | 310         |              |       |       | —      |   |   |   | — |   |   |   | — |   |   |   | 310 |   |   |   | — |   |   |
| Deferred  compensation, net                                                      |       |                  | —     |        |       |           | —     |             |       |             | 288            |              |       |                   | —      |              |       |       | (286        | ) |   |   | — |   |   |   | — |   |   |   | 2 |   |   |   | — |   |   |
| Amortization of  deferred compensation                                           |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | 745         |   |   |   | — |   |   |   | — |   |   |   | 745 |   |   |   | — |   |   |
| Net loss                                                                         |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —      |              |       |       | —      |   |   |   | (9,455 | ) |   |   | — |   |   |   | (9,455 | ) |   |   | (9,455 | ) |   |
| **Balance at July 31, 2004**                                                |       |                  | 65,592     |        |       |           | 66         |             |       |             | 225,832        |              |       |                   | —      |              |       |       | —      |   |   |   | (131,116 | ) |   |   | (391 | ) |   |   | 94,391 |   |   |   | (9,840 | ) |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

F-6

 

----

**INTELLISYNC CORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS (Continued)**

**(In thousands)**

 

| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** **     | ** **        | ** ** | **Accumulated**        | ** **          | ** **        | ** ** | ** ** | ** **                            |
|--------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|----------------|------------|------------------|------------|------------------|----------------|-------------------|------------|------------------------|---------------------|-------------------|------------|------------|---------------------------------------|
| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional** | ** ** | **Receivable**   | ** ** | **Deferred**     | ** **     | ** **        | ** ** | **Other**              | ** **          | ** **        | ** ** | ** ** | ** **                            |
| ** **                                                   | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **From**       | ** ** | **Stock**        | ** ** | **Accumulated**  | ** **     | **Comprehensive** | ** ** | **Stockholders’** | ** **          | **Comprehensive** | ** ** |
| ** **                                                   | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stockholders** | ** ** | **Compensation** | ** **     | **Deficit**       | ** ** | **Income (Loss)** | ** **          | **Equity**        | ** ** | **Loss**   | ** **                            |
| Issuance of common stock  upon exercise of stock options     |       |                  | 691        |        |       |           | 1          |             |       |             | 588            |              |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | — |   |   |   | 589 |   |   |   | $      — |   |   |
| Issuance of common stock  under Employee Stock Purchase Plan |       |                  | 356        |        |       |           | —     |             |       |             | 619            |              |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | — |   |   |   | 619 |   |   |   | — |   |   |
| Unrealized loss on securities  available-for-  sale          |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | (2 | ) |   |   | (2 | ) |   |   | (2 | ) |   |
| Realized loss on  securities available-for-  sale            |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | (10 | ) |   |   | (10 | ) |   |   | (10 | ) |   |
| Currency translation  adjustment                             |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | 63 |   |   |   | 63 |   |   |   | 63 |   |   |
| Stock based compensation recovery                            |       |                  | —     |        |       |           | —     |             |       |             | (25            | )                 |       |                   | —              |              |       |       | —                                |   |   |   | — |   |   |   | — |   |   |   | (25 | ) |   |   | — |   |   |
| Net loss                                                     |       |                  | —     |        |       |           | —     |             |       |             | —         |              |       |                   | —              |              |       |       | —                                |   |   |   | (13,414 | ) |   |   | — |   |   |   | (13,414 | ) |   |   | (13,414 | ) |   |
| **Balance at July 31, 2005**                            |       |                  | 66,639     |        |       |           | $ 67  |             |       |             | $ 227,014 |              |       |                   | $  — |              |       |       | $     — |   |   |   | $ (144,530 | ) |   |   | $ (340 | ) |   |   | $ 82,211 |   |   |   | $ (13,363 | ) |   |

 

The accompanying notes arean integral part of these consolidated financial statements.

F-7

 

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**INTELLISYNC CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

| ** **                                                                   | ** ** | **Year Ended July 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating  activities:                                       |       |                                   |       |   |   |   |   |
| Net loss                                                                     |       | $                                      | (13,414    | ) | $ | (9,455 | ) | $ | (7,736 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                   |       |   |   |   |   |
| Purchased in-process research and development                                |       | 220                                    |       | 3,667 |   | 406 |   |
| Other-than-temporary impairment of investments                               |       | —                                 |       | — |   | 2,394 |   |
| Provision for (recovery) doubtful accounts                                   |       | 111                                    |       | 316 |   | (273 | ) |
| Depreciation                                                                 |       | 1,258                                  |       | 1,037 |   | 1,358 |   |
| Amortization                                                                 |       | 8,922                                  |       | 4,652 |   | 709 |   |
| Amortization of debt issuance costs                                          |       | 660                                    |       | 242 |   | — |   |
| Non-cash stock compensation (recovery)                                       |       | (25                                    | )          | 745 |   | 1,742 |   |
| Realized loss (gain) on sale of investment                                   |       | 10                                     |       | — |   | (43 | ) |
| Changes  in assets and liabilities:                                          |       |                                   |       |   |   |   |   |
| Accounts receivable                                                          |       | (2,963                                 | )          | (2,847 | ) | (1,556 | ) |
| Inventories                                                                  |       | 23                                     |       | 44 |   | (37 | ) |
| Other current assets                                                         |       | (402                                   | )          | (1,372 | ) | 302 |   |
| Other assets                                                                 |       | (596                                   | )          | (117 | ) | 115 |   |
| Accounts payable                                                             |       | 1,022                                  |       | (2,253 | ) | 1,487 |   |
| Accrued liabilities                                                          |       | (1,258                                 | )          | (3,021 | ) | (2,882 | ) |
| Deferred revenue                                                             |       | 1,830                                  |       | 632 |   | (795 | ) |
| Other liabilities                                                            |       | —                                 |       | 184 |   | — |   |
| Net cash used in operating activities                                        |       | (4,602                                 | )          | (7,546 | ) | (4,809 | ) |
| Cash flows from investing  activities:                                       |       |                                   |       |   |   |   |   |
| Purchase of property and equipment                                           |       | (2,426                                 | )          | (759 | ) | (451 | ) |
| Purchase of short term investments                                           |       | (8,080                                 | )          | (35,616 | ) | (8,349 | ) |
| Proceeds from the sales of short-term investments                            |       | 19,946                                 |       | 7,650 |   | 9,625 |   |
| Proceeds from the maturities of short-term investments                       |       | 9,450                                  |       | 6,500 |   | 9,385 |   |
| Increase in restricted cash                                                  |       | (445                                   | )          | (3,679 | ) | — |   |
| Acquisitions, net of cash acquired                                           |       | (8,048                                 | )          | (18,939 | ) | (2,428 | ) |
| Other investments                                                            |       | —                                 |       | (200 | ) | — |   |
| Net cash provided by (used in) investing activities                          |       | 10,397                                 |       | (45,043 | ) | 7,782 |   |
| Cash flows from financing  activities:                                       |       |                                   |       |   |   |   |   |
| Principal payments on borrowings                                             |       | —                                 |       | (1,764 | ) | (2,000 | ) |
| Principal payments on capital lease                                          |       | (132                                   | )          | (36 | ) | — |   |
| Proceeds from long term debt                                                 |       | —                                 |       | 60,000 |   | — |   |
| Debt issuance costs                                                          |       | (237                                   | )          | (2,948 | ) | — |   |
| Note repayments from (advances to) stockholders                              |       | —                                 |       | 310 |   | 330 |   |
| Proceeds upon exercise of stock options                                      |       | 589                                    |       | 1,795 |   | 2,043 |   |
| Proceeds from ESPP shares issued                                             |       | 619                                    |       | 337 |   | 165 |   |
| Net cash provided by financing activities                                    |       | 839                                    |       | 57,694 |   | 538 |   |
| Effect of exchange rate changes on cash and cash equivalents                 |       | (92                                    | )          | 44 |   | — |   |
| Net increase in cash and cash equivalents                                    |       | 6,542                                  |       | 5,149 |   | 3,511 |   |
| Cash and cash equivalents at beginning of year                               |       | 12,991                                 |       | 7,842 |   | 4,331 |   |
| Cash and cash equivalents at end of year                                     |       | $                                      | 19,533     |   | $ | 12,991 |   | 7,842 |   |
| Supplemental disclosure of cash  flow information:                           |       |                                   |       |   |   |   |   |
| Interest paid                                                                |       | $                                      | 1,597      |   | $ | 6 |   | $ | 10 |   |
| Income taxes paid                                                            |       | $                                      | 746        |   | $ | 322 |   | $ | 331 |   |
| Capital lease obligations                                                    |       | $                                      | 296        |   | $ | 231 |   | $ | — |   |
| Common stock issued in connection with business acquisition                  |       | $                                      | —     |   | $ | 69,246 |   | $ | 550 |   |
| Net non-cash stock compensation                                              |       | $                                      | —     |   | $ | 288 |   | $ | 2,044 |   |
| Reversal of stock-based compensation                                         |       | $                                      | (25        | ) | $ | — |   | $ | (69 | ) |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-8

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**INTELLISYNCCORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1   TheCompany and a Summary of its Significant Accounting Policies**

*The Company*

Intellisync Corporation(Intellisync or the “Company”) develops, markets and supports desktop,enterprise and mobile carrier-class software that enables consumers, businessexecutives and information technology professionals to extend the capabilitiesof enterprise groupware and vertical applications, data-enabled mobile devicesand other personal communication platforms. The primary software applicationsthe Company developed and marketed include push-email, data synchronization andsystems management software. The Company’s software also enables organizationsto search, find, match and synchronize identity data within their computersystems and network databases.

*Liquidity andCapital Resources*

The Company has incurredlosses and negative cash flows since inception. The Company incurred a net lossof approximately $13,414,000 and negative cash flows from operations ofapproximately $4,602,000 for fiscal 2005. The Company’s cash balances maydecline further, although the Company believes that the effects of itsstrategic actions implemented to improve revenue as well as control costs alongwith existing cash resources will be adequate to fund its operations for atleast the next 12 months. Failure to generate sufficient revenues or controlspending could adversely affect the Company’s ability to achieve its businessobjectives.

*Basis ofPresentation and Consolidation*

Theaccompanying consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. The consolidated financialstatements include the results of operations of all companies or assetsrecently acquired since the date of pertinent acquisitions. These acquisitionsinclude Starfish Software, Inc., Spontaneous Technology, Inc.,Synchrologic, Inc., Identity Systems, Tourmaline Networks, Inc., andPDAapps, Inc., the assets purchased from Loudfire, Inc., and theengineering employees transferred from SoftVision SRL in accordance with anemployee transfer agreement. Refer to Note 4, Acquisitions, for additionaldetails. All significant inter-companybalances and transactions have been eliminated in consolidation. Certain amountsin prior periods have been reclassified to conform to the current presentation.

*Use of Estimatesand Assumptions*

The preparation of theconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires the Company to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the reporting period. On an on-going basis, the Companyevaluates its estimates, including those related to provision for doubtfulaccounts, channel inventory and product returns, valuation of goodwill andintangibles, investments and other long-lived assets, restructuring accruals,valuation of income taxes, license and services revenue recognition andcontingencies. The Company bases its estimates on various factors andinformation which may include, but are not limited to, history and priorexperience, experience of other enterprises in the same industry, new relatedevents, current economic conditions and information from third partyprofessionals that are believed to be reasonable under the circumstances, theresults of which form the basis for taking judgments about the carrying valuesof assets 

F-9

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andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

*Translation ofFinancial Statements of Foreign Entities*

The functional currency ofthe Company and most of its subsidiaries is the applicable local currency inaccordance with Statement of Financial Accounting Standards (SFAS) No. 52,*“Foreign Currency Translation,”*while the Company’s reporting currency is the U.S. dollar. Assets andliabilities of the Company and its subsidiaries with functional currenciesother than the U.S. dollar are translated into U.S. dollar equivalents at therate of exchange in effect on the balance sheet date. Revenues and expenses aretranslated at the weighted average monthly exchange rates throughout the year. Translationgains or losses are recorded as a separate component of stockholders’ equityand transaction gains and losses are reflected in net income.

For fiscal 2005 and 2004,the Company recorded net translation gain of $63,000 and net translation lossof $259,000, respectively. For fiscal 2005, 2004 and 2003, the Company realizednet transaction losses of $134,000, $19,000 and $4,000, respectively. TheCompany does not currently undertake any foreign currency hedging activities. Dueto the number of currencies involved, the constant change in currency exposuresand the substantial volatility of currency exchange rates, the effect ofexchange rate fluctuations upon the Company’s future operating results could besignificant.

*Revenue Recognition*

Revenue is derived from software licenses and relatedservices, which include implementation and integration of software solutions,post contract support, training, hosting and consulting.

Transactionsinvolving the sale of software products are accounted for under the AmericanInstitute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2,“*Software Revenue Recognition*,” asamended by SOP No. 98-9, “*Modification of 97-2,Software Revenue Recognition with Respect to Certain Transactions*.”For contracts with multiple elements, and for which vendor-specific objectiveevidence of fair value for the undelivered elements exists, revenue isrecognized for the delivered elements based upon the residual contract value asprescribed by SOP No. 98-9. The Company has accumulated relevantinformation from contracts to use in determining the availability ofvendor-specific objective evidence and believes that such information complieswith the criteria established in SOP No. 97-2 as follows:

·       Customersare required to pay separately for maintenance. Optional stated future renewalrates are included as a term of the contracts. The Company uses the renewalrate as vendor-specific objective evidence of fair value for maintenance.

·       TheCompany charges standard hourly rates for consulting services, when suchservices are sold separately, based upon the nature of the services andexperience of the professionals performing the services.

·       Fortraining, the Company charges standard rates for each course based upon theduration of the course, and such courses are separately priced in contracts.The Company has a history of selling such courses separately.

Revenue from license fees is recognized whenpersuasive evidence of an arrangement exists, delivery of the product hasoccurred, no significant Company obligations with regard to implementation orintegration exist, the fee is fixed or determinable and collectibility isprobable. Arrangements for which the fees are not deemed probable forcollection are recognized upon cash collection. Payments from customersreceived in advance of revenue recognition are recorded as deferred revenue.

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Service revenue primarily comprises revenue fromconsulting fees, maintenance contracts, training and hosting fees. Servicerevenue from consulting, hosting and training is recognized as the service isperformed. Maintenance contracts include the right to unspecified upgrades andongoing support. Maintenance revenue is deferred and recognized ratably asservices are provided over the maintenance period.

License and service revenue on contracts involvingsignificant implementation, customization or services, that are essential to thefunctionality of the software is recognized over the period of each engagement,primarily using the percentage-of-completion method. Costs incurred aregenerally used as the measure of progress towards completion as prescribed bySOP No. 81-1, “*Accounting for Performanceof Construction-Type and Certain Product-Type Contracts*.” Revenuefor these arrangements is classified as license revenue and service revenuebased upon estimates of fair value for each element, and the revenue isrecognized based on the percentage-of-completion ratio for the arrangement. Aprovision for estimated losses on engagements is made in the period in whichthe loss becomes probable and can be reasonably estimated. The Companyconsiders a project completed when all contractual obligations have been met(generally the go live date).

The Companycurrently licenses its products directly to individuals, small businesses andcorporations, to original equipment manufacturers, or OEMs, and to distributorsand value-added resellers in North America, Europe, the Asia-Pacific region,South America and Africa. Revenue from products distributed indirectly throughmajor distributors and resellers is recognized on a sell through basis.Agreements with the Company’s major distributors and resellers contain specificproduct return privileges for stock rotation and obsolete products that aregenerally limited to contractual amounts. Reserves for estimated future returnsare provided for upon revenue recognition. Product returns are recorded as a reductionof revenue. Accordingly, the Company has established a product returns reservecomposed of 100% of product inventories held at the Company’s distributionpartners, as well as an estimated amount for returns from customers of thedistributors and other resellers as a result of stock rotation and obsoleteproducts. Such reserves are based on:

·       historicalproduct returns and inventory levels on a product by product basis;

·       currentinventory levels and sell through data on a product by product basis asreported by the Company’s major distributors worldwide;

·       demandforecast by product in each of the principal geographic markets, which isimpacted by the Company’s product release schedule, seasonal trends andanalyses developed by the Company’s internal sales and marketing group; and

·       generaleconomic conditions.

The Company licensesrights to use its technology portfolio, whereby licensees, particularly OEMs,typically pay a non-refundable license fee in one or more installments andon-going royalties based on their sales of products incorporating the Company’stechnology. Revenue from OEMs under minimum guaranteed royalty arrangements,which are not subject to future obligations, is recognized when such royaltiesare earned and become payable. Royalty revenue is recognized as earned whenreasonable estimates of such amounts can be made. Royalty revenue that issubject to future obligations is recognized when such obligations are fulfilled.Royalty revenue that exceeds minimum guarantees is recognized in the periodearned.

*Cash and CashEquivalents*

The Company considers allhighly liquid investments with an original maturity or maturity at date ofpurchase of three months or less to be cash equivalents.

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*Short TermInvestments*

The Company considers cashinvested in highly liquid financial instruments with original maturitiesgreater than three months to be short-term investments, which are accounted forin accordance with SFAS No. 115, “*Accounting for CertainInvestments in Debt and Equity Securities*.” SFAS No. 115requires the Company to classify debt and equity securities into one of threecategories: held to maturity, trading or available-for-sale. As of July 31,2005 and 2004, the Company’s short-term investments include auction ratepreferred stock, auction rate receipts, municipal bonds and fixed-incomeannuities which are valued using the amortized cost method which approximatesmarket value due to short maturities of these instruments. Short-terminvestments also include United States government backed securities and equitysecurities, which carried at fair value, with the unrealized gains and lossesreported as a separate component of stockholders’ equity. The Company intendsto make such funds readily available for operating purposes. Realized gains andlosses on sales of investment securities are included in the consolidatedstatements of operations. The cost of securities sold is based on the specificidentification method. Refer to Note 3 for more details on short-terminvestments. The Company monitors its investments for impairment by consideringcurrent factors including the economic environment, market conditions andoperational performance and other specific factors relating to the businessunderlying the investment, and records reductions in carrying values whennecessary. Changes in value of these investments are primarily related tochanges in interest rates and are considered temporary in nature. Except fordeclines in fair value that are not considered temporary, net unrealized gainsor losses on these investments are reported as a component of accumulatedcomprehensive income or loss in accumulated other comprehensive loss.

*Inventories*

Inventories consist principally of cables, softwareand related documentation, which are stated at the lower of cost (first-in,first-out) or market. Market is “net realizable value”, which, forfinished goods is the estimated selling price, less costs to complete anddispose of the inventory. For raw materials, it is replacement cost or the costof acquiring similar products from the Company’s vendors.

The Company initially records its inventory at costand each quarter evaluates the difference, if any, between cost and market. Thedetermination of the market value of inventories is primarily dependent onestimates of future demand for the Company’s products, which in turn is basedon other market estimates such as technological change, competitor actions andestimates of future selling prices.

The Company recordswrite-downs for the amount that cost of inventory exceeds its estimated marketvalue. No adjustment is required when market value exceeds cost.

*SoftwareDevelopment Costs*

Software development costsincurred prior to the establishment of technological feasibility are includedin research and development and are expensed as incurred. The Company definesestablishment of technological feasibility at the point which product reachesbeta (testing for errors and usability of interface). Software developmentcosts incurred subsequent to the establishment of technological feasibilitythrough the period of general market availability of the product arecapitalized in accordance with SFAS No. 86, “*Accountingfor the Costs of Computer Software to be Sold, Leased or Otherwise Marketed*.”During fiscal 2005, 2004 and 2003, all software development costs have beenexpensed as incurred due to the period of time between beta and making themgenerally available has been short.

*Property andEquipment*

Property and equipment are stated at cost. Depreciationand amortization is computed using the straight-line method over theestimated useful lives of the assets. Computerequipment and software are depreciated generally over three years; furnitureand office equipment are depreciated generally over four 

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years;and leasehold improvements are amortized overthe estimated useful lives, or the term of the related leases, whichever isshorter. Repair and maintenance costs arecharged to operations as incurred and major improvements are capitalized. TheCompany reviews the carrying amount of fixed assets whenever events or changesin circumstances indicate that the carrying amount of the assets may not berecoverable. The Company, therefore, evaluates the remaining life andrecoverability of such equipment in light of current market conditions. Upondisposal, the assets and related accumulated depreciation are removed from theCompany’s accounts and resulting gains and losses are recorded in other, net.

The Company follows the provisions of the AICPA’s SOP No. 98-1“*Accounting for the Costs of Computer SoftwareDeveloped or Obtained for Internal Use*,” in determining the amountof developed in-house software costs to be capitalized. The Company applies theprovisions of the Financial Accounting Standards Board (FASB) Emerging IssuesTask Force Issue (EITF) No. 00-02 “*Accountingfor Website Development Costs*” in determining the amount of Websitedevelopment costs to be capitalized. These standards require capitalization ofcertain direct development costs associated with internal use software andWebsite development costs. Costs to be capitalized include internal andexternal direct project costs including, among others, payroll and labor,material, and services. These costs are being amortized over the estimateduseful life. Costs incurred on new projects in a preliminary phase and projectsthat contract negotiations have not begun, as well as maintenance, and trainingcosts are charged to expense as incurred.

The Company’s capitalizedsoftware costs were $1,773,000 and $1,519,000 with related accumulateddepreciation of $1,416,000 and $1,260,000 at July 31, 2005 and 2004,respectively. Capitalized software costs are included in property and equipmentand are amortized generally over three years.

*BusinessCombinations and Asset Purchases*

Business Combinations are accounted for in accordancewith SFAS No. 141, *“BusinessCombinations”* which effectively requires that the purchase method ofaccounting for business combinations be followed. In accordance with SFAS 141,the Company determines the recognition of intangible assets based on thefollowing criteria: (1) the intangible asset arises from contractual orother rights, or (2) the intangible is separable or divisible from theacquired entity and capable of being sold, transferred, licensed, returned orexchanged. In conjunction with business combinations, the Company may recordrestructuring liabilities of the acquired company in accordance with EITF No. 95-3,*“Recognition of Liabilities in Connectionwith a Purchase Business Combination.”*These costs representliabilities that are recorded as part of the purchase price allocation for theacquisition. Accordingly, the Company’s recent acquisitions of Synchrologic andIdentity Systems were accounted for using the guidance in SFAS No. 141 andEITF No. 95-3.

EITF No. 98-3, *“Determining Whether a Nonmonetary TransactionInvolves Receipt of a Productive Asset or of a Business,*” definesthe elements necessary to evaluate whether a business has been received in anonmonetary exchange transaction. EITF No. 98-3 defines a businessas a self-sustaining integrated set of activities and assets conducted andmanaged for the purpose of providing a return to investors. A business consistsof (a) inputs, (b) processing applied to those inputs, and (c) resultingoutputs that are used to generate revenues. Pursuant to EITF No. 98-3,since the acquisitions of certain assets of SoftVision in fiscal 2004 andLoudfire in fiscal 2003 did not have all the required elements to be consideredthe purchase of a business, the Company recorded the transactions as an assetpurchase.

*Goodwill andIntangible Assets*

Goodwill represents the excess of purchase price,including acquisition costs, of acquired businesses over the fair value of theidentifiable net assets acquired. Goodwill is evaluated in terms of its fairvalue annually in the fourth fiscal quarter or more frequently if impairmentindicators arise and any impairment recognized at that time. Refer to “*Impairment of Long-Lived Assets*”below.

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Impairment of goodwill is tested at the reporting unitlevel by comparing the reporting unit’s carrying amount, including goodwill, tothe fair value of the reporting unit. The Company has two reporting units andestimates the each unit’s fair value using the present value of expected futurecash flows. Cash flow forecasts used in evaluation of goodwill were based ontrends of historical performance and management’s estimate of futureperformance. If the carrying amount of a reporting unit exceeds its fair value,goodwill is considered impaired and a second step is performed to measure theamount of impairment loss, if any.

The Company reviews goodwill for potential impairmentas of July 31 each year and was not required to record a goodwillimpairment charge as a result of the review. The Company will continue toperform the goodwill impairment review annually or more frequently if facts andcircumstances warrant a review.

Other intangible assets result from the application ofthe purchase method of accounting for the Company’s acquisitions and arecomposed of the unamortized identifiable assets including acquired developedand core technology, patents, trademarks, customer base, covenantnot-to-compete, customer contracts and acquired workforce (not accounted as abusiness combination). Developed and core technology, patents and customer baseare amortized over the period of benefit, generally three to seven years. Trademarksare amortized over the period of benefit of two or three years. Covenantnot-to-compete, customer contracts and acquired workforce are amortized overthe period of benefit, ranging from nine months to three years.

Refer to Note 5 for moredetails on goodwill and other intangible assets.

*Impairment ofLong-Lived Assets*

The Company evaluates long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable in accordance with SFAS No. 144, “*Accounting for the Impairment or Disposal of Long-Lived Assets*.”An asset is considered impaired if its carrying amount exceeds the future netcash flow the asset is expected to generate. If such asset is considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the asset exceeds its fair market value. The Companyassesses the recoverability of its long-lived and intangible assets bydetermining whether the unamortized balances can be recovered throughundiscounted future net cash flows of the related assets. The amount ofimpairment, if any, is measured based on projected discounted future net cashflows using a discount rate reflecting the Company’s average cost of capital.

During fiscal 2003, theCompany disposed its limited partnership interest in Azure Venture Partners,LLP, a venture capital fund. The disposal of the interest allowed the Companyto avoid commitments for further investments in equity instruments of variousprivately-held companies made through Azure, many of which had not generatedadequate returns. In addition, the disposal is in line with the Company’sstrategy of focusing resources and efforts more on its core operations. Consequently,the Company recorded an other-than-temporary impairment charge of $2,394,000. Totalproceeds of $75,000 from the sale of the interest were received in May 2003,which approximated the carrying value of the investment after the writedown.

*Long-TermInvestments*

Long-term investments thatare not represented by marketable securities are carried at cost lesswrite-downs for declines in value that are judged to be other-than-temporary. Declinesin fair value are considered other-than-temporary when: (i) the carryingvalue of the investments exceeds the fair value of such investments usingcurrent assumptions and (ii) the timing and/or extent of cash flows expectedto be received on the investments has adversely changed from the previousvaluation date. Dividends are recorded in other, net, when received.

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*Restricted Cash*

Cash and investments that are restricted for use, forlegal or other contractual reasons, are segregated and classified as restrictedcash. The Company’s restricted cash consists of cash held by a financialinstitution as collateral under the terms of the interest rate swap agreement,into which the Company entered during fiscal 2004, , which is more fullyexplained in footnote 7, to match any unfavorable mark-to-market exposure (fairvalue) on the swap. The amount of collateral required totals a minimum of$1,800,000 plus an amount equal to the unfavorable mark-to-market exposure onthe swap. Generally, the required collateral will rise as interest rates rise. Asof July 31, 2005 and 2004, the Company has posted approximately $4,181,000and $3,736,000, respectively, of collateral under the swap agreement which isincluded in “Restricted Cash” in the consolidated balance sheet.

Restricted cash alsoincludes cash held by financial institutions as collateral on letters of creditin connection with the Company’s certain operating lease obligations. Thisportion of the restricted cash was $125,000, net of current portion of $196,000at July 31, 2005, and $296,000, net of current portion of $101,000 at July 31,2004. The short-term and the long-term portions are classified as “OtherCurrent Assets” and “Restricted Cash,” respectively, in the consolidatedbalance sheets.

*Contingencies*

The Company evaluatescontingent liabilities in accordance with SFAS No. 5, *“Accounting for Contingencies.”*TheCompany assesses the likelihood of any adverse judgments or outcomes to apotential claim or legal proceeding, as well as potential ranges of probablelosses, when the outcome of the claims or proceedings are probable andreasonably estimable. A determination of the amount of accrued liabilitiesrequired, if any, for these contingencies is made after analysis of eachmatter. Because of uncertainties related to these matters, the Company basesits estimates on the information available at the time. As additionalinformation becomes available, the Company reassesses the potential liabilityrelated to its pending claims and litigation and may revise its estimates. Anyrevisions in the estimates of potential liabilities could have a materialimpact on its results of operations and financial position.

*Advertising Expense*

In accordance with the EITF No. 01-09, “Accountingfor Consideration Given by a Vendor to a Customer”, the Company carefullyevaluates the substance of any co-op advertising support. To the extent thatthe co-op advertising support relates to the acquisition of advertisingmaterial which the Company could obtain independently, these costs areconsidered advertising or sales and marketing expense. To the extent that theyrelate to promotional support for the Company’s customers’ advertisingactivities, they are considered reductions of revenue, in accordance with theEITF 01-09. The Company evaluates co-op advertising commitments on acustomer by customer basis considering actions taken throughout the course ofthe year, and the Company’s prior history in dealing with customer co-opadvertising issues. Costs accounted for as reductions of revenue amounted to$65,000, $152,000 and $179,000 in fiscal 2005, 2004 and 2003, respectively.

Other advertising costs,approximately $2,055,000, $1,072,000 and $626,000 for fiscal 2005, 2004 and2003, respectively, are charged to sales and marketing expense as incurred.

*Income Taxes*

Income taxes are computedusing an asset and liability approach, which requires the recognition of taxespayable or refundable for the current year and deferred tax assets andliabilities for the future tax consequences of events that have been recognizedin the Company’s consolidated financial statements or tax returns. Themeasurement of current and deferred tax assets and liabilities are based onprovisions of the enacted tax law and the effects of future changes in tax lawsor rates are not anticipated. Deferred tax 

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assetsare reduced, if necessary, by the amount of any tax benefits that are notexpected to be realized based on available evidence. The Company is subject toincome tax audits in all of the jurisdictions in which it operates and, as aresult, must also assess exposures to any potential issues arising from currentor future audits of current and prior years tax returns. Accordingly, theCompany must assess such potential exposure and, where necessary, provide areserve to cover any expected loss. To the extent that the Company establishessuch a reserve, the provision for income taxes would be increased. If theCompany ultimately determines that payment of these amounts is unnecessary, itreverses the liability and recognizes a tax benefit during the period in whichit determines that the liability is no longer necessary. The Company records anadditional charge in the provision for income taxes in the period in which itdetermines that the recorded tax liability is less than it expects the ultimateassessment to be.

*ComprehensiveIncome (Loss)*

The Company has adoptedthe accounting treatment prescribed by SFAS No. 130. Comprehensive income(loss) is defined as a change in equity of a company during a period fromtransactions and other events and circumstances excluding transactionsresulting from investments by owners and distributions to owners. The primarydifference between net income (loss) and comprehensive income (loss) for the Companyarises from foreign currency translation adjustments and net unrealizedgains/(losses) on available-for-sale securities.

*Concentration ofSupply and Credit Risk*

The Company depends on development tools provided by alimited number of third party vendors. Together with application developers,the Company relies primarily upon software development tools provided bycompanies in the personal computer (PC) and mobile computing device industries.If any of these companies fail to support or maintain these development tools,the Company will have to support the tools itself or transition to anothervendor. Any maintenance or support of the tools by the Company or transition toother tools could be time consuming, could delay product release and upgradeschedule and could delay the development and availability of third partyapplications used on the Company’s products. Failure to procure the neededsoftware development tools or any delay in availability of third partyapplications could negatively impact the Company’s ability and the ability ofthird party application developers to release and support the Company’sproducts or they could negatively and materially affect the acceptance anddemand for the Company’s products, business and prospects.

Financial instruments that potentially subject theCompany to significant concentrations of credit risk consist principally ofcash, cash equivalents, investments and trade accounts receivable. The Companyplaces its cash, cash equivalents and short-term investments primarily inauction rate preferred stock, auction rate receipts, certificates of deposit,commercial paper, fixed-income annuities, government notes and bonds and moneymarket accounts. At July 31, 2005, the Company held its depositoryaccounts with six financial institutions in the United States, three financialinstitutions in Japan, and eleven financial institutions in other parts of theworld. Deposits with these institutions may exceed the amount of insuranceprovided on such deposits. The Company has not historically experienced anylosses on deposits held at these institutions. The Company, by policy, limitsthe amount of credit exposure for cash equivalents and investments to any oneissuer.

Accounts receivable are typically unsecured and arederived from revenues earned from customers located throughout the world, whichminimizes the concentration of credit risk. The Company performs ongoing creditevaluations of its customers and maintains allowances for potential creditlosses. Historically, such losses have been within management’s expectations.

F-16

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Thefollowing table details the activity in the allowances for accounts receivable (in thousands):

| **Classification**                                   | ** ** | ** ** | ** ** | **Balance at  beginning of  period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Deductions /  Writeoffs** | ** ** | **Balance  at end of  period** | ** ** |
|------------------------------------------------------|------------|------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|
| Provision for doubtful  accounts for the year ended: | ** ** |       | ** ** | ** **                                     |       |                                          | ** ** | ** **                       |       |                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| July 31, 2003                                   |       |       | $          | 725                                            | ** ** |                                          |       | $                                | (273       | )                                        |       |   | $ | 112 | ** ** |   |   | $ | 340 | ** ** |   |
| July 31, 2004                                   |       |       | $          | 340                                            | ** ** |                                          |       | $                                | 316        | ** **                               |       |   | $ | 186 | ** ** |   |   | $ | 470 | ** ** |   |
| July 31,  2005                                  |       |       | $          | 470                                            | ** ** |                                          |       | $                                | 111        | ** **                               |       |   | $ | 17 | ** ** |   |   | $ | 564 | ** ** |   |

 

Verizon Wireless accounted for 10% of the totalaccounts receivable balance at July 31, 2005 and 2004. No other customersaccounted for more than 10% of total of accounts receivable during the sameperiods. No customer accounted for more than 10% of the total revenue forfiscal 2005 and 2004. Ingram Micro US accounted for 10% of the total revenuefor fiscal 2003. In accordance with the Company’s revenue recognition policy,such revenue from a major distributor represents revenue recognized at the timethe Company’s products were sold to end-user customers. No end-user customers,direct or through distributors and resellers, accounted for more than 10% oftotal revenue during the same periods.

Historically, the Company’ssales are generally denominated in United States dollars. Recently, as a resultprimarily of its recent acquisitions, the Company has increasingly generated aportion of its revenues and incurred a portion of its expenses in Euros,British pounds, the Japanese Yen and Australian dollars. The Company currentlydoes not have any hedging or similar foreign currency contracts to mitigate itsexposure to the risk of changes in foreign currency rates.

*Fair Value ofFinancial Instruments*

The carrying amounts ofcash and cash equivalents, short-term investments, accounts receivable,accounts payable and accrued expenses approximate their respective fair valuesbecause of the short-term maturity of these items. The carrying value oflong-term debt and capital lease obligations approximates fair value.

*Stock-BasedCompensation*

The Company accounts for non-cash stock-based employeecompensation using the intrinsic method in accordance with AccountingPrinciples Board (APB) Opinion No. 25, “*Accountingfor Stock Issued to Employees and Related Interpretations*,” andcomplies with the disclosure provisions of SFAS No. 123, “*Accounting for Stock-Based Compensation*” and SFAS No. 148,“*Accounting for Stock-Based Compensation, Transitionand Disclosures*.” Stock and other equity instruments issued tonon-employees is accounted for in accordance with SFAS No. 123 and EITF No. 96-18,“*Accounting for Equity Instruments Issued to Otherthan Employees for Acquiring, or in Conjunction with Selling Goods or Services*”and valued using the Black Scholes model. Expense associated with stock-basedcompensation is being amortized on an accelerated basis over the vesting periodof the individual award consistent with the method described in FASBInterpretation (FIN) No. 28.

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Ifcompensation cost for the Company’s stock plans had been determined consistentwith SFAS No. 123 “*Accounting for Stock-BasedCompensation*,” the Company’s net loss and loss per common sharewould have been adjusted to the pro-forma amounts indicated below (inthousands, except per common share data):

| ** **                                                                                                  | ** ** | **Year Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net loss as  reported                                                                                       |       | $                                      | (13,414    | ) | $ | (9,455 | ) | $ | (7,736 | )) |
| Add (Deduct):  Stock-based employee compensation expense (recovery) included in reported net  loss          |       | (25                                    | )          | 745 |   | 1,742 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value method  for all awards |       | (6,400                                 | )          | (3,978 | ) | (1,058 | ) |
| Pro forma net  loss                                                                                         |       | $                                      | (19,839    | ) | $ | (12,688 | ) | $ | (7,052 | ) |
| Basic and diluted net loss per common share as  reported                                                    |       | $                                      | (0.20      | ) | $ | (0.16 | ) | $ | (0.17 | ) |
| Basic and diluted  pro forma net loss per common share                                                      |       | $                                      | (0.30      | ) | $ | (0.22 | ) | $ | (0.15 | ) |

 

Because the Black-Scholes option valuation model wasdeveloped for traded options and requires the input of subjective assumptionsand the number of future shares to be issued or cancelled is not known, theresulting pro forma compensation cost may not be representative of that to beexpected in future years.

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option pricing model with the following weighted averageassumptions:

| ** **                | ** ** | **Stock Option Plans**       | ** ** | **Employee Stock Purchase Plan** | ** ** |
|---------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **Year Ended July 31,** | ** ** | **Year Ended July 31,**          | ** ** |
| ** **                | ** ** | **2005**                               | ** ** | **2004**                                        | ** ** | **2003** | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** | ** 2003 ** | ** ** |
| Expected life (in  years) |       | 4.5                                    |       | 3.5                                             |       | 3.4 |   |   | 1.0 |   |   |   | 1.0 |   |   |   | 0.5 |   |   |
| Risk-free  interest rate  |       | 4.07                                   | %          | 3.44                                            | %          | 2.34 | % |   | 2.03 | % |   |   | 1.27 | % |   |   | 1.22 | % |   |
| Stock price  volatility   |       | 110                                    | %          | 118                                             | %          | 132 | % |   | 125 | % |   |   | 131 | % |   |   | 131 | % |   |
| Expected dividend yield   |       | —                                 |       | —                                          |       | — |   |   | — |   |   |   | — |   |   |   | — |   |   |

 

Thefollowing is a summary of weighted-average grant date fair values:

| ** **                                    | ** ** | **Weighted-Average Grant  Date Fair Value** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Year Ended July 31,**                     | ** ** |
| ** **                                    | ** ** | **2005**                                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Options granted  under Stock Option Plans     |       | $                                                          | 1.67       |   | $ | 2.55 |   | $ | 0.90 |   |
| Shares granted under the  Stock Purchase Plan |       | $                                                          | 1.37       |   | $ | 0.79 |   | $ | 0.30 |   |

 

Starting in the firstquarter of fiscal 2006, the Company will account for stock options under SFAS No. 123(R), *“Share-BasedPayment.”* Refer to Note 2, Recently Issued Accounting Pronouncements,for further details.

*DerivativeInstruments*

The Company applies SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities*,” as amended, which establishes accounting and reportingstandards for derivative instruments and for hedging activities. SFAS No. 133requires that an entity recognize derivatives as either assets or liabilitieson the balance sheet and measure those instruments at fair value. Theaccounting for changes in the fair value of a derivative depends on the intendeduse of the derivative and the resulting designation. The Company designates itsderivatives based upon criteria established by SFAS No. 133. For aderivative designated as a 

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fairvalue hedge, the gain or loss is recognized in earnings in the period of changetogether with the offsetting loss or gain on the hedged item attributed to therisk being hedged. For a derivative designated as a cash flow hedge, theeffective portion of the derivative’s gain or loss is initially reported as acomponent of accumulated other comprehensive income and subsequentlyreclassified into earnings when the hedged exposure affects earnings. Theineffective portion of the gain or loss is reported in earnings immediately. Referto Note 7 for details on the Company’s only derivative instruments.

*Net Income (Loss)Per Common Share*

Net income (loss) per common share is computed inaccordance with SFAS No. 128. Basic net income (loss) per common share iscomputed using the weighted average common shares outstanding during the period.Diluted net income (loss) per common share is computed using the weightedaverage common shares and dilutive common equivalent shares outstanding duringthe period.

In October 2004, theEITF reached a consensus on EITF No. 04-8 “*The Effectof Contingently Convertible Debt on Diluted Earnings per Share,*”that the dilutive effect of contingent convertible debt instruments (“CoCo’s”)must be included in diluted earnings per share regardless of whether thetriggering contingency has been satisfied, if dilutive. Adoption of EITF No. 04-08would be on a retroactive basis and would require restatement of prior perioddiluted earnings per share, subject to certain transition provisions. It iseffective for all periods ending after December 15, 2004. Due to the lossesthe Company incurred for fiscal 2005, diluted net loss per share does notdiffer from basic net loss per share, since potential shares of common stockissuable upon the conversion of the convertible debt are anti-dilutive for allperiods presented. EITF No. 04-8 could have a future impact on theCompany’s results of operations in the event that the potential shares ofcommon stock issuable upon conversion of the convertible debt were included inthe diluted earnings per share calculation.

**Note2   Recently Issued Accounting Pronouncements**

*Share-Based Payment*

In December 2004, the FASB issued SFAS No. 123R,*“Share-Based Payment, an amendment of FASB StatementsNo. 123 and 95.”* The principal effect of SFAS No. 123Rwill be to require the inclusion in the earnings of a compensation expense forstock option grants and employee stock plan purchases that previously was onlyreported as a disclosure in a note to the Company’s consolidated financialstatements. The Company is required to adopt the provisions of SFAS No. 123Rin the first quarter of fiscal 2006 ending October 31, 2005. The Companyis presently evaluating SFAS No. 123R and has not yet determined whichmethod it will select for its adoption of SFAS No. 123R. The Companyexpects that the adoption of SFAS No. 123R will have a material impact onits annual earnings.

StaffAccounting Bulletin (SAB) No. 107,*“Share-BasedPayment.”*On March 29, 2005, the Securities and ExchangeCommission (SEC) staff issued SAB No. 107 to express the views of the staffregarding the interaction between SFAS No. 123R and certain SEC rules andregulations and to provide the staff’s views regarding the valuation ofshare-based payment arrangements for public companies. The Company is currentlyin the process of implementing SFAS No. 123R, effective as of the firstquarter of fiscal 2006, and will take into consideration the additionalguidance provided by SAB No. 107 in connection with the implementation ofSFAS No. 123R.

*Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004*

In December 2004, theFASB issued FSP No. 109-2, “Accounting and Disclosure Guidance forthe Foreign Earnings Repatriation Provision within the American Jobs CreationAct of 2004”. The American Jobs Creation Act introduces a special one-timedividends received deduction on the repatriation of certain foreign earnings toa U.S. taxpayer (repatriation provision), provided certain criteria are met.This 

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positionprovides accounting and disclosure guidance for the repatriation provision. TheCompany does not believe the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004 nor the FSP will have a material impact onits financial condition or results of operations.

*Accounting forConditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143*

In March 2005, theFASB issued FIN No. 47, *“Accounting forConditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143,‘Accounting for Asset Retirement Obligations.’”* FIN No. 47clarifies when an entity would be required to recognize a liability for thefair value of an asset retirement obligation that is conditional on a futureevent if the liability’s fair value can be reasonably estimated. Uncertaintysurrounding the timing and method of settlement that may be conditional onevents occurring in the future would be factored into the measurement of theliability rather than the recognition of the liability. FIN No. 47 iseffective for fiscal years ending after December 15, 2005. The Company iscurrently assessing the impact that the interpretation may have on itsconsolidated financial position and results of operations.

*Accounting Changesand Error Corrections*

In June 2005, theFASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” which replaces APB Opinion No. 20,“*Accounting Changes*,” and SFAS No. 3,“*Reporting Accounting Changes in InterimFinancial Statements*.” SFAS No. 154 changes the requirementsfor the accounting and reporting of a change in accounting principle. APBOpinion No. 20 previously required that most voluntary changes in anaccounting principle be recognized by including the cumulative effect of thenew accounting principle in net income of the period of the change. SFAS No. 154now requires retrospective application of changes in an accounting principle toprior period financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change. TheStatement is effective for fiscal years beginning after December 15, 2005.The Company does not expect the adoption of this statement will have a materialimpact on its financial statements.

*Other-Than-TemporaryImpairment*

In June 2005, theFASB decided not to provide additional guidance on the meaning ofother-than-temporary impairment, and directed the staff to issue proposed FSPEITF 03-1-a, “*ImplementationGuidance for the Application of Paragraph 16 of EITF Issue No. 03-1*,”as final. The final FSP will supersede EITF Issue No. 03-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*,” and EITF Topic No. D-44,“*Recognition of Other-Than-TemporaryImpairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value*.”The final FSP (retitled FSP FAS No. 115-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments”*) will replace the guidanceset forth in paragraphs 10-18 of EITF No. 03-1 with referencesto existing other-than-temporary impairment guidance, such as SFAS No. 115,“*Accounting for Certain Investments in Debtand Equity Securities*,” SEC Staff Accounting Bulletin No. 59, “*Accounting for Noncurrent Marketable EquitySecurities*,” and APB Opinion No. 18, “*The Equity Method of Accounting for Investmentsin Common Stock.”* FSP FAS No. 115-1 will codify theguidance set forth in EITF Topic D-44 and clarify that an investor shouldrecognize an impairment loss no later than when the impairment is deemed otherthan temporary, even if a decision to sell has not been made. FSP FAS No. 115-1will be effective for other-than-temporary impairment analysis conducted inperiods beginning after September 15, 2005. The Company does not believethe adoption of FSP FAS No. 115-1 will have a significant impact onits consolidated results of operations or financial position.

F-20

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*Amortization Periodfor Leasehold Improvements*

In June 2005, theEITF reached a consensus on Issue No. 05-06, “*Determiningthe Amortization Period for Leasehold Improvements.*” The guidance requiresthat leasehold improvements acquired in a business combination or purchasedsubsequent to the inception of a lease be amortized over the lesser of theuseful life of the assets or a term that includes renewals that are reasonablyassured at the date of the business combination or purchase. The guidance iseffective for periods beginning after June 29, 2005. The adoption of EITF No. 05-06is not expected to have an impact on the Company’s financial position, resultsof operations or cash flows.

**Note 3   Balance Sheet Components**

Cashequivalents and short-term investments consist of the following (inthousands):

| ** **                   | ** ** | **July 31, 2005** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **Gross**                   | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                   | ** ** | **Cost**                    | ** ** | **Loss** | ** ** | **Gain** | ** ** | **Fair Value** | ** ** |
| Cash equivalents             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificate of deposits      |       |                        | $          | 179 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 179 |   |   |
| Commercial papers            |       |                        | 1,996      |   |   |   | — |   |   |   | (1 | ) |   |   | 1,995 |   |   |
| Government notes and bonds   |       |                        | 2,382      |   |   |   | — |   |   |   | — |   |   |   | 2,382 |   |   |
| Money market funds           |       |                        | 3,641      |   |   |   | — |   |   |   | — |   |   |   | 3,641 |   |   |
|                         |       |                        | $          | 8,198 |   |   |   | $ | — |   |   |   | $ | (1 | ) |   |   | $ | 8,197 |   |   |
| Short term investments       |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Auction rate preferred stock |       |                        | $          | 1,000 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 1,000 |   |   |
| Auction rate receipts        |       |                        | 4,500      |   |   |   | — |   |   |   | — |   |   |   | $ | 4,500 |   |   |
| Fixed income annuities       |       |                        | 4,499      |   |   |   | — |   |   |   | — |   |   |   | $ | 4,499 |   |   |
| Government notes and bonds   |       |                        | 9,385      |   |   |   | — |   |   |   | (70 | ) |   |   | 9,315 |   |   |
| Other                        |       |                        | 2          |   |   |   | 3 |   |   |   | — |   |   |   | 5 |   |   |
|                         |       |                        | $          | 19,386 |   |   |   | $ | 3 |   |   |   | $ | (70 | ) |   |   | $ | 19,319 |   |   |

 

| ** **                   | ** ** | **July 31, 2004** | ** ** |
|------------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **Gross**                   | ** ** | **Gross** | ** ** | **Gross** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amortized**               | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Estimated** | ** ** |
| ** **                   | ** ** | **Cost**                    | ** ** | **Loss** | ** ** | **Gain** | ** ** | **Fair Value** | ** ** |
| Cash equivalents             |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificate of deposit       |       |                        | $          | 121 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 121 |   |   |
| Government notes and bonds   |       |                        | 2,323      |   |   |   | — |   |   |   | — |   |   |   | 2,323 |   |   |
| Money market funds           |       |                        | 4,603      |   |   |   | — |   |   |   | — |   |   |   | 4,603 |   |   |
|                         |       |                        | $          | 7,047 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 7,047 |   |   |
| Short term investments       |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed income annuities       |       |                        | $          | 4,368 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | 4,368 |   |   |
| Government notes and bonds   |       |                        | 17,042     |   |   |   | 5 |   |   |   | (62 | ) |   |   | 16,985 |   |   |
| Auction rate preferred stock |       |                        | 15,800     |   |   |   | — |   |   |   | — |   |   |   | 15,800 |   |   |
| Auction rate receipts        |       |                        | 3,500      |   |   |   | — |   |   |   | — |   |   |   | 3,500 |   |   |
| Other                        |       |                        | 2          |   |   |   | 2 |   |   |   | — |   |   |   | 4 |   |   |
|                         |       |                        | $          | 40,712 |   |   |   | $ | 7 |   |   |   | $ | (62 | ) |   |   | $ | 40,657 |   |   |

 

The Company invests excess cash in fixed incomesecurities, consisting of both corporate and government securities, that arehighly liquid, of high-quality investment grade. The Company intends to 

F-21

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make such funds readilyavailable for operating purposes, if needed. The Company expects to realize thefull value of all these investments upon maturity or sale.

Thefollowing table summarizes the fair value and gross unrealized losses of the Company’sshort-term investments, aggregated by type of investment instrument andlength of time that individual securities have been in a continuous unrealizedloss position, at July 31, 2005 (in thousands):

| ** **                         | ** ** | **Estimated  Fair Value** | ** ** | **Gross  Unrealized  Loss** | ** ** |
|------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| Government and  agency securities: |       |                           |       |                        |       |   |   |   |   |
| Less than 12 months                |       |                           | $          | 5,035                       |       |   |   | $ | (31 | ) |   |
| 12 months or greater               |       |                           | 3,480      |                        |       |   | (39 | ) |   |
| Total                              |       |                           | $          | 8,515                       |       |   |   | $ | (70 | ) |   |

 

The Company’s investment portfolio consists ofgovernment securities that have a maximum maturity of two years. The longer theduration of these securities, the more susceptible they are to changes inmarket interest rates and bond yields. As yields increase, those securitiespurchased with a lower yield-at-cost show a mark-to-market unrealized loss. Allunrealized losses are due to changes in interest rates and bond yields. TheCompany expects to realize the full value of all these investments uponmaturity or sale.

Theestimated fair value of cash equivalents and short-term investments classifiedby date of contractual maturity at July 31, 2005, are as follows (inthousands):

| Due within one  year or less        |   | $     | 17,312 |   |
|-------------------------------------|--------|-------|--------|--------|
| Due after 25 year  through 40 years |   | 4,700 |   |
| No maturity dates                   |   | 5,504 |   |
|                                |   | $     | 27,516 |   |

 

The realized loss on sales of securities was $10,000for fiscal 2005. The realized gain on sales of securities was zero and $43,000for fiscal 2004 and 2003, respectively. During fiscal 2005, 2004 and 2003, theCompany did not record any cash equivalents- or short-term investment-relatedimpairment charges.

Accountsreceivable, net, consist of the following (in thousands):

| ** **                            | ** ** | **July 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Accounts receivable                   |       | $                 | 14,246     |   | $ | 10,850 |   |
| Less: Provision for doubtful accounts |       | (564              | )          | (470 | ) |
| Accounts receivable, net              |       | $                 | 13,682     |   | $ | 10,380 |   |

 

Inventoriesconsist of the following (in thousands):

| ** **                         | ** ** | **July 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Raw materials                      |       |              | $          | 11 |   |   |   | $ | 54 |   |   |
| Finished goods and work-in-process |       |              | 35         |   |   |   | 15 |   |   |
| Inventories                        |       |              | $          | 46 |   |   |   | $ | 69 |   |   |

 

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Propertyand equipment, net, consist of the following (in thousands):

| ** **                                      | ** ** | **July 31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Computer equipment and software                 |       | $                 | 8,632      |   | $ | 5,972 |   |
| Furniture and office equipment                  |       | 1,836             |       | 1,695 |   |
| Leasehold improvements                          |       | 929               |       | 909 |   |
|                                            |       | 11,397            |       | 8,576 |   |
| Less: Accumulated depreciation and amortization |       | (8,369            | )          | (7,036 | ) |
| Property and equipment, net                     |       | $                 | 3,028      |   | $ | 1,540 |   |

 

The depreciation and amortization expense for fiscal2005, 2004 and 2003 was $1,258,000, $1,037,000 and $1,358,000, respectively.

The Company had an equipment under capital leasetotaling $527,000 and $231,000 with related accumulated depreciation of$185,000 and $49,000 at July 31, 2005 and 2004, respectively.

Accruedliabilities consist of the following (inthousands):

| ** **                              | ** ** | **July 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Payroll related accruals                |       | $                 | 3,026      |   | $ | 3,109 |   |
| Accrued interest                        |       | 1,494             |       | 988 |   |
| Taxes payable                           |       | 1,218             |       | 401 |   |
| Deferred rent                           |       | 259               |       | 435 |   |
| Restructuring accruals, current portion |       | 86                |       | 820 |   |
| Other accrued liabilities               |       | 1,486             |       | 1,729 |   |
| Accrued liabilities                     |       | $                 | 7,569      |   | $ | 7,482 |   |

 

Otherliabilities consist of the following (inthousands):

| ** **                                   | ** ** | **July 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|
| ** **                                   | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Interest rate swap                           |       | $                 | 2,469      |   | $ | 1,557 |   |
| Deferred tax liability                       |       | 446               |       | 597 |   |
| Restructuring liabilities, long-term portion |       | —            |       | 260 |   |
| Other long-term liabilities                  |       | —            |       | 73 |   |
| Other liabilities                            |       | $                 | 2,915      |   | $ | 2,487 |   |

 

**Note 4   Acquisitions**

The Company acquiredPDAapps, Inc. and Tourmaline Networks, Inc., during fiscal 2005,SoftVision SRL’s workforce through a transfer agreement, Identity Systems(formerly Search Software America Pty. Ltd.), Synchrologic, Inc., andSpontaneous Technology, Inc. during fiscal 2004 and substantially all ofthe assets of Loudfire, Inc. and the capital stock of Starfish Software, Inc.during fiscal 2003. The PDAapps, Tourmaline, Identity Systems, Synchrologic,Spontaneous Technology and Starfish transactions were accounted for as businesscombinations required by SFAS No. 141, “*BusinessCombinations*.” The SoftVision workforce transfer and Loudfireacquisition were accounted for as an asset purchase.

*PDAapps, Inc.*

On June 23, 2005, the Company completed itsacquisition of all of the issued and outstanding stock of PDAapps, Inc.,makers of Intellisync IM (formerly VeriChat), the mobile instant messagingsolution for all 

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Palm OS devices, Pocket PCdevices, Symbian devices and RIM Blackberry devices. Under the terms of anAgreement and Plan of Merger, dated as of June 23, 2005, the outstandingshares of PDAapps common stock were converted into the right to receive (i) anaggregate of approximately $4,000,000 in aggregate initial cash considerationand (ii) an aggregate of up to $2,600,000 in cash earnout consideration(based on future revenue generated by the Company from the former PDAappsclient base), subject to the deposit of $1,000,000 in escrow to be available tocompensate Intellisync pursuant to the indemnification obligations of theholders of PDAapps common stock. The earnout consideration, if achieved, is dueand payable shortly following the first anniversary of the acquisition. As of July 31,2005, the Company has not accrued the contingent earnout payment amount. Anyearnout consideration paid will be recorded as additional goodwill.

Theconsolidated financial statements include the results of operations of PDAappssince the date of acquisition. Under the purchase method of accounting, thetotal purchase price was allocated to PDAapps’ net tangible and intangibleassets based upon their estimated fair value as of the acquisition date. Theinitial purchase price of $4,150,000 (including estimated acquisition costs of$150,000) was assigned to the fair value of the assets acquired, including thefollowing (in thousands):

| Tangible assets acquired            |   | $     | 74     |   |
|-------------------------------------|--------|-------|--------|--------|
| Deferred tax  assets                |   | 976   |   |
| Liabilities assumed                 |   | (337  | )      |
| Deferred tax  liability assumed     |   | (976  | )      |
| In-process research and development |   | 220   |   |
| Developed and core technology       |   | 2,320 |   |
| Customer base                       |   | 140   |   |
| Covenant-not-to-compete             |   | 24    |   |
| Goodwill                            |   | 1,709 |   |
|                                |   | $     | 4,150  |   |

 

In accordance with SFAS No. 109, “*Accounting for Income Taxes*,” deferred tax liabilities ofapproximately $976,000 have been recorded for the tax effect of the amortizableintangible assets. Deferred tax assets of $976,000 have also been recorded bythe Company to account for the tax effect of the Company’s net operating lossand credit carryforwards.

Tangible assets acquired, which includes $46,000 ofcash, and liabilities assumed were valued at their respective carrying amountsas the Company believes that these amounts approximated their current fairvalues at the acquisition date. The valuation of identifiable intangible assetsacquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. This allocation was generally basedon the fair value of these assets determined using the income approach.

An estimate of $1,709,000 has been allocated togoodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance withSFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is notamortized but is tested for impairment at least annually.

Of the total purchase price, $2,484,000 was allocatedto amortizable intangibles included in the above list. The developed and coretechnology and customer base are being amortized in proportion with theexpected cash flows to be received from the underlying assets over theirestimated useful life of five and seven years, respectively. Thecovenant-not-to-compete is being amortized using the straight-line method overthe estimated useful life of the asset of 30 months. Refer to Note 5.

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As of the acquisition date, technological feasibilityof the in-process technology had not been established and the technology had noalternative future use. Accordingly, the Company expensed the in-processresearch and development at the date of the acquisition.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which discounts expected future cash flows topresent value. The key assumptions used in the valuation include, among others,expected completion date of the in-process projects identified as of theacquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations are normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful development of the in-processresearch and development, the expected profitability levels of such technology,and the uncertainty of technological advances that could potentially impact theestimates. The Company assumes the pricing model for the resulting product of theacquired in process research and technology to be standard within its industry.The Company, however, did not take into consideration any consequential amountof expense reductions from integrating the acquired in-process technology withother existing in-process or completed technology. Therefore, the valuationassumptions do not include significant anticipated cost savings.

The key assumptions underlying the valuation ofacquired in-process research and development from PDAapps are as follows (inthousands, except percentage):

Project names: Enhancedversion of VeriChat product—to feature J2ME (Java 2 Platform, Micro Edition)and IMode support, presence manager (uses phone state to dictate the status ofa user so others can decide if they should send an instant messaging (IM) orplace a call), secure enterprise chat and carrier branded chat

Percent completed as ofacquisition date: 30-50%

Estimated costs tocomplete technology at acquisition date: $900

Risk-adjusted discountrate: 25%

First period expectedrevenue: 2nd quarter of calendar year 2006

The development of the above technology remains highlydependent on the remaining efforts to achieve technical viability, rapidlychanging customer markets, uncertain standards for a new product, and significantcompetitive threats from several companies. The nature of the efforts todevelop this technology into a commercially viable product consists primarilyof planning, designing, experimenting, and testing activities necessary todetermine that the technology can meet market expectations, includingfunctionality and technical requirements. Failure to bring the product tomarket in a timely manner could result in a loss of market share or a lostopportunity to capitalize on emerging markets, and could have a materialadverse impact on the Company’s business and operating results.

Subsequent to theacquisition of PDAapps, there have been no significant developments related tothe current status of the acquired in-process research and development projectthat would result in material changes to the assumptions.

*Tourmaline Networks, Inc.*

On March 1, 2005, the Company completed itsacquisition of all of the issued and outstanding stock of Tourmaline Networks, Inc.,a privately held developer and marketer of mobile email based on QUALCOMM’sBREW® solution headquartered in San Diego, California. Under the terms of anAgreement and Plan of Merger, dated as of February 9, 2005, theoutstanding shares of Tourmaline common stock were converted into the right toreceive (i) an aggregate of approximately $4,118,000 in 

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aggregate initial cashconsideration and (ii) an aggregate of up to $2,881,918 in cash earnoutconsideration (based on future revenue generated by the Company from the formerTourmaline client base), subject to the deposit of a certain portion of theinitial cash consideration and earnout consideration in escrow to be availableto compensate Intellisync pursuant to the indemnification obligations of theholders of Tourmaline common stock. The earnout consideration, if achieved, isdue and payable shortly following the first anniversary of the acquisition. Asof July 31, 2005, the Company has not accrued the contingent earnoutpayment amount. Any earnout consideration paid will be recorded as additionalgoodwill.

Theconsolidated financial statements include the results of operations ofTourmaline since the date of acquisition. Under the purchase method ofaccounting, the total purchase price was allocated to Tourmaline’s net tangibleand intangible assets based upon their estimated fair value as of theacquisition date. The initial purchase price of $4,218,000 (including estimatedacquisition costs of $100,000) was assigned to the fair value of the assetsacquired, including the following (in thousands):

| Tangible assets acquired        |   | $     | 478    |   |
|---------------------------------|--------|-------|--------|--------|
| Deferred tax  assets            |   | 803   |   |
| Liabilities assumed             |   | (275  | )      |
| Deferred tax  liability assumed |   | (803  | )      |
| Developed and core technology   |   | 800   |   |
| Customer base                   |   | 1,443 |   |
| Goodwill                        |   | 1,772 |   |
|                            |   | $     | 4,218  |   |

 

In accordance with SFAS No. 109, “*Accounting for Income Taxes*,” deferred tax liabilities ofapproximately $803,000 have been recorded for the tax effect of the amortizableintangible assets. Deferred tax assets of $803,000 have also been recorded bythe Company to account for the tax effect of the Company’s net operating lossand credit carryforwards.

Tangible assets acquired, which includes $23,000 ofcash, and liabilities assumed were valued at their respective carrying amountsas the Company believes that these amounts approximated their current fairvalues at the acquisition date. The valuation of identifiable intangible assetsacquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. This allocation was generally basedon the fair value of these assets determined using the income approach.

An estimate of $1,772,000 has been allocated togoodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance withSFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill will not beamortized but will be tested for impairment at least annually.

Of the total purchaseprice, $2,243,000 was allocated to amortizable intangibles included in theabove list. The amortizable intangible assets are being amortized using anaccelerated method according to the expected cash flows to be received from theunderlying assets over their respective estimated useful life of three to sixyears. Refer to Note 5.

*SoftVision SRL*

On June 14, 2004, the Company completed thetransfer of 91 employees from SoftVision SRL, an offshore software developmentcompany with headquarters in Cluj-Napoca, Romania, pursuant to an EmployeeTransfer Agreement dated as of February 5, 2004. Under the terms of theagreement, the Company paid cash of approximately $693,000 and assumed certainemployee-related liabilities of approximately $31,000. The SoftVision workforceacquisition was accounted for as an asset purchase. The 

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consolidated financialstatements include the effect of additional employees the Company acquired fromSoftVision since the date of acquisition.

The full amount of thepreliminary purchase price of $724,000 was assigned to the fair value of theacquired workforce. The amortizable acquired workforce is being amortized usingthe straight-line method over its estimated useful life of two years. Refer toNote 5.

*Identity Systems(formerly Search Software America)*

On March 16, 2004, the Company completed itsacquisition of all of the issued and outstanding stock of SPL WorldgroupSoftware, Inc., SPL Worldgroup Ltd. and Search Software America Pty. Ltd.,or collectively SSA , privately held divisions of SPL WorldGroup andheadquartered in Sydney, Australia, pursuant to a Stock Purchase Agreementdated as of February 24, 2004. SSA, now called Identity Systems, withoperations in the United States, United Kingdom, and Australia, is a developerof solutions that enhance the ability to find, match and group (synchronize)identity data within computer systems and network databases. Under the terms ofthe stock purchase agreement, the Company paid cash of $22,129,000.

Theconsolidated financial statements include the results of operations of IdentitySystems since the date of acquisition. Under the purchase method of accounting,the total purchase price was allocated to Identity System’s net tangible andintangible assets based upon their estimated fair value as of the acquisitiondate. The purchase price of $22,179,000 (including acquisition costs of$50,000) was assigned to the fair value of the assets acquired, including thefollowing (in thousands):

| Tangible assets acquired            |   | $      | 3,728  |   |
|-------------------------------------|--------|--------|--------|--------|
| Deferred tax assets                 |   | 242    |   |
| Liabilities assumed                 |   | (3,987 | )      |
| Deferred tax  liability assumed     |   | (646   | )      |
| In-process research and development |   | 775    |   |
| Developed and core technology       |   | 5,513  |   |
| Customer base                       |   | 8,777  |   |
| Goodwill                            |   | 7,777  |   |
|                                |   | $      | 22,179 |   |

 

In accordance with SFAS No. 109, “*Accounting for Income Taxes*,” deferred tax liabilities ofapproximately $646,000 have been recorded for the tax effect of the amortizableintangible assets. In addition, during fiscal 2005, deferred tax assets of$242,000 have also been recorded by the Company to account for the tax effectof the credit carryforwards. The deferred tax asset adjusted goodwillaccordingly by the same amount.

The valuation of identifiable intangible assetsacquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. This allocation was generally basedon the fair value of these assets determined using the income approach.

Tangible assets acquired, which includes $2,146,000 ofcash, and liabilities assumed were valued at their respective carrying amountsas the Company believes that these amounts approximated their current fairvalues at the acquisition date. The valuation of identifiable intangible assetsacquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. This allocation was generally basedon the fair value of these assets determined using the income approach.

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$7,777,000, as adjusted per above, was allocated togoodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance withSFAS No. 142, “*Goodwill and OtherIntangible Assets*,” goodwill will not be amortized but will betested for impairment at least annually.

Of the total purchase price, $14,290,000 was allocatedto amortizable intangibles included in the above list. The amortizableintangible assets are being amortized using an accelerated method according tothe expected cash flows to be received from the underlying assets over theirrespective estimated useful life of seven to ten years. Refer to Note 5.

As of the acquisition date, technological feasibilityof the in-process technology had not been established and the technology had noalternative future use. Accordingly, the Company expensed the in-processresearch and development at the date of the acquisition.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which discounts expected future cash flows topresent value. The key assumptions used in the valuation include, among others,expected completion date of the in-process projects identified as of the acquisitiondate, estimated costs to complete the projects, revenue contributions andexpense projections assuming the resulting product has entered the market, anddiscount rate based on the risks associated with the development life cycle ofthe in-process technology acquired. The discount rate used in the present valuecalculations are normally obtained from a weighted-average cost of capitalanalysis, adjusted upward to account for the inherent uncertainties surroundingthe successful development of the in-process research and development, theexpected profitability levels of such technology, and the uncertainty oftechnological advances that could potentially impact the estimates. The Companyassumes the pricing model for the resulting product of the acquired in processresearch and technology to be standard within its industry. The Company,however, did not take into consideration any consequential amount of expensereductions from integrating the acquired in-process technology with otherexisting in-process or completed technology. Therefore, the valuationassumptions do not include significant anticipated cost savings.

The key assumptions underlying the valuation ofacquired in-process research and development from Identity Systems are asfollows (in thousands):

Project names:SSA-NAME3 Version 3.0 and IDS Version 3.0

Percent completedas of acquisition date: 10%

Estimated costs tocomplete technology at acquisition date: $600

Risk-adjusteddiscount rate: 25%

Firstperiod revenue: June 2005

The development of the above technology was highlydependent on the efforts to achieve technical viability, rapidly changingcustomer markets, uncertain standards for a new product, and significantcompetitive threats from several companies. The nature of the efforts to developthis technology into a commercially viable product consisted primarily ofplanning, designing, experimenting, and testing activities necessary todetermine that the technology could meet market expectations, includingfunctionality and technical requirements. Failure to bring the product tomarket in a timely manner could have resulted in a loss of market share or alost opportunity to capitalize on emerging markets, and could have had amaterial adverse impact on the Company’s business and operating results.

Subsequent to theacquisition of Identity Systems, there had been no significant developmentsrelated to the acquired in-process research and development project that wouldresult in material changes to the assumptions.

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*Synchrologic, Inc.*

On December 29, 2003, the Company completed itsacquisition of all of the issued and outstanding stock ofSynchrologic, Inc. headquartered in Atlanta, Georgia pursuant to anAgreement and Plan of Merger, dated as of September 14, 2003. Synchrologic’sproduct line provides mobile access to enterprise applications, email andpersonal information management, or PIM, data, file content, intranet sites,and Web content, while giving IT groups the tools to manage mobile devicesremotely.

In the merger, all outstanding shares of Synchrologiccommon stock and preferred stock were converted into the right to receive atotal of 15,130,171 shares of the Company’s common stock. In addition, alloutstanding options to purchase Synchrologic common stock were converted intooptions to purchase a total of 1,018,952 shares of the Company’s common stock.The total number of shares issued was determined by dividing $60,000,000 by theaverage closing price of $5.22 of the shares of the Company’s common stock forthe thirty consecutive trading days ending on the last complete trading dayimmediately preceding the closing date of the merger (which amount was subjectto adjustment based on the transaction expenses incurred by Synchrologic inconnection with the merger), provided that the number of shares did not exceed19,800,000 or be fewer than 16,200,000 (in each case subject to adjustmentbased on the transaction expenses incurred by Synchrologic in connection withthe merger). The shares were valued at approximately $62,125,000 using thefive-trading-day average price surrounding the date the acquisition wasannounced of $4.11 per share, and the options were valued at approximately$4,123,000 using the Black-Scholes option pricing model. The following assumptionswere used to perform the calculations of the fair market value of stock optionsissued: fair value of Company’s common stock of $4.05, expected life of 3.9years, risk-free interest rate of 3.4%, expected volatility of 132% and noexpected dividend yield.

Theconsolidated financial statements include the results of operations ofSynchrologic since the date of acquisition. Under the purchase method ofaccounting, the total purchase price was allocated to Synchrologic’s nettangible and intangible assets based upon the fair value as of the acquisitiondate. The purchase price of $67,037,000 (comprising the value of the shares andoptions described above and the estimated acquisition costs of $900,000 and netof a $111,000 adjustment for writing-off a certain liability due toSynchrologic) was assigned to the fair value of the assets acquired, includingthe following (in thousands):

| Tangible assets acquired            |   | $      | 4,105  |   |
|-------------------------------------|--------|--------|--------|--------|
| Deferred tax  assets                |   | 6,094  |   |
| Liabilities assumed                 |   | (5,552 | )      |
| Deferred tax  liability assumed     |   | (6,094 | )      |
| In-process research and development |   | 2,423  |   |
| Developed and core technology       |   | 10,493 |   |
| Patents                             |   | 1,321  |   |
| Customer base                       |   | 3,487  |   |
| Goodwill                            |   | 50,760 |   |
|                                |   | $      | 67,037 |   |

 

In accordance with SFAS No. 109, “*Accounting for Income Taxes*,” deferred tax liabilities ofapproximately $6,094,000 have been recorded for the tax effect of theamortizable intangible assets. Deferred tax assets of $6,094,000 have also beenrecorded by the Company to account for the tax effect of Synchrologic’s netoperating loss and credit carryforwards.

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The valuation of identifiable intangible assetsacquired was based on management’s estimates, currently available informationand reasonable and supportable assumptions. This allocation was generally basedon the fair value of these assets determined using the income approach.

Approximately $50,760,000, as adjusted, was allocatedto goodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance withSFAS No. 142, *“Goodwill and OtherIntangible Assets,”* goodwill associated with Synchrologicacquisition will not be amortized but will be tested for impairment at leastannually.

Of the total purchase price, $15,301,000 was allocatedto amortizable intangibles included in the above list. The amortizableintangible assets are being amortized using the straight-line method over theestimated useful life of the respective assets of four years. Refer to Note 5.

As of the acquisition date, technological feasibilityof the in-process technology had not been established and the technology had noalternative future use. Accordingly, the Company expensed the in-processresearch and development at the date of the acquisition.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which discounts expected future cash flows topresent value. The key assumptions used in the valuation include, among others,expected completion date of the in-process projects identified as of theacquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations are normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful development of the in-processresearch and development, the expected profitability levels of such technology,and the uncertainty of technological advances that could potentially impact theestimates. The Company assumed the pricing model for the resulting product ofthe acquired in process research and technology to be standard within itsindustry. The Company, however, did not take into consideration anyconsequential amount of expense reductions from integrating the acquiredin-process technology with other existing in-process or completed technology.Therefore, the valuation assumptions do not include significant anticipatedcost savings.

The key assumptions underlying the valuation ofacquired in-process research and development from Synchrologic were as follows(in thousands):

Project names: Versionupgrade of Data Sync, File Sync, E-mail Accelerator and Systems Managementproducts

Percentcompleted as of acquisition date: 60%–70%

Estimatedcosts to complete technology at acquisition date: $3,000

Risk-adjusteddiscount rate: 22%

First period revenue: calendar year 2004

The development of the above technology was highlydependent on the efforts to achieve technical viability, rapidly changingcustomer markets, uncertain standards for a new product, and significantcompetitive threats from several companies. The nature of the efforts todevelop this technology into a commercially viable product consisted primarilyof planning, designing, experimenting, and testing activities necessary todetermine that the technology could meet market expectations, includingfunctionality and technical requirements. Failure to bring the product tomarket in a timely manner could have resulted in a loss of market share or alost opportunity to capitalize on emerging markets, and could have had amaterial adverse impact on the Company’s business and operating results.

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Subsequent to the acquisition of Synchrologic, therehad been no significant developments related to the acquired in-processresearch and development project that would result in material changes to theassumptions.

The liabilities assumed bythe Company included Synchrologic’s outstanding balance of approximately$1,764,000 under a credit facility agreement with a bank. The Company fullypaid the outstanding balance during fiscal 2004. The bank credit facilityagreement was automatically terminated upon the Company’s acquisition ofSynchrologic.

*SpontaneousTechnology, Inc.*

On September 17, 2003, the Company consummatedthe acquisition of Spontaneous Technology, Inc. of Salt Lake City, Utah, aprovider of enterprise secure Virtual Private Network, or sVPNTM,software designed to extend existing corporate applications to most wirelessdevices. Under the terms of the agreement, the Company issued a total of869,259 shares of Intellisync’s common stock valued at approximately $2,999,000using the five-trading-day average price surrounding the date the acquisitionwas announced of $3.45 per share, less registration costs. The number of shareswere calculated using the average price of the Company’s common stock for tenconsecutive trading days ended three business days prior the date ofacquisition. Later during fiscal 2004, Intellisync paid cash of approximately$752,000 for the satisfaction of another pre-acquisition clause related to anacquired customer contract. There were also 224,417 additional shares releasedfrom escrow during fiscal 2005 that were issued upon satisfaction of apre-acquisition clause. Additionally, Intellisync was required to paySpontaneous Technology additional consideration of up to $7,000,000 in sharesof Intellisync’s common stock. The additional consideration was contingent uponthe amount of Intellisync’s revenue associated with sales of its productsincluding certain technology of Spontaneous Technology during the period ended September 30,2004. The earnout period ended with Intellisync’s aggregate revenue on productsassociated with Spontaneous Technology amounting to less than the given earnoutthreshold. Consequently, no additional consideration was paid to SpontaneousTechnology.

Theconsolidated financial statements include the results of operations ofSpontaneous Technology since the date of acquisition. Under the purchase methodof accounting, the total purchase price was allocated to Spontaneous Technology’snet tangible and intangible assets based upon their fair value as of theacquisition date. The purchase price of $4,071,000 (including acquisition costsof $320,000 and the payment made for the resolution of the pre-acquisitioncontingency of $752,000) was assigned to the fair value of the assets acquired,including the following (in thousands):

| Tangible assets acquired            |   | $      | 18     |   |
|-------------------------------------|--------|--------|--------|--------|
| Liabilities assumed                 |   | (1,726 | )      |
| In-process research and development |   | 469    |   |
| Developed and core technology       |   | 889    |   |
| Patents                             |   | 168    |   |
| Customer base                       |   | 499    |   |
| Goodwill                            |   | 3,754  |   |
|                                |   | $      | 4,071  |   |

 

Tangible assets acquired and liabilities assumed werevalued at their respective carrying amounts as the Company believes that theseamounts approximated their current fair values at the acquisition date. Thevaluation of identifiable intangible assets acquired was based on management’sestimates, currently available information and reasonable and supportableassumptions. This allocation was generally based on the fair value of theseassets determined using the income approach.

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Approximately $3,754,000, as adjusted, was allocatedto goodwill. Goodwill represents the excess of the purchase price over the fairvalue of the net tangible and intangible assets acquired. In accordance withSFAS No. 142, *“Goodwill and OtherIntangible Assets,”* goodwill will not be amortized but will betested for impairment at least annually.

Of the total purchase price, $1,556,000 was allocatedto amortizable intangibles included in the above list. The amortizableintangible assets are being amortized using the straight-line method over theestimated useful life of the respective assets of four years. Refer to Note 5.

As of the acquisition date, technological feasibilityof the in-process technology had not been established and the technology had noalternative future use. Accordingly, the Company expensed the in-processresearch and development at the date of the acquisition.

The amount of the purchase price allocated toin-process research and technology was based on established valuationtechniques used in the high-technology software industry. The fair valueassigned to the acquired in-process research and development was determinedusing the income approach, which discounts expected future cash flows topresent value. The key assumptions used in the valuation include, among others,expected completion date of the in-process projects identified as of theacquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations are normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful development of the in-processresearch and development, the expected profitability levels of such technology,and the uncertainty of technological advances that could potentially impact theestimates. The Company assumed the pricing model for the resulting product ofthe acquired in process research and technology to be standard within itsindustry. The Company, however, did not take into consideration anyconsequential amount of expense reductions from integrating the acquiredin-process technology with other existing in-process or completed technology.Therefore, the valuation assumptions do not include significant anticipatedcost savings.

The key assumptions underlying the valuation ofacquired in-process research and development from Spontaneous Technology wereas follows (in thousands):

Project names: Versionupgrade of Spontaneous Technology’s secure Virtual Private Network (sVPN)

Percentcompleted as of acquisition date: 60%

Estimatedcosts to complete technology at acquisition date: $125

Risk-adjusteddiscount rate: 22%

First period revenue: calendar year 2004

The development of the above technology was highlydependent on the efforts to achieve technical viability, rapidly changingcustomer markets, uncertain standards for a new product, and significantcompetitive threats from several companies. The nature of the efforts todevelop this technology into a commercially viable product consisted primarilyof planning, designing, experimenting, and testing activities necessary todetermine that the technology could meet market expectations, includingfunctionality and technical requirements. Failure to bring the product tomarket in a timely manner could have resulted in a loss of market share or a lostopportunity to capitalize on emerging markets, and could have had a materialadverse impact on the Company’s business and operating results.

Subsequent to theacquisition of Spontaneous Technology, there had been no significantdevelopments related to the acquired in-process research and developmentproject that would result in material changes to the assumptions.

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*Loudfire, Inc.*

In July 2003, the Company signed and closed anagreement to acquire substantially all of the assets of Loudfire, Inc. ofTulsa, Oklahoma, developer of LoudPCTM software. LoudPC software allows anyonewith an Internet browser or Web-enabled phone to enjoy real-time access toemail and PIM data located in either Microsoft Outlook or Outlook Express. Theproduct also provides secure access to pre-specified files residing on a host PC. Under the terms of the asset purchaseagreement, the Company paid $1,000,000 in cash and issued $500,000 worth ofshares of the Company’s common stock. The 134,445 shares issued were calculatedusing the average price of the Company’s common stock for a ten-day periodended three business days prior the date of acquisition.

Additionally, the Company was required to pay Loudfireadditional consideration of up to $3,500,000 in cash or, at the Company’selection, shares of its common stock depending upon the Company’s revenuesassociated with sales of its products including certain technology of Loudfireduring the 12 months following the closing of the asset purchase. During suchperiod, however, Company’s revenue on products associated with Loudfireamounted to less than the earnout threshold. Consequently, no additionalconsideration was paid to Loudfire.

Theconsolidated financial statements include the results of operations of Loudfiresince the date of acquisition. The purchase price of $1,654,000 (includingacquisition costs of $154,000) was assigned to the fair value of the assetsacquired, including the following (in thousands):

| Developed and  core technology |   | $   | 1,352  |   |
|--------------------------------|--------|-----|--------|--------|
| Customer base                  |   | 158 |   |
| Covenant  not-to-compete       |   | 104 |   |
| Customer  contracts            |   | 40  |   |
|                           |   | $   | 1,654  |   |

 

The intangible assets acquired are amortized using thestraight-line method over the estimated useful life of the assets ranging fromnine months to four years.

During the fourth quarterof fiscal 2004, the Company recorded an adjustment to the provisional purchaseprice allocation, which increased the amount of the acquisition costs by$54,000, thereby ratably increasing all the intangible assets acquired. Thechanges had no impact on goodwill as no goodwill resulted from the acquisitionof Loudfire.

*Starfish Software, Inc.*

In March 2003, the Company signed and closed apurchase agreement with Motorola, Inc. of Schaumburg, Illinois to acquireall of capital stock of Starfish Software, Inc., a wholly owned subsidiaryof Motorola headquartered in Scotts Valley, California. Starfish is a providerof end-to-end mobile infrastructure solutions based on integrated platformscomposed of server, desktop and device software for mobile datasynchronization, wireless connectivity and device management. Under the termsof the stock purchase agreement, the Company initially paid a total of$1,501,000 in cash, subject to further adjustment based on actual workingcapital as of the closing date. The Company further paid $178,000 based onsubsequent adjustments made to Starfish’s working capital.

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TheStarfish acquisition has been accounted for as a purchase business combination.The consolidated financial statements include the results of operations ofStarfish since the date of acquisition. The purchase price of $1,831,000(including acquisition costs of $152,000) was assigned to the fair value of theassets acquired, including the following (in thousands):

| Tangible assets acquired            |   | $    | 1,133  |   |
|-------------------------------------|--------|------|--------|--------|
| Liabilities assumed                 |   | (913 | )      |
| In-process research and development |   | 406  |   |
| Developed and core technology       |   | 634  |   |
| Patents                             |   | 190  |   |
| Trademarks                          |   | 49   |   |
| Customer base                       |   | 261  |   |
| Existing contracts                  |   | 71   |   |
|                                |   | $    | 1,831  |   |

 

Tangible assets acquired and liabilities assumed werevalued at their respective carrying amounts as the Company believes that theseamounts approximated their current fair values at the acquisition date. Thevaluation of identifiable intangible assets acquired was based on management’sestimates, currently available information and reasonable and supportableassumptions. This allocation was generally based on the fair value of theseassets determined using the income approach.

During the third quarter of fiscal 2004, the Companyrecorded a number of adjustments to the provisional purchase price allocationfollowing the resolution of certain contingencies totaling approximately$73,000, which decreased the fair value of acquired developed and coretechnology, customer base, patents and trademarks by approximately $41,000,$17,000, $12,000 and $3,000, respectively. The changes had no impact ongoodwill as no goodwill resulted from the acquisition of Starfish.

Of the total purchase price, $1,205,000 was allocatedto amortizable intangibles included in the above list. The amortizableintangible assets are being amortized using the straight-line method over theestimated useful life of the respective assets of nine months to four years.

As of the acquisition date, technological feasibilityof the in-process technology had not been established and the technology had noalternative future use. Accordingly, the Company expensed the in-processresearch and development at the date of the acquisition.

The amount of the purchase price allocated to inprocess-research and technology was based on established valuation techniquesused in high-technology computer software industry. The fair value assigned tothe acquired in-process research and development was determined using theincome approach, which discounts expected future cash flows to present value. Thekey assumptions used in the valuation include, among others, expectedcompletion date of the in-process projects identified as of the acquisitiondate, estimated costs to complete the projects, revenue contributions andexpense projections assuming the resulting product have entered the market, anddiscount rate based on the risks associated with the development life cycle ofthe in-process technology acquired. The discount rate used in the present valuecalculations are normally obtained from a weighted-average cost of capitalanalysis, adjusted upward to account for the inherent uncertainties surroundingthe successful development of the in-process research and development, theexpected profitability levels of such technology, and the uncertainty oftechnological advances that could potentially impact the estimates. The Companyassumes the pricing model for the resulting product of the acquired in processresearch and technology to be standard within its industry. The Company,however, did not take into consideration any consequential amount of expensereductions from 

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integrating the acquiredin-process technology with other existing in-process or completed technology. Therefore,the valuation assumptions do not include significant anticipated cost savings.

The key assumptions underlying the valuation ofacquired in-process research and development from Starfish are as follows (inthousands):

Project name: Mercuryplatform technology

Percentcompleted as of acquisition date:  70%

Estimatedcosts to complete technology at acquisition date: $375

Risk-adjusteddiscount rate:  30%

First period revenue: calendar year 2004

The development of the above technology was highlydependent on the efforts to achieve technical viability, rapidly changingcustomer markets, uncertain standards for a new product, and significantcompetitive threats from several companies. The nature of the efforts todevelop this technology into a commercially viable product consisted primarilyof planning, designing, experimenting, and testing activities necessary todetermine that the technology could meet market expectations, includingfunctionality and technical requirements. Failure to bring the product tomarket in a timely manner could have resulted in a loss of market share or alost opportunity to capitalize on emerging markets, and could have had amaterial adverse impact on the Company’s business and operating results.

Subsequent to theacquisition of Starfish, there had been no significant developments related tothe acquired in-process research and development project that would result inmaterial changes to the assumptions.

*Pro Forma Results*

Thefollowing unaudited pro-forma consolidated financial information reflects theresults of operations for fiscal 2005, 2004 and 2003 as if Tourmaline, IdentitySystems, Synchrologic, Spontaneous Technology and Starfish acquisitions hadoccurred on the beginning of each period presented and after giving effect topurchase accounting adjustments. PDAapps’, SoftVision’s workforce and Loudfire’sresults of operations have been excluded from the pro forma financialinformation as amounts are considered immaterial to the Company. These proforma results have been prepared for comparative purposes only and do notpurport to be indicative of what operating results would have been had theacquisitions in aggregate actually taken place on the beginning of each periodpresented. In addition, these results are not intended to be a projection offuture results and do not reflect any synergies that might be achieved from thecombined operation (in thousands, except per share data):

| ** **                                             | ** ** | **Year Ended July 31** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| Pro forma revenue                                      |       | $                                     | 60,247     |   | $ | 54,506 |   | $ | 49,395 |   |
| Pro forma net loss                                     |       | $                                     | (9,730     | ) | $ | (13,525 | ) | $ | (29,100 | ) |
| Pro forma basic  and diluted net loss per common share |       | $                                     | (0.15      | ) | $ | (0.20 | ) | $ | (0.47 | ) |

 

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**Note5   Goodwill, Developed and Core Technology and Other Intangible Assets**

Thefollowing table sets forth the changes in goodwill during fiscal 2005 (inthousands):

| ** **                                                      | ** ** | **Goodwill** | ** ** |
|-----------------------------------------------------------------|------------|--------------|------------|
| **Balance  at July 31, 2004**                              |       | $            | 65,288     |   |
| Acquired from  Tourmaline                                       |       | 1,772        |       |
| Acquired from  PDAapps                                          |       | 1,709        |       |
| Identity Systems  deferred tax adjustment (Note 4)              |       | (242         | )          |
| Foreign exchange  effects on non-US dollar-denominated goodwill |       | (53          | )          |
| **Balance at July 31, 2005**                               |       | $            | 68,474     |   |

 

Otherintangible assets, net, consist of the following (in thousands, except weightedaverage useful life):

| ** **                    | ** ** | **Weighted**                  | ** ** | **July 31, 2005** | ** ** | **July 31, 2004**   | ** ** |
|-------------------------------|------------|-------------------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Average  Useful Life** | ** ** | **Gross**                   | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Developed and core technology |       | 6.3  years                    |       | $                           | 24,613     |                          |       | $ | (10,061 | ) |   | $ | 14,552 |   | $ | 21,237 |   |   | $ | (5,370 | ) |   | $ | 15,867 |   |
| Patents                       |       | 4.0  years                    |       | 1,680                       |       |                          | (715       | ) |   | 965 |   | 1,680 |   |   | (298 | ) |   | 1,382 |   |
| Trademarks                    |       | 2.5  years                    |       | 250                         |       |                          | (189       | ) |   | 61 |   | 250 |   |   | (75 | ) |   | 175 |   |
| Customer base                 |       | 5.5  years                    |       | 14,750                      |       |                          | (4,541     | ) |   | 10,209 |   | 13,129 |   |   | (1,472 | ) |   | 11,657 |   |
| Covenant not-to-compete       |       | 2.5  years                    |       | 129                         |       |                          | (105       | ) |   | 24 |   | 105 |   |   | (54 | ) |   | 51 |   |
| Existing contracts            |       | 16.5  months                  |       | 111                         |       |                          | (111       | ) |   | — |   | 313 |   |   | (296 | ) |   | 17 |   |
| Acquired workforce            |       | 16  months                    |       | 724                         |       |                          | (589       | ) |   | 135 |   | 724 |   |   | (45 | ) |   | 679 |   |
|                          |       |                          |       | $                           | 42,257     |                          |       | $ | (16,311 | ) |   | $ | 25,946 |   | $ | 37,438 |   |   | $ | (7,610 | ) |   | $ | 29,828 |   |

 

Other intangible assets as of July 31, 2005include a total of approximately $4,727,000 amortizable identifiableintangibles obtained from the Company’s acquisition of PDAapps and Tourmalineduring fiscal 2005. The additions to other intangibles and associatedaccumulated depreciation during fiscal 2005 were offset by a write-off of$202,000 of expired, fully-amortized existing contracts. The foreign exchangeeffects on non-US dollar-denominated intangibles and associated accumulateddepreciation were $294,000 and $19,000, respectively, for fiscal 2005.

The amortization of developed and core technologyamounted to $4,683,000, $2,693,000 and $628,000 for fiscal 2005, 2004 and 2003,respectively. The amortization of other intangible assets amounted to$4,239,000, $1,959,000 and $81,000 for fiscal 2005, 2004 and 2003,respectively.

Basedon acquisitions completed as of July 31, 2005, the estimated futureamortization expense of other intangible assets is as follows (in thousands):

| ** **                       | ** ** | **Developed  and Core  Technology** | ** ** | **Other  Intangibles** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|------------------------|------------|
| Fiscal year ending July 31, |       |                                     |       |                   |       |   |   |   |   |
| 2006                             |       |                                     | $          | 4,992                  |       |   |   | $ | 3,624 |   |   |
| 2007                             |       |                                     | 4,872      |                   |       |   | 3,108 |   |   |
| 2008                             |       |                                     | 2,568      |                   |       |   | 1,836 |   |   |
| 2009                             |       |                                     | 1,195      |                   |       |   | 995 |   |   |
| 2010                             |       |                                     | 733        |                   |       |   | 705 |   |   |
| Thereafter                       |       |                                     | 192        |                   |       |   | 1,126 |   |   |
|                             |       |                                     | $          | 14,552                 |       |   |   | $ | 11,394 |   |   |

 

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**Note 6**   Related PartyTransactions

In July 2004, the Company entered into severancearrangement with its former chief technology officer. Under this arrangement,the Company paid out severance of approximately $52,000 during the fourthquarter of fiscal 2004.

In April 2004, the Company underwent a reductionin workforce resulting in 17 individuals, including two executive officers,departing employment with the Company. Severance pay for affected officers wasapproximately $100,000 and recorded within “*Restructuring and OtherCharges*” in the consolidated statements of operations for fiscalyear ended July 31, 2004.

The Company had a full-recourse promissory note used by its chief executiveofficer to purchase shares of the Company’s common stock with aprincipal amount of approximately $310,000. The loan carried an interest rateof 4.75% per annum and was payable on June 14, 2008. During fiscal 2004, the promissory note was fullypaid, together with the accrued interest.

On September 30, 2003, the Company’s board ofdirectors approved change of control agreements with three of the Company’sofficers that provides for 12 months acceleration of vesting of each individual’soptions held at the time of a change of control. In addition, the Companygranted these individuals options to purchase an aggregate of an additional425,000 shares of the Company’s common stock. As of the date of grant, theoption shares will vest over four years, with 25% vesting after one year andthen 1¤48thvesting monthly thereafter. The Company accounts for these options using theguidance prescribed by APB Opinion No. 25, “*Accountingfor Stock Issued to Employees and Related Interpretations*,” and EITFNo. 00-23, “*Issues Relating toAccounting for Stock Compensation Under APB Opinion No. 25 and FIN No. 44*.”

As a result, the Company determined that the approvalof the change of control agreement would result in a new measurement date forthe calculation of stock-based compensation expense under FIN No. 44because the modification may allow the officers to vest in an option or awardthat would otherwise have been forfeited pursuant to the award’s original terms.As of July 31, 2005, no change of control had occurred and the Company isunable to determine the number of options that the officers will ultimatelyretain that would otherwise have been forfeited, absent the modification. As aresult, no compensation expense has been recognized in relation to those awardsas of July 31, 2005.

Refer to Note 16,Subsequent Events, for recent related-party transactions.

**Note 7**   Long-Term Debt

Thefollowing table sets forth the Company’s long-term obligations, excludingcapital lease obligations (in thousands):

| ** **                                                                                               | ** ** | **July 31,  2005** | ** ** | **July 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| 3% convertible  senior notes, interest due semi-annually, principal due in March 2009          |       | $                       | 57,531     |                    | $          | 58,443 |   |
| Interest rate  swap fair value hedge adjustment on $60 million of 3% convertible  senior notes |       | 2,469                   |       | 1,557                   |       |
|                                                                                                     |       | 60,000                  |       | 60,000                  |       |
| Less: current portion                                                                                    |       | —                  |       | —                  |       |
| Long-term portion                                                                                        |       | $                       | 60,000     |                    | $          | 60,000 |   |

 

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*3% ConvertibleSenior Notes*

During fiscal 2004, the Company completed the offeringof $60,000,000 of convertible senior notes to qualified institutional buyers inreliance on Rule 144A under the Securities Act. The notes are seniorunsecured obligations of Intellisync and rank junior to any future secureddebt, on a parity with all of the Company’s other existing and future seniorunsecured debt and prior to any existing or future subordinated debt. As of July 31,2005, the Company had no other senior or subordinated debt, except for ordinarycourse trade payables. The Company may not redeem any of the notes prior totheir maturity. Holders, however, may require the Company to repurchase thenotes upon some types of change in control transactions. The notes will matureon March 1, 2009 unless earlier converted or redeemed. Neither the Companynor any of its subsidiaries are subject to any financial covenants under theindenture. In addition, neither the Company nor any of its subsidiaries arerestricted under the indenture from paying dividends, incurring debt, orissuing or repurchasing its securities.

The notes are convertible into shares of common stockof the Company at the holders option any time prior to the close of business onthe final maturity date of the notes, subject to prior redemption of the notes.The initial conversion rate is 250.0000 shares per each $1,000 principal amountof notes which represents an initial conversion price of $4.00 per share. Theconversion rate is subject to adjustment for certain events, including the paymentof dividends, and other events specified in the indenture.

Holders of the notes may require the Company to redeemall or any portion of the notes upon the occurrence of certain designatedevents which generally involve a transaction with respect to its common stock. Thenotes are redeemable at a redemption price equal to 100% of the principalamount of the notes to be redeemed plus accrued interest to, but excluding, theredemption date.

The notes bear interest at a rate of 3% per annum.Interest on the notes is paid on March 1 and on September 1 of eachyear.

All costs and expensesincurred with the issuance of the above offering have been capitalized within “OtherAssets” and amortized over five years, the life of the respective debt. Suchcosts amounted to approximately $3,185,000 and $2,949,000 with relatedaccumulated amortization of $902,000 and $242,000 as of July 31, 2005 and2004, respectively.

*Interest Rate Swap*

During fiscal 2004, the Company entered into twointerest rate swap agreements with a financial institution on a total notionalamount of $60,000,000, whereby the Company receives fixed-rate interest of 3%in exchange for variable interest payments. The interest rate swaps expire uponthe maturity of the Company’s $60,000,000, 3% convertible senior notes in March 2009,and effectively convert fixed-rate notes into variable-rate borrowings. Theinterest rate is reset semi-annually and is equal to the 6-month LIBORrate less a rate spread. The total variable interest rate, approximately 2.9%at July 31, 2005, resulted in interest expense savings relative to fixedrates of approximately $499,000 for fiscal 2005. Under the provisions of SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities*,” as amended, this arrangement has been designated andqualifies as an effective fair value hedge of interest rate risk related to the$60,000,000 convertible senior notes. As the terms of the swaps match those ofthe underlying hedged debt, the changes in the fair value of these swaps areoffset by corresponding changes in the carrying value of the hedged debt, andtherefore do not impact the Company’s net earnings. As of July 31, 2005,the fair value of the interest rate swaps was approximately $2,469,000 andrecorded in “Other Liabilities” with an equal adjustment recorded to thecarrying value of the $60,000,000 convertible senior notes.

Refer to Note 9 for thedescription of the collateral required on the interest rate swap.

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**Note 8**   Employee 401(k) Plan

The Company has adopted aplan to provide retirement and incidental benefits for its employees. Asallowed under Section 401(k) of the Internal Revenue Code, the 401(k) planprovides tax-deferred salary deductions for eligible employees. Employees maycontribute from 1% to 70% of their annual compensation, limited to a maximumannual amount as set periodically by the Internal Revenue Service. The Companymatches 50% of employee contributions up to a maximum of $1,500 per year perperson. Employee contributions vest immediately, whereas Company matchingcontributions vest at a rate of 25% per year after the first year of employment.At the direction of each employee participant, the trustee of the 401(k) planinvests the contributions to the 401(k) plan in selected investmentoptions. The Company’s matching contributions to the 401(k) plan wereapproximately $206,000, $152,000 and $119,000 in fiscal 2005, 2004 and 2003,respectively.

**Note9**   Commitmentsand Contingencies

*Leases*

During fiscal 2005, the Company entered into a capitallease agreement for computer peripherals, which expires in September 2007.In addition, during fiscal 2004, the Company entered into a capital leaseagreement for a phone system, which expires in February 2008. Theagreements resulted in capitalized costs of $296,000 and $231,000 during fiscal2005 and 2004, respectively. Assets and future obligations related to thecapital leases are included in the accompanying consolidated balance sheet asof July 31, 2005 in property and equipment and in the respective liabilityaccounts, respectively. Current and long-term portions of the capitalleases amounted to $153,000 and $206,000, respectively, at July 31, 2005.Depreciation of assets held under the capital leases is included indepreciation and amortization expense.

The Company leases its facilities under operatingleases that expire at various dates through December 2008. The totalamount of rental payments due over the lease term is being charged to rent onthe straight-line method over the term of the lease. The difference betweenrent expense recorded and the amount paid is credited or charged to “deferredrent” which is included in current liabilities in the accompanying balancesheets. Deferred rent was approximately $259,000 and $435,000 at July 31,2005 and 2004, respectively. Total rent expense was approximately $2,542,000,$1,771,000 and $827,000 for fiscal 2005, 2004 and 2003, respectively.

Futureminimum lease payments for all non-cancelable capital and operating leaseagreements at July 31, 2005, were as follows (in thousands):

| ** **                     | ** ** | **Fiscal year ending July 31,** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                           | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
| Capital lease obligation(1)    |       | $                                                   | 393        |   | $ | 177 |   | $ | 177 |   | $ | 39 |   | $ | — |   |   | $ | — |   |   |
| Operating leases:              |       |                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating leases               |       | 5,420                                               |       | 3,103 |   | 1,099 |   | 849 |   | 369 |   |   | — |   |   |
| Proceeds from subleases        |       | (46                                                 | )          | (46 | ) | — |   | — |   | — |   |   | — |   |   |
| Net operating leases           |       | 5,374                                               |       | 3,057 |   | 1,099 |   | 849 |   | 369 |   |   | — |   |   |
| Future  minimum lease payments |       | $                                                   | 5,767      |   | $ | 3,234 |   | $ | 1,276 |   | $ | 888 |   | $ | 369 |   |   | $ | — |   |   |

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(1)          Includes interestpayments due (interest rates ranging from 2.4% to 12.7%). 

*Acquisitionsand Potential Earnout Payments*

In June 2005, we completed our acquisition of allof the issued and outstanding stock of PDAapps. Under the terms of an Agreementand Plan of Merger, dated as of June 23, 2005, the outstanding shares ofPDAapps common stock were converted into the right to receive (i) anaggregate of approximately 

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$4,000,000 in aggregateinitial cash consideration and (ii) an aggregate of up to $2,600,000 incash earnout consideration (based on future revenue generated by the Companyfrom the former PDAapps client base), subject to the deposit of $1,000,000 inescrow to be available to compensate Intellisync pursuant to theindemnification obligations of the holders of PDAapps common stock. The earnoutconsideration, if achieved, is due and payable shortly following the firstanniversary of the acquisition.

In March 2005, we completed our acquisition ofall of the issued and outstanding stock of Tourmaline. Under the terms of anAgreement and Plan of Merger, dated as of February 9, 2005, theoutstanding shares of Tourmaline common stock were converted into the right toreceive (i) an aggregate of approximately $4,118,000 in aggregate initialcash consideration and (ii) an aggregate of up to $2,881,918 in cashearnout consideration (based on future revenue generated by the Company fromthe former Tourmaline client base), subject to the deposit of a certain portionof the initial cash consideration and earnout consideration in escrow to beavailable to compensate Intellisync pursuant to the indemnification obligationsof the holders of Tourmaline common stock. The earnout consideration, ifachieved, is due and payable shortly following the first anniversary of theacquisition.

As of July 31, 2005,the Company has not accrued any contingent earnout payment amounts discussedabove. Any earnout consideration paid will be recorded as additional goodwillassociated with the respective acquisition.

*Guarantees*

The Company has three letters of credit thatcollateralize certain operating lease obligations and total approximately$321,000 and $397,000 at July 31, 2005 and 2004, respectively. The Companycollateralizes these letters of credit with cash deposits made with two of itsfinancial institutions and has classified the short-term and the long-termportions of approximately $196,000 and $125,000 at July 31, 2005, and$101,000 and $296,000 at July 31, 2004 as “Other Current Assets” and “RestrictedCash,” respectively, in the consolidated balance sheets. The long-term portionexpires through June 2006. The holders of the letters of credit are ableto draw on each respective letter of credit in the event that the Company isfound to be in default of its obligations under each of its operating leases.

Under the terms of the interest rate swap agreementinto which the Company entered during fiscal 2004, the Company must providecollateral to match any unfavorable mark-to-market exposure (fair value) on theswap. The amount of collateral required totals a minimum of $1,800,000 plus anamount equal to the unfavorable mark-to-market exposure on the swap. Generally,the required collateral will rise as interest rates rise. As of July 31,2005, and July 31, 2004, the Company has posted approximately $4,181,000and $3,736,000, respectively, of collateral under this swap agreement which isincluded in “Restricted Cash” in its consolidated balance sheet.

In the event of earlytermination of the Company’s service agreement with eˆdeltacom, a division ofITC^DeltaCom, Inc. and a managed service provider, the Company may berequired to pay eˆdeltacom a penalty fee of up to approximately $45,000.

*Warranties*

The Company generally provides a warranty for itssoftware products and services to its customers for a period of 90 days. TheCompany’s software products’ media are generally warrantied to be free ofdefects in materials and workmanship under normal use and the products are alsogenerally warrantied to perform substantially as described in certain Companydocumentation. The Company’s services are generally warrantied to be performedin a professional manner and to conform materially to the specifications setforth in a customer’s signed contract. In the event there is a failure of suchwarranties, the Company generally corrects or provides a reasonable work aroundor replacement product. The Company believes such obligations do notsignificantly affect the Company’s financial position or results of operations.

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The Company accrues forwarranty expenses at the time revenue is recognized and maintains a warrantyaccrual for the estimated future warranty obligation based upon therelationship between historical and anticipated costs. In other instances,additional amounts are recorded when such costs are probable and can bereasonably estimated. The warranty accrual is reviewed at least quarterly. Asof July 31, 2005, the warranty accrual was $200,000, which approximatesthe balance as of July 31, 2004.

*Indemnification Obligations*

On certain occasions, theCompany provides to its customers intellectual property indemnification,subject to certain limitations, in its arrangements for the Company’s softwareproducts or services. Typically these obligations provide that the Company willindemnify, defend and hold the customers harmless against claims by thirdparties that its software products or services infringe upon the copyrights,trademarks, patents or trade secret rights of such third parties. As of July 31,2005, there has been no significant claim made by any third party with regardto the Company’s software products or services. The liability reserve forindemnification obligations is not significant.

Section 145 of theDelaware General Corporation Law, or the Delaware Law, permits theindemnification of officers, directors, and other corporate agents undercertain circumstances and subject to certain limitations. The Company’sCertificate of Incorporation and Bylaws provide that the Company shallindemnify its directors, officers, employees, and agents to the full extentpermitted by Delaware Law, including in circumstances in which indemnificationis otherwise discretionary under Delaware law. In addition, the Company hasentered into separate indemnification agreements with its directors andofficers which would require the Company, among other things, to indemnify themagainst certain liabilities which may arise by reason of their status orservice (other than liabilities arising from willful misconduct of a culpablenature). These indemnification provisions may be sufficiently broad to permitindemnification of the Company’s officers and directors for liabilities(including reimbursement of expenses incurred) arising under the SecuritiesAct, as amended. At present, there is no pending litigation or proceedinginvolving a director, officer, employee or other agent of the Company in whichindemnification is being sought nor is the Company aware of any threatenedlitigation that may result in a claim for indemnification by any director,officer, employee or other agent of the Company.

The offering memorandumand registration statement associated with the 3% Convertible Senior Notes Due2009 include indemnification provisions that obligate the Company toindemnify and hold harmless each initial purchaser of the notes against any andall losses, claims, damages and liabilities (including, without limitation, anylegal or other expenses reasonably incurred in connection with defending orinvestigating any such action or claim) caused by any untrue statement oralleged untrue statement of a material fact contained in such memorandum or theregistration statement. As of July 31, 2005, the Company does not believeit is probable that it will have to make any material payments for claimsthat could result from such provisions in the future. As such, no amountshave been recorded under these indemnifications as of July 31, 2005.

*Litigation*

In August 2004, a patent-infringement claim wasfiled against the Company by NCR Corporation in the U.S. District Court for theSouthern District of Ohio. In the complaint, NCR alleged certain of the Company’sproducts infringe three of its patents which allegedly cover technology forsynchronizing databases between personal digital assistants and host computers.On July 5, 2005, the case was dismissed pursuant to a settlement betweenthe Company and NCR whereby the Company paid NCR $600,000. This amount isamortized over the license period of certain NCR patents determined to bebetween January 2002 and December 2010 based on the greater ofstraight line amortization or in proportion to volume of the deployed licenses.As a result, approximately $239,000 was expensed during the fourth quarter offiscal 2005. The remaining $361,000 was recorded as “Other Assets” in theconsolidated balance sheet as of July 31, 2005.

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The Company is party tovarious legal proceedings and claims, either asserted or unasserted, whicharise in the ordinary course of business, including proceedings and claims thatrelate to acquisitions it has completed or to companies it has acquired, commercial, employment and othermatters. While the outcome of these matters cannot be predicted withcertainty, the Company does not believe that the outcome of any of these claimsor any of the above mentioned legal matters will have a material adverse effecton its consolidated financial position, results of operations or cash flow. In accordance with generallyaccepted accounting principles, the Company make a provision for a liability when it is both probablethat a liability has been incurred and the amount of the loss can be reasonablyestimated. These provisions are reviewed at least quarterly and adjusted toreflect the impacts of negotiations, settlements, rulings, advice of legalcounsel, and other information and events pertaining to a particular case.Litigation is inherently unpredictable. However, the Company believes that it has validdefenses with respect to the legal matters pending against Intellisync. It ispossible, nevertheless, that the Company’s consolidated financial position, cash flows or results ofoperations could be affected by the resolution of one or more of thesecontingencies.

**Note 10   StockholderRights Plan**

In January 2003,the Board of Directors of the Company has adopted a stockholder rights plan. Theplan is designed to protect the long-term value of the Company for itsstockholders during any future, unsolicited acquisition attempt. Key featuresof the rights plan include:

·       therights become exercisable only upon the occurrence of certain events specifiedin the plan, including the acquisition of 15% of the Company’s outstandingcommon stock by a person or group;

·       eachright entitles the registered holder, other than an “acquiring person,” underspecified circumstances, to purchase from the Company one one-thousandth of ashare of Series A Participating Preferred Stock, par value $0.001 pershare, or the Preferred Shares, of the Company, at a price of $10.00 per oneone-thousandth of a Preferred Share, subject to adjustment. In addition, eachright entitles the registered holder, other than an “acquiring person,” underspecified circumstances, to purchase from the Company that number of shares ofthe Company’s Common Stock having a market value of two times the exerciseprice of the right;

·       subjectto certain limitations, the terms of the rights may be amended by a resolutionof the Board of Directors without the consent of the holders of the rights; and

·       the right may be redeemedat a price of $0.001 per right.

**Note 11   Stockholders’ Equity**

*Preferred Stock*

TheCompany has authorized 2,000,000 shares of preferred stock, par value $0.001per common share. The Company’s Board of Directors has authority toprovide for the issuance of the shares of preferred stock in series, toestablish from time-to-time the number of shares to be included in each suchseries and to fix the designation, powers, preferences and rights of the sharesof each such series and the qualifications, limitations or restrictionsthereof, without any further vote or action by the shareholders. As of July 31,2005 and 2004, no shares of preferred stock have been issued.

*Common Stock*

The Company has authorized160,000,000 shares of common stock, par value $.001 per common share. As of July 31,2005 and 2004, 66,639,299 and 65,592,118 respectively, shares of common stockhave been issued.

F-42

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*Stock Option Plans*

In March 2000, the Board of Directors adopted the2000 Supplemental Stock Option Plan, or the SSOP. The SSOP provides forgranting of NSOs to purchase sharesof common stock to non-executive officers, employees and consultants of theCompany. To date, the Company has notgranted any significant options to consultants or advisors. Inaccordance with the SSOP, the stated exercise price shall not be less than 85%of the estimated fair market value of common stock on the date of grant asdetermined by the Board of Directors. The SSOP allows optionees to purchasestock on exercise of options using cash, through a tender of shares or througha same-day sale option exercise program. The SSOP provides that the optionsshall be exercisable over a period not to exceed ten years. Options generallyvest 25% one year after date of grant and 1¤48th each monththereafter for the next 36 months. The SSOP provides that, in the event ofcertain change of control transactions involving the Company, outstandingoptions will be assumed by the acquiror or the acquiror would issue replacementoptions. If the acquiror did not assume or replace outstanding options, thenthese options would terminate upon the closing of the transactions. Optionsavailable for grant as of July 31, 2005 were approximately 11,000 shares.

In January 2001, the Company’s Board of Directorsapproved a cancellation and regrant program for outstanding options. Under theprogram, holders of outstanding options granted after July 24, 1996, withexercise prices in excess of $15.00 per share were given the choice ofretaining these options or obtaining in substitution repriced options for thesame number of shares that would be issued on a date which was at least sixmonths plus one day from the cancellation date. Holders of approximately2,676,000 shares elected to participate in the program and received the newoptions. The re-grants for executive officers and directors were priced at$2.10 (the fair market value on July 30, 2001, the date of the new grant).The re-grants for employees were priced at $1.78 (85% of the underlying marketprice on July 30, 2001). The new options vest according to their originalgrant schedules.

In September 2001, the Company’s Board ofDirectors approved a new proposal to offer its employees, officers anddirectors the opportunity to cancel stock options granted to them between September 1999and June 2001 in exchange for an equal number of new options. The newoptions were granted on April 24, 2002, six months and two days followingthe close of the tender offer on October 22, 2001, and priced at $1.11(the fair market value on the grant date). Holders of options exercisable for approximately 845,000 shares elected toparticipate in the program and received the new options. The new optionsvest according to their original grant schedules.

In December 2002, the Company’s Board of Directors and stockholders adopted the2002 Stock Option Plan, or the 2002 Plan, to replace the 93 Plan which expired in October 2003.The 2002 Plan provides for granting of ISOs and NSOs to purchase shares ofcommon stock to employees, directors,consultants and advisors of the Company. In accordance with the 2002Plan, the stated exercise price, (i) for an ISO, shall not be less thanthe fair market value, (ii) for an NSO, shall not be less than eighty-fivepercent (85%) of the fair market value, as determined by the Board ofDirectors, of a share of stock on the date of the granting of the option. The2002 Plan allows optionees to purchase stock on exercise of options using cash,through a tender of shares or through a same-day sale option exercise program. The2002 Plan provides that the options shall be exercisable over a period not toexceed ten years. Options generally vest 25% one year after date of grant and 1¤48theach month thereafter for the next 36 months. The 2002 Plan provides that, inthe event of certain change of control transactions involving the Company,outstanding options will be assumed by the acquiror or the acquiror would issuereplacement options. If the acquiror did not assume or replace outstanding options,then these options would terminate upon the closing of the transactions. In November 2004,the Company increased the number of shares of common stock authorized forissuance under 2002 Plan by 6,500,000 to 8,775,000. Options available for grant as of July 31, 2005 were approximately1,936,000 shares. Refer to Note 16, Subsequent Events, regarding potentialamendment to the 2002 Plan.

F-43

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The Company assumedcertain options granted to former employees of acquired companies, or theAcquired Options. All of the Acquired Options were adjusted to effectuate theconversion under the terms of the agreements between the Company and thecompanies acquired. The Acquired Options generally became exercisable over afour-year period and generally expire ten years from the date of grant. Noadditional options will be granted under any of these plans.

*Restricted StockGrant Agreement*

In June 2002, the Company granted its newpresident and chief executive officer an option to purchase 1,500,000restricted shares of common stock at $0.59 per share (the fair market value on July 14,2002, the date of the grant). The options may be exercised prior to the optionsbecoming vested, but such shares are subject to repurchase over the optionvesting period. If the officer’s employment is terminated for any reason, theCompany has the right to repurchase any unvested shares. A total of 700,000shares, conditional upon continued employment, vest 25% one year after date ofgrant and 1¤48theach month thereafter for the next 36 months. The remaining 800,000 shares vestin full on June 14, 2009, but the vesting may be accelerated uponachievement of certain performance objectives (212,500 shares have beenaccelerated as of July 31, 2005). The grant provides for acceleration ofvesting upon change of control. In June 2002, the officer exercised theoption with respect to 525,000 shares in exchange for a full recourse,interest-bearing promissory note. The promissory note was fully paid, togetherwith the accrued interest, in January 2004.

Stockoption activity, both incentive and nonqualified, under all plans is presentedas follows:

| ** **                                  | ** ** | ** **                        | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**             | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **Options  Available  For Grant** | ** ** | **Number of  Shares**   | ** ** | **Range of  Price  Per Share** | ** ** | **Weighted  Average   Exercise  Price Per  Share** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price Per  Share** | ** ** |
| ** **                                  | ** ** | **(In thousands)**           | ** ** | **(In thousands)**      | ** ** | ** **                               | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| Balance at July 31, 2002               |       |                              | 3,281      |                         |       |                                     | 6,386      |   |   | $0.10 - $14.25 |   |   | $ | 1.48 |   |   |   | 5,704 |   |   |   | $ | 1.43 |   |   |
| Increase in shares authorized               |       |                              | 2,275      |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                     |       |                              | (3,161     | )                            |       |                                     | 3,161      |   |   | $0.22 - $  3.69 |   |   | $ | 1.19 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                              | —     |                         |       |                                     | (1,374     | ) |   | $0.10 - $ 3.26 |   |   | $ | 1.49 |   |   |   |   |   |   |   |   |   |   |
| Canceled                                    |       |                              | 1,845      |                         |       |                                     | (1,845     | ) |   | $0.26 - $14.25 |   |   | $ | 1.59 |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                              | (7         | )                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at July 31, 2003               |       |                              | 4,233      |                         |       |                                     | 6,328      |   |   | $0.16 - $14.25 |   |   | $ | 1.29 |   |   |   | 5,003 |   |   |   | $ | 1.39 |   |   |
| Options assumed in Synchrologic acquisition |       |                              |       |                         |       |                                     | 1,010      |   |   | $0.09 - $ 8.10 |   |   | $ | 0.37 |   |   |   |   |   |   |   |   |   |   |
| Granted                                     |       |                              | (4,189     | )                            |       |                                     | 4,189      |   |   | $2.42 - $ 7.51 |   |   | $ | 4.04 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                              | —     |                         |       |                                     | (1,561     | ) |   | $0.09 - $ 2.94 |   |   | $ | 1.16 |   |   |   |   |   |   |   |   |   |   |
| Canceled                                    |       |                              | 1,764      |                         |       |                                     | (1,764     | ) |   | $0.22 - $14.25 |   |   | $ | 2.64 |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                              | (942       | )                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at July 31, 2004               |       |                              | 866        |                         |       |                                     | 8,202      |   |   | $0.09 - $14.25 |   |   | $ | 2.32 |   |   |   | 4,793 |   |   |   | $ | 1.49 |   |   |
| Increase in shares authorized               |       |                              | 6,500      |                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Granted                                     |       |                              | (6,237     | )                            |       |                                     | 6,237      |   |   | $1.85 - $ 3.62 |   |   | $ | 2.19 |   |   |   |   |   |   |   |   |   |   |
| Exercised                                   |       |                              | —     |                         |       |                                     | (692       | ) |   | $0.09 - $ 2.10 |   |   | $ | 0.87 |   |   |   |   |   |   |   |   |   |   |
| Canceled                                    |       |                              | 991        |                         |       |                                     | (991       | ) |   | $0.36 - $ 5.95 |   |   | $ | 2.92 |   |   |   |   |   |   |   |   |   |   |
| Expired                                     |       |                              | (173       | )                            |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at  July 31, 2005              |       |                              | 1,947      |                         |       |                                     | 12,756     |   |   | $0.09 - $14.25 |   |   | $ | 2.29 |   |   |   | 5,093 |   |   |   | $ | 1.99 |   |   |

 

All options were granted during fiscal 2005, 2004 and2003 at the fair market value of the Company’s common stock. Proceeds receivedby the Company from exercises are credited to common stock and additionalpaid-in capital.

At July 31, 2005,there were no shares subject to repurchase, and options to purchase 1,946,780shares were available for future grants.

F-44

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*Deferred StockCompensation.*

In conjunction with the cancellation and regrantprogram implemented in January 2001, the new options granted to executiveofficers and directors were priced at the fair market value on the date of thenew grant and accounted for as fixed awards. Accordingly, no stock compensationcharge was recorded for these new options. The new options granted to employeeswere priced at a discount and accounted for under the guidance in FIN No. 44.According to FIN No. 44, the associated compensation charge under variableaccounting is based on any excess of the common stock closing price at the endof the reporting period or date of exercise, forfeiture, cancellation withoutreplacements, if earlier, over the exercise price. This cost is amortized on anaccelerated basis over the remaining vesting period consistent with the methoddescribed in FIN No. 28, “*Accounting for StockAppreciation Rights and Other Variable Stock Option or Award Plans*.”The Company recorded a recovery of a previous charge of $25,000 in fiscal 2005and a charge of approximately $79,000 and $400,000 in fiscal 2004 and 2003,respectively, for the underlying deferred compensation relating to theemployees’ options.

As a result of the cancellation and regrant programimplemented in September 2001 and in accordance with FIN No. 44,options to purchase 55,500 shares, net of the effect of recent terminations,that were granted between July and October 2001 became subject tovariable plan accounting. FIN No. 44 holds that if a lower-priced optionis granted within a six-month period before or after a higher priced optionheld by the same person is cancelled, the combined transactions are considereda repricing and result in variable plan accounting. The Company recorded forthese options a charge of $0 in fiscal 2005, a recovery of a $21,000 in fiscal2004 and a charge of $33,000 in fiscal 2003.

The 525,000 unvested shares that were exercised infiscal 2002 by the president and chief executive officer of the Company underthe Restricted Stock Grant Agreement were paid with a full recourse, fixedinterest-bearing promissory note (Refer to Note 6). The shares are accountedfor by the Company under the provisions of EITF No. 00-23, “*Issues Related to the Accounting for Stock Compensation under APBOpinion No. 25 and FIN No.44*.” EITF No. 00-23 holdsthat if unvested options were exercised with a full recourse note with a fixedinterest rate, variable accounting would result until such time that theunderlying options have vested and the repurchase provision for the options haslapsed. According to EITF No. 00-23, the associated compensationcharge is based on any excess of the fair value of the stock at the end of thereporting period or date of vesting, if earlier, over the fair value of thenote at that date. The underlying note was paid during fiscal 2004, therefore,the Company recorded a recovery of a portion of the previous year’s charge ofapproximately $346,000 in fiscal 2004. For fiscal 2003, the Company recorded acharge of $1,611,000 for the underlying options.

As a result of the employeeterminations during fiscal 2003, the Company recorded a reduction of unearnedstock-based compensation of $69,000. For many of the terminated employees andexecutives, the Company incurred significant deferred stock-based charges onthe original option grants over the previous years. The reversed amountsrepresent the additional paid in capital and stock-based compensation amountsassociated with the unvested options and stock awards.

The Company recorded an expense recovery of $25,000 infiscal 2005 and a total expense of $745,000 and $1,742,000 in fiscal 2004 and2003, respectively, relating to the above deferred compensation charges.

Upon the Company’s adoption in the first quarter offiscal 2006 of SFAS No. 123R,“Share-Based Payments,” (refer to Note 2, Recently Issued AccountingPronouncements) variable accounting for stock options, as those discussedabove, will no longer be utilized. Instead, compensation expense will bedetermined based on the fair value of the stock options at the date of grant.

F-45

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Thefollowing table summarizes information about stock options under all plansoutstanding at July 31, 2005:

| ** **                         | ** ** | **Options Outstanding** | ** ** | ** **              | ** ** |
|------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | ** **                   | ** ** | ** **              | ** ** | **Weighted-Average  Remaining** | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** |
| **Range of  Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding** | ** ** | **Contractual Life  (In years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| ** **                         | ** ** | **(In thousands)**      | ** ** | ** **              | ** ** | ** ** | ** ** | **(In thousands)** | ** ** | ** ** | ** ** |
| $  0.09  - $0.45         |       |                         | 1,214      |                    |       |   | 7.40 |   |   |   | $ | 0.30 |   |   |   | 1,066 |   |   |   | $ | 0.30 |   |   |
| $  0.57  - $1.85         |       |                         | 2,100      |                    |       |   | 5.95 |   |   |   | $ | 0.92 |   |   |   | 1,971 |   |   |   | $ | 0.87 |   |   |
| $  2.00                  |       |                         | 2,050      |                    |       |   | 9.32 |   |   |   | $ | 2.00 |   |   |   | 0 |   |   |   | $ | 0.00 |   |   |
| $  2.04  - $2.15         |       |                         | 740        |                    |       |   | 8.36 |   |   |   | $ | 2.11 |   |   |   | 215 |   |   |   | $ | 2.10 |   |   |
| $  2.17  - $2.72         |       |                         | 3,170      |                    |       |   | 9.37 |   |   |   | $ | 2.29 |   |   |   | 137 |   |   |   | $ | 2.54 |   |   |
| $  2.76  - $3.30         |       |                         | 1,178      |                    |       |   | 8.73 |   |   |   | $ | 3.09 |   |   |   | 385 |   |   |   | $ | 3.12 |   |   |
| $  3.37  - $4.43         |       |                         | 1,200      |                    |       |   | 8.21 |   |   |   | $ | 4.08 |   |   |   | 519 |   |   |   | $ | 4.07 |   |   |
| $  4.65  - $7.51         |       |                         | 1,077      |                    |       |   | 8.15 |   |   |   | $ | 4.84 |   |   |   | 773 |   |   |   | $ | 4.81 |   |   |
| $  8.10                  |       |                         | 17         |                    |       |   | 8.41 |   |   |   | $ | 8.10 |   |   |   | 17 |   |   |   | $ | 8.10 |   |   |
| $14.25                             |       |                         | 10         |                    |       |   | 5.19 |   |   |   | $ | 14.25 |   |   |   | 10 |   |   |   | $ | 14.25 |   |   |
|                               |       |                         | 12,756     |                    |       |   | 8.28 |   |   |   | $ | 2.29 |   |   |   | 5,093 |   |   |   | $ | 1.99 |   |   |

 

*Employee StockPurchase Plan*

In December 1998, the Board of Directors adoptedthe Employee Stock Purchase Plan, or the ESPP. The purpose of the ESPP is toprovide eligible employees of the Company with a means of acquiring commonstock of the Company through payroll deductions. The ESPP consists of foursix-month purchase periods in each two-year offering period. Shares may bepurchased under the ESPP at 85% of the lesser of the fair market value of thecommon stock on the beginning of the offering period date or ending of thepurchase period. During fiscal 2005, 2004 and 2003, 355,910, 278,868 and522,003 shares were sold through the ESPP at a weighted average price of $1.74,$1.21 and $0.32, respectively.

A maximum of 500,000shares of the Company’s common stock was initially made available for issuanceunder the ESPP, which amount is cumulatively increased on August 1 of eachyear by an amount equal to the lesser of (i) 500,000 shares, or (ii) alesser amount of shares determined by the Board of Directors. In fiscal 2005,the board of the Company authorized an increase in the number of sharesavailable for purchase under the ESPP pursuant to the evergreen provisions ofthe ESPP. As of July 31, 2005, the number of shares available for purchaseunder the ESPP is approximately 350,000, exclusive of 500,000 shares approvedby the Board of Directors to be added on August 1, 2005.

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**Note12   Restructuring and Other Charges**

Restructuringand other charges in the consolidated statements of operations consist of thefollowing:

| ** **                               | ** ** | **Year Ended July 31,**                               | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                               | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| ** **                               | ** ** | **(In thousands, except percentage)**                 | ** ** |
| Restructuring charges:                   |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Severance costs                          |       |                                                                 | $          | — |   |   |   | $ | 253 |   |   |   | $ | 257 |   |   |
| Facilities costs                         |       |                                                                 | —     |   |   |   | 600 |   |   |   | 159 |   |   |
| Restructuring charges                    |       |                                                                 | $          | — |   |   |   | $ | 853 |   |   |   | $ | 416 |   |   |
| Other charges:                           |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Litigation settlement and related costs  |       |                                                                 | $          | 355 |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Costs relating to potential acquisitions |       |                                                                 | 150        |   |   |   | 76 |   |   |   | 379 |   |   |
| Other charges                            |       |                                                                 | $          | 505 |   |   |   | $ | 76 |   |   |   | $ | 379 |   |   |
| Restructuring and  other charges         |       |                                                                 | $          | 505 |   |   |   | $ | 929 |   |   |   | $ | 795 |   |   |

 

*RestructuringCharges*

The Company implemented a number of cost-reductionplans aimed at reducing costs that were not integral to its overall strategy,better aligning its expense levels with current revenue levels and ensuringconservative spending during periods of economic uncertainty. These initiativesincluded a reduction in workforce and facilities consolidation.

*Fiscal2004.**  *Duringfiscal 2004, the Company implemented reduction in workforce aimed at reducingexcess capacity in its continued effort to streamline its operations, affecting17 employees in various business functions (nine in research and developmentand eight in sales and marketing). The program was completed by the end of April 2004,and the associated severance costs incurred were approximately $253,000, noneof which remained unused as of July 31, 2004.

The Company continually evaluates the balance of therestructuring reserve it recorded in prior years based on the remainingestimated amounts to be paid. As a result of vacating the remaining office space in SantaCruz, California and the difficulties in subletting such facilitybecause of the continuing deterioration of the real estate market in thislocation, the Company determined that additional charges were needed foradjustments in expected future sublease rates and brokerage fees. As a result, total facilities costs of $600,000, inclusive of the costs of $250,000for vacating a floor of the Company’s office facility in San Jose, California, wererecorded during fiscal 2004.

*Fiscal2003.**  *Duringfiscal 2003, the Company implemented a reduction in workforce, affecting19 employees in engineering and product management. As a result, theCompany incurred severance and other fringe benefit costs of $257,000.

The continuing deterioration of the real estate marketin Santa Cruz, California resulted in the difficulties for the Company tosublet the sections of its facility in such location, which the Company vacatedin previous years. As a result, the Company determined that additional chargeswere needed for adjustments in expected future sublease rates and brokeragefees. A restructuring charge adjustment of $159,000 was therefore recorded infiscal 2003.

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Asummary of the severance and facilities costs and assets held for disposalrelating to the cost reduction plans implemented is outlined as follows (inthousands):

| ** **                         | ** ** | **Workforce  Reduction** | ** ** | **Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------------------------|------------|-----------|------------|
| **Balance  at July 31, 2002** |       |                     | $          | 43                                            |       |      |       | $ | 3,076 |   |   | $ | 3,119 |   |
| Restructuring  provision           |       |                     | 257        |                                          |       |      | —     |   |   | 257 |   |
| Adjustment                         |       |                     | —     |                                          |       |      | 159        |   |   | 159 |   |
| Cash payments                      |       |                     | (300       | )                                             |       |      | (1,469     | ) |   | (1,769 | ) |
| **Balance  at July 31, 2003** |       |                     | $          | —                                        |       |      |       | $ | 1,766 |   |   | $ | 1,766 |   |
| Restructuring  provision           |       |                     | 253        |                                          |       |      | 250        |   |   | 503 |   |
| Adjustment                         |       |                     | —     |                                          |       |      | 350        |   |   | 350 |   |
| Cash payments                      |       |                     | (253       | )                                             |       |      | (1,286     | ) |   | (1539 | ) |
| **Balance  at July 31, 2004** |       |                     | $          | —                                        |       |      |       | $ | 1,080 |   |   | $ | 1,080 |   |
| Cash payments                      |       |                     | —     |                                          |       |      | (994       | ) |   | (994 | ) |
| **Balance at July 31, 2005**  |       |                     | $          | —                                        |       |      |       | $ | 86 |   |   | $ | 86 |   |

 

The remaining unpaid amount as of July 31, 2005of $86,000 related to the net lease expense due to the consolidation of excessfacilities, will be paid over the respective lease terms through June 2006using cash from operations and is reflected accordingly in “Accrued Liabilities”in the consolidated balance sheet as of July 31, 2005.

The Company believes thatthe above restructurings have contributed towards the improvement in its grossand operating income during fiscal 2005 and 2004. The Company has furtherreduced the total costs of excess facilities by the estimated proceeds fromassumed future subleases. If the actual results differ from its estimates andassumptions, the Company may be required to adjust further its facilities costsaccrual related to expected losses on subleases, including recording additionallosses. Differences, if any, between the estimated amounts accrued and theactual amounts paid will be reflected in operating expenses in future periods.

*Other charges*

*Litigationsettlement and related costs.*   During the fourthquarter of fiscal 2005, the Company made a cash payment of $600,000 forlitigation settlement with NCR Corporation. This amount is amortized over thelicense period of certain NCR patents determined to be between January 2002and December 2010 based on the greater of straight line amortization or inproportion to volume of the deployed licenses. As a result, approximately$239,000 was expensed during the fourth quarter of fiscal 2005. The remaining$361,000 was recorded as “Other Assets” in the consolidated balance sheet as ofJuly 31, 2005. In addition, an expense of $116,000 was recorded for thelitigation related costs incurred during the fourth quarter of fiscal 2005.

*CostsRelating To Potential Acquisitions.**  *During fiscal 2005, 2004 and 2003,the Company incurred residual costs of approximately $150,000, $76,000 and$379,000 for operating expenses, mainly legal and accounting, relating topotential acquisitions that the Company ceased pursuing.

 

F-48

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**Note13   Income Taxes**

The income tax provision(benefit) is summarized as follows (in thousands):

| ** **                         | ** ** | **Year Ended July 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current                            |       |                                   |       |   |   |   |   |
| Federal                            |       | $                                      | —     |   | $ | — |   | $ | — |   |
| State                              |       | 232                                    |       | 15 |   | 47 |   |
| Foreign  withholding and other tax |       | 573                                    |       | 466 |   | 239 |   |
|                               |       | $                                      | 805        |   | $ | 481 |   | $ | 286 |   |

 

Net deferred taxassets/liabilities are summarized as follows (in thousands):

| ** **                                                | ** ** | **July 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|
| ** **                                                | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Deferred tax assets:                                      |       |              |       |   |   |
| Net  operating loss carryforwards                         |       | $                 | 52,802     |   | $ | 50,441 |   |
| Alternative  minimum tax credit carryforwards             |       | 107               |       | 107 |   |
| Research  and development and other credit carryforwards  |       | 6,443             |       | 6,732 |   |
| Foreign  tax credit carryforwards                         |       | —            |       | 1,952 |   |
| Reserves  and accruals                                    |       | 2,662             |       | 6,231 |   |
| Depreciation  and amortization                            |       | 9,468             |       | 5,747 |   |
| Total  deferred tax assets                                |       | 71,482            |       | 71,210 |   |
| Deferred  tax asset valuation allowance                   |       | (65,598           | )          | (65,546 | ) |
|                                                      |       | 5,884             |       | 5,664 |   |
| Deferred  tax liabilities—acquired intangible assets |       | (6,079            | )          | (6,261 | ) |
| Net deferred tax  assets/liabilities                      |       | $                 | (195       | ) | $ | (597 | ) |

 

Inaccordance with SFAS No. 109, deferred tax liabilities of approximately$803,000 and $976,000, net of amortization, were recorded during fiscal 2005for the tax effect of the non-deductible amortizable intangible assetsassociated with the Tourmaline and PDAapps, respectively. As the Companyamortizes the intangible assets acquired in these transactions the deferred taxliability associated with those assets will decrease resulting in a smaller netdeferred tax liability for the Company.

Exceptfor fiscal 1997, the Company has incurred losses from inception through fiscal2005. The Company believes that, based on the history of such losses and otherfactors, the weight of available evidence indicates that it is more likely thannot that the Company, with the exception of Australia, will not be able torecover its deferred tax assets against future earnings prior to expiration. Accordingly,the company has recognized a deferred tax asset of $242,000 in Australia andestablished a full valuation allowance against the remainder of its deferredtax assets to the extent they are not likely to be recoverable. The change invaluation allowance for deferred tax assets was an increase of $52,000,$7,826,000 and $1,134,000 during fiscal 2005, 2004 and 2003, respectively.

Deferredtax assets of approximately $17,230,000 as of July 31, 2005 pertain tocertain net operating losses carryforwards and credit carryforwards resultingfrom the exercise of employee stock options. When recognized, the tax benefitof these loss and credit carryforwards are accounted for as a credit toadditional paid-in capital rather than a reduction of the income tax provision.

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A reconciliation of theincome tax provision to the amount computed by applying the statutory federalincome tax rate to income (loss) before income tax provision is summarized asfollows (in thousands):

| ** **                                  | ** ** | **Year Ended July 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Amounts  computed at statutory federal rate |       | $                                      | (4,287     | ) | $ | (3,051 | ) | $ | (2,533 | ) |
| Foreign  withholding and other tax          |       | 843                                    |       | 106 |   | 218 |   |
| Future  benefits not currently recognized   |       | 4,031                                  |       | 2,138 |   | 1,805 |   |
| Deferred  stock compensation                |       | (9                                     | )          | 253 |   | 592 |   |
| In-process  research and development        |       | 75                                     |       | 983 |   | 138 |   |
| Other                                       |       | 152                                    |       | 52 |   | 66 |   |
|                                        |       | $                                      | 805        |   | $ | 481 |   | $ | 286 |   |

 

At July 31,2005, the Company has federal and state net operating loss carryforwards of$150,886,000 and $25,724,000 respectively, and federal and state creditcarryforwards of $4,474,000 and $2,076,000, respectively, available to offsetfuture taxable income. The Company’s carryforwards expire in 2006 through 2025if not utilized.

TheTax Reform Act of 1986 limits the use of net operating loss and tax creditcarryforwards in certain situations where changes occur in the stock ownershipof a company. As a result of ownership changes which may have occurred in pastfiscal years, the Company’s net operating losses and carryforwards may besubject to these limitations.

The Company does not provide for taxes on unremittedearnings of its foreign subsidiary as these earnings are intended to bereinvested permanently.

**Note14**   Net Loss Per Common Share

Basicnet loss per common share is computed by dividing net loss available to commonstockholders by the weighted average number of common shares outstanding forthe period. Diluted net loss per common share is computed by dividing net lossby the weighted average number of dilutive potential common shares that wereoutstanding during the period. Diluted weighted average shares reflect thedilutive effect, if any, of potential common shares based on the treasury stockmethod.

Basicand diluted net loss per common share was calculated as follows (in thousands,except per common share amounts):

| ** **                                                                                        | ** ** | **Year Ended July 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| *Numerator:*                                                                                      |       |                                   |       |   |   |   |   |
| Net  loss attributable to common stockholders                                                     |       | $                                      | (13,414    | ) | $ | (9,455 | ) | $ | (7,736 | ) |
| *Denominator:*                                                                                    |       |                                   |       |   |   |   |   |
| Weighted  average shares outstanding used to compute basic and diluted net loss per  common share |       | 65,750                                 |       | 57,732 |   | 46,222 |   |
| Basic and diluted net loss per  common share                                                      |       | $                                      | (0.20      | ) | $ | (0.16 | ) | $ | (0.17 | ) |

 

Allcommon shares that were held in escrow or that were subject to repurchase bythe Company, totaling approximately zero, 1,584,000 and 335,000 as of July 31,2005, 2004 and 2003, respectively, were excluded from basic and diluted netloss per common share calculations.

Potential common shares attributable to stock options,convertible senior notes, warrants, shares held in escrow and shares subject torepurchase by the Company of 27,756,240, 24,786,384 and 6,563,822 wereoutstanding at July 31, 2005, 2004 and 2003, respectively. However, as aresult of a net loss incurred by the Company in the years ended July 31,2005, 2004 and 2003, none of the in-the-money potential common 

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shares were included inthe weighted average outstanding shares (using the treasury stock method) usedto calculate net loss per common share because the effect would have beenantidilutive.

**Note15**   Business Segments

Operatingsegments are identified as components of an enterprise about which separate,discrete financial information is available that is evaluated by the chiefoperating decision maker or decision-making group to make decisions abouthow to allocate resources and assess performance. The Company’s chief operatingdecision maker is the chief executive officer. To date, the Company hasreviewed its operations principally in a single segment.

TheCompany operates in a single industry segment encompassing the development,marketing and support of software and services that provide synchronization,wireless messaging, mobile application development, application/devicemanagement, real-time remote information access, secure VPN and identitysearching/matching/screening capabilities. The Company’s customer base consistsprimarily of corporate organizations, business development organizations,industry associations, mobile carriers, resellers, international systemintegrators, large OEMs in the personal computer market and selecteddistributors, which primarily market to the retail channel, in North America,Europe, the Asia-Pacific region, South America, and Africa.

Revenue is attributed toregions based on the location of customers. Revenue information by geographicregion is as follows (in thousands):

| ** **          | ** ** | **Year Ended July 31,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States       |       | $                                      | 41,089     |   | $ | 28,315 |   | $ | 15,978 |   |
| Japan               |       | 3,162                                  |       | 5,346 |   | 4,412 |   |
| Other International |       | 15,247                                 |       | 8,647 |   | 4,470 |   |
| Total revenue       |       | $                                      | 59,498     |   | $ | 42,308 |   | $ | 24,860 |   |

 

Revenue information bycustomer group is as follows (in thousands):

| ** **             | ** ** | **Year Ended July 31,** | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Enterprise and  retail |       | $                                      | 33,800     |   | $ | 21,564 |   | $ | 12,122 |   |
| OEMs                   |       | 16,028                                 |       | 19,631 |   | 12,738 |   |
| Mobile carriers        |       | 9,670                                  |       | 1,113 |   | — |   |
| Total revenue          |       | $                                      | 59,498     |   | $ | 42,308 |   | $ | 24,860 |   |

 

Goodwill information bygeographic region is as follows (inthousands):

| ** **              | ** ** | **July 31,** | ** ** |
|-------------------------|------------|-------------------|------------|
| ** **              | ** ** | **2005**          | ** ** | **2004** | ** ** |
| United States           |       | $                 | 62,050     |   | $ | 58,780 |   |
| United Kingdom          |       | 4,744             |       | 4,828 |   |
| Other International     |       | 1,680             |       | 1,680 |   |
| Total long-lived assets |       | $                 | 68,474     |   | $ | 65,288 |   |

 

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Other long-lived assetinformation by geographic region is as follows (in thousands):

| ** **              | ** ** | **July 31,** | ** ** |
|-------------------------|------------|-------------------|------------|
| ** **              | ** ** | **2005**          | ** ** | **2004** | ** ** |
| United  States          |       | $                 | 33,132     |   | $ | 29,829 |   |
| United  Kingdom         |       | 1,531             |       | 2,030 |   |
| Australia               |       | 1,411             |       | 6,209 |   |
| Other  International    |       | 475               |       | 416 |   |
| Total long-lived assets |       | $                 | 36,549     |   | $ | 38,484 |   |

 

**Note16**   Subsequent Events

*Officers’Resignations*

On August 29, 2005,the Company entered into a severance agreement and mutual release with itsChief Strategy Officer, Steve Goldberg, in connection with Mr. Goldberg’sresignation from employment by the Company effective August 31, 2005.Pursuant to the terms of the agreement, Mr. Goldberg will receive, amongother items, a lump sum payment of $120,000, twelve months of acceleratedvesting of his options to purchase registrant’s common stock, the right toexercise his vested options until six months following his termination date andsix months of COBRA premiums paid by the Company. The agreement includes ageneral mutual release by the Company and Mr. Goldberg and anon-solicitation agreement by Mr. Goldberg for twelve months following theeffective date of the agreement.

On October 15, 2005,the Company entered into a severance agreement and mutual release with itsChief Technology Officer, Said Mohammadioun, in connection with Mr. Mohammadioun’sresignation from employment by the Company effective October 15, 2005.Pursuant to the terms of the agreement, Mr. Mohammadioun will receive,among other items, a lump sum payment of $46,875, two and a half months ofaccelerated vesting of his options to purchase registrant’s common stock, theright to exercise his vested options until six months following his terminationdate and two and a half months of COBRA premiums paid by the registrant. Theagreement includes a general mutual release by registrant and Mr. Mohammadiounand a non-solicitation agreement by Mr. Mohammadioun for twelve monthsfollowing the effective date of the agreement.

*Appointment of NewOfficers*

On October 3, 2005,Blair Hankins was appointed as Senior Vice President of Technology, ClientDevelopment, of the Company and David P. Eichler was appointed as ChiefFinancial Officer upon resignation of Keith Kitchen as Chief Financial Officerof the Company. Mr. Kitchen has agreed to remain with the Company as theCompany’s Principal Accounting Officer for an undetermined amount of timefollowing the appointment of Mr. Eichler in order to provide transitionservices to the Company and Mr. Eichler, as the newly appointed ChiefFinancial Officer.

*Complaint Filed bySpontaneous Technology*

On October 5, 2005,Plaintiff Spontaneous Technology, Inc. served the Company with a complaintfiled in the Third Judicial District Court, of Salt Lake County, State of Utah.In the Complaint, Plaintiff asserts a cause of action for breach of contractrelated to the calculation of an earnout payment in the Asset PurchaseAgreement entered into between the parties on July 30, 2003. Plaintiffseeks compensatory damages in the amount of $673,750 and recovery of itsattorneys’ fees and costs. We believe the action has no merit and arevigorously defending against it. We cannot estimate any possible loss at thistime.

*Amendment to the2002 Stock Option Plan*

On October 25, 2005,the Company’s Board of Directors has approved, subject to stockholder approvalat the upcoming annual meeting of stockholders, an amendment to the 2002 StockOption Plan to allow for the granting of restrictive stock units in lieu of orin combination with available stock option shares approved under such plan.

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