**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K/A**

 

**Amendment No. 1**

 

**ý****                                ****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**

 

**INTELLISYNCCORPORATION**

(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 mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days. Yes  ý       No  o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-K/A or any amendment to this Form 10-K/A. ý

 

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

 

Indicate by checkmark whether the registrant is ashell company (as defined in Exchange Act Rule 12b-2). Yes  o      No  ý

 

The aggregate market value of the voting stock held bynon-affiliates of the registrant was approximately $129,158,201 at January 31,2005 the registrant’s most recently completed second fiscal quarter.

 

The number of the registrant’s $0.001 par value CommonStock outstanding as of November 21, 2005, was 67,492,113 shares of CommonStock.

 

**DOCUMENTS INCORPORATEDBY REFERENCE:**

 

**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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**EXPLANATORYNOTE**

 

This Annual Report onForm 10-K/A (“Form 10-K/A”) is being filed as Amendment No. 1 to the Registrant’sAnnual Report on Form 10-K for the fiscal year ended July 31, 2005 , which wasfiled with the Securities and Exchange Commission (“SEC”) on October 28,2005 (the “Original Filing”).  The Registrant is filing this Form 10-K/Ato: (i) correct a typographical error contained in the Certificate of PrincipalFinancial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of2002  that was filed as Exhibit 31.2 tothe Original Filing; (ii) correct a typographical error contained in theCertification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that wasfiled as Exhibit 32.2 to the Original Filing; (iii) list the cross-referencesto certain exhibits to be incorporated by reference in the exhibit indexhereto; and (iv) provide information in Note 17 – Subsequent Events (Unaudited)related to certain events that occurred following the date the Original Filingwas filed with the SEC, including the resignation effective November 21, 2005of Mr. J. Keith Kitchen as Principal Accounting Officer and the appointment ofMr. David P. Eichler as Principal Accounting Officer.

 

Except for the foregoing amended information, thisForm 10-K/A continues to describe conditions as of the date of the OriginalFiling, and we have not updated the disclosures contained herein to reflectevents that have occurred subsequent to that date, except as specificallydescribed in Note 17 – Subsequent Events (Unaudited).  Other eventsoccurring after the date of the Original Filing or other information necessaryto reflect subsequent events have been disclosed in reports filed with the SECsubsequent to the Original Filing.

 

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**TABLE OF CONTENTS**

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

 

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**PART I**

 

**ITEM 1.**                   BUSINESS

 

*ThisAnnual Report on Form 10-K/A contains certain forward-looking statementsthat involve risks and uncertainties. Words such as “anticipates,” “believes,” “expects,”“future,” “plan,” “intends,” “should,” and similar expressions are used toidentify forward-looking statements. These statements are only projectionsbased on current assumptions made by management. The actual results that weachieve may differ materially from those indicated in any forward-lookingstatements due to the risks and uncertainties set forth under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “RiskFactors” and elsewhere in this Form 10-K/A. We undertake no obligation torevise any forward-looking statements in order to reflect events orcircumstances that may arise after the date of this report. Readers are urgedto review and consider carefully the various disclosures made by us in thisreport and our reports filed with the Securities and Exchange Commission thatinform interested parties about the risks and factors that may affect ourbusiness.*

 

**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 onAugust 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/A.

 

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/A.

 

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 bydistributors, resellers and retailers in North America, Europe, theAsia-Pacific region, South America and Africa. We also allow individuals andorganizations to utilize our software directly by hosting our products andcharging a subscription fee.

 

**AVAILABLE INFORMATION**

 

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, current reportson Form 8-K and proxy statements, and other information and amendments tothose reports filed electronically (if applicable), are accessible at no coston our Web site at *www.intellisync.com*.They are also available by contacting our Investor Relations at *invrel@intellisync.com* or 408-321-7650. These filings arealso accessible on the SEC’s Web site at *www.sec.gov.*The public may read and copy any materials we filed 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.

 

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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 the information contained therein orincorporated therein are not intended to be incorporated into this AnnualReport on Form 10-K/A or our other filings with the SEC.

 

**INDUSTRY BACKGROUND**

 

Significant advancements in miniaturization, visualdisplays, long-life batteries and portable communications in the 1990’s haveled to the introduction of many innovative mobile computing devices today. Inaddition, 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.Laptops provide enough power to support almost any application a user wants torun, 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 voiceapplications.

 

Mobile device manufacturers, corporate enterprises andapplication developers face constant pressure to provide increased mobilefunctionality. Many of these manufacturers, enterprises and developers seek toincorporate mobile data communication, exchange and synchronizationcapabilities to enhance existing services or expand into new markets. Enabling mobile devices to intelligently communicate,exchange and synchronize information is a complex and challenging task and hashistorically been cumbersome and expensive because it may have requiredcombining products from multiple companies to arrive at a mobile solution. Simply facilitating synchronization or datamessaging requires data-level, or content-aware, synchronization technology tomaintain complete, up-to-date and accurate information. In order to manageinformation effectively, mobile device users need convenient connectivity andsynchronization solutions for the specific combination of networks, devices andapplications that they use. These software solutions must allow these users tosynchronize information maintained separately on multiple devices (for example,contact databases maintained by a mobile professional using a handheld computerin the field and by a support colleague using a desktop personal computer, orPC, in the office). A software solution that links such different devices mustaddress multiple hardware architectures, operating systems, communicationsarchitectures and application-specific data formats and structures.

 

**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 ouraward-winning Intellisync family, the Intellisync Mobile SuiteTM, theIntellisync Mobile Suite for Carrier, the Intellisync SyncML platform,Identity Search server and Intellisync IM (formerly VeriChat). Encompassing allaspects of mobility, we provide the critical technology solutions needed for

 

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businesses to realize the full potential of smart devices and advancedwireless networks. Our mobility offerings 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**:  Devicemanagement provides a robust platform for mobile carriers to configure, update,and provision leading mobile devices for their customers and offers a mechanismfor remotely maintaining and securing mobile devices.

 

•       **Application Mobilization**:  Weallow organizations to mobilize a wide range of enterprise applications anddata to a wide variety of devices and platforms.

 

•       **Services**:  Weprovide professional and maintenance services to support the evaluation,purchase, installation and use of our products.

 

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**PRODUCTS**

 

We provide individuals and organizations with acomplete mobile platform featuring a comprehensive suite of software productsand services that synchronizes and distributes critical information toemployees, customers or partners. Our solutions are designed to supportcontinued innovation—the growing number of devices, access points and datasources 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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| **Product Name**                                     | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | ** ** | **Introduction Date** |
|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| ***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       |
| *** ***                                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       |                  |
| ***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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | ** **            |

 

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| **Product Name**                                                                              | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                  | ** ** | **Introduction Date** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
|                                                                                          |       | 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            |
| *** ***                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                  |
| ***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           |

 

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| **Product Name**                             | ** ** | **Description**                                                                                                                                                                                                                                                                                                                 | ** ** | **Introduction Date** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| •   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 a leading developer and marketerof innovative wireless software solutions for the global mobile communicationsmarket by leveraging our engineering, technology and domain expertise andexecuting on a plan to broaden our market reach through distribution agreementsand partnerships with leading enterprises, mobile carriers, device manufacturers,and software providers. We believe that our strategy will allow us to deepenrelationships with our existing customers, attract new customers and furtherdiversify our revenue streams.

 

Our strategy includes the following key elements:

 

***Extend Technology andProduct 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 andsupported by service providers and our strategic partners.

 

***Maintain and StrengthenStrategic 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 Awarenessand Marketing Efforts.******  ***We intend toincrease customer awareness of our products, technologies and services. We planto enhance awareness of the Intellisync brand by increasing our marketingactivity and furthering our image as a high-quality provider with acomprehensive offering of technology solutions.

 

***Expand Our WorldwidePresence.******  ***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 CustomerSatisfaction.******  ***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 ThroughStrategic Acquisitions.******  ***We haveacquired and integrated core technologies from SpontaneousTechnology, Inc., Synchrologic, Inc., Identity Systems (formerlySearch Software America, or SSA), Tourmaline Networks, Inc. and PDAapps.We are willing to acquire, when appropriate, additional businesses andtechnologies that will expand and add functionality to our product offerings,augment our distribution channels, expand our market opportunities or broadenour customer base.

 

***Continue Revenue Growthand Improve Operating Efficiencies.******  ***We maintaina disciplined commitment to increasing our quarterly revenue. Together with ourother strategies listed above, we plan to improve revenue

 

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by continuing to develop new and current products, services andtechnologies. We intend to capitalize on the continued growth in demand forwireless services and the related infrastructure required, including hosting,application and other related services, to support that growth. We alsoactively seek to improve our operational efficiency and reduce our coststhroughout our operations, removing administrative complexities, eliminatingredundancies, and integrating acquired businesses.

 

**SALES AND MARKETING**

 

We market and sell our products through a direct salesforce and several third party distribution channels in the United States andinternationally, including wireless carriers, retail, the Internet, value-addedresellers, distributors, software providers and system integrators. We havealso historically developed partnerships with original equipment manufacturers,or OEMs, service providers, mobile carriers and other enterprises around theworld to market or to create marketing opportunities for our applications. Wedepend on these partners to help us deliver world class mobilitysolutions and we believe that by working together we combine the strengths ofour broad mobility platform with the expertise, tools and networks of ourtechnology and distribution partners to create substantial value, not only forour customers, but also for both our partners and our company. IntellisyncCorporation’s Partner Program is designed to provide organizations a variety oftools, information, training and resources needed to successfully sell ourproducts and solutions. We work with these organizations to train certain oftheir sales forces and collaborate with them in joint marketing programs.

 

Through ongoing communications with OEMs, enterprisesand carrier sales and marketing organizations, we match our application portfoliowith the strategic needs of the carrier and the preferences of theirsubscribers. We have sales and marketing offices located in San Jose,California; Greenwich, Connecticut; Alpharetta, Georgia; Sydney, Australia;Cologne, Germany; Reading, United Kingdom; and Tokyo, Japan and a numberof sales representatives working from their homes in the United States, Italyand 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 ourpartners. Our customers continue to expand and optimize their deployments ofIntellisync software products. As a result, Intellisync’s customer basepresents a ready market for complementary products, services, and solutionsfrom our partners.

 

In addition, Intellisync is the mobile platform ofchoice for some of the largest mobile carriers and operators in the world. Fromwireless messaging to device management to mobile applications, we are helpingcarriers in their efforts to reduce churn, increase average revenue per user(ARPU), penetrate enterprise accounts and increase mobile data profits.

 

We strive to be both a technology and marketingpartner with our OEM and strategic customers. Our sales and marketingorganization sells our products directly to our OEM partners, distributors andend users. We work closely with OEM partners on their new hardware products byproviding them with technical input, thereby helping to ensure that oursoftware products will work successfully with the OEM’s hardware products. Wealso train and educate the OEM’s sales and marketing organizations on ourproducts, allowing them to act as our “virtual” sales force to their channelsand direct customers. In addition, we work closely with our hardware andsoftware strategic partners to develop effective marketing programs designed toincrease sales. Refer to the discussion below under the caption “*Risk Factors*—*If we fail to maintain our existing relationships or enterinto new relationships with OEM and business development organizations, or ifproducts offered by our OEM partners fail to achieve or maintain marketacceptance, our brand awareness, the sales of our products and use of our serviceswould suffer.**”*

 

We manage a content-rich web site to facilitate thesale and support of our products and engage in electronic marketing throughemail, newsletter and white paper postings to drive awareness and sales leads.Over the years, we have built a substantial database of users who have opted toreceive information about enterprise mobile computing. In addition, weparticipate in a number of industry conferences and trade shows bothindependently and with strategic partners.

 

In the United States, our sales organization worksdirectly with major distributors, resellers, computer dealers, retailers,mail-order companies and Web stores to distribute our retail packaged products.Internationally, we market and sell through selected distributors and resellersthat focus on specific geographic and market

 

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segment areas. These international partners operate as an extension ofour marketing and sales organizations, developing the appropriate sales channelsin their regions. They also work with local resellers as well as local officesof our OEM customers to develop specific marketing and channel promotions fortheir regions. 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 ourdistributors with stock balancing and price protection rights. These rightspermit our distributors to return slow-moving products to us for credit and toreceive price adjustments for inventories of our products held by distributorsif we lower the price of those products. We recognize revenues on productsshipped to distributors at the time the merchandise is sold by the distributor;as a result, the immediate effect of returns and adjustments on our quarterlyoperating results has been minimal to date. Also, to date, we have notexperienced any significant returns or price protection adjustments.

 

No customers, distributor or otherwise, accounted formore than 10% of our total revenue during fiscal 2005 and 2004. During fiscal2003, Ingram Micro US accounted for 10% of our total revenue.

 

In order to develop further our brand namerecognition, we plan to continue to expand our joint marketing programs,marketing channel promotions and bundling arrangements with our strategicpartners. We also plan to continue to leverage our relationships with industryleaders and to expand and diversify our own sales and marketing initiatives toincrease our sales to mobile carriers and enterprises. Hence, we anticipatethat sales and marketing expenses will increase in fiscal 2006.

 

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**CUSTOMER SUPPORT**

 

Our service and support organization providessecondary technical support to OEMs, primary technical support to enterprises,retailers and end users, and education and training services to enterprises,OEMs and retailers. We also utilize an outsourced vendor to provide first linetechnical support related to the majority of our retail products. Our currentOEMs typically have software maintenance agreements with us. These agreementsprovide for technical support and include maintenance of our products inaccordance with specifications contained in our guidelines for such products,as well as access to technical support personnel by telephone, fax and e-mail.Customers under license agreements are typically entitled to certain productupdates and modifications, primarily bug fixes. Our OEMs and some of our retailchannel partners provide telephone and initial support to end-users.

 

**SEASONALITY**

 

Typically, our products and services experienceseasonal 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 platform orwhose mobile solutions are highly fragmented. Wealso believe that users demanding synchronization functionality with a widevariety of mobile computing devices and software applications will view ourproducts favorably compared to those of larger companies whose products may notbe 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 our competitors.To maintain or increase our competitive advantage, we will need tocontinually enhance and expand our current product, service and technologyofferings 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;

 

•       the level ofsecurity of the products and services provided;

 

•       the pricefor which products and services are offered;

 

•       convenienceand breadth of products and services offered;

 

•       the qualityand market acceptance of new enhancements to our current services and features;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 directcompetition from major applications and operating systems software vendors whomay in the future choose to incorporate data synchronization functionality intotheir operating systems software, thereby potentially reducing

 

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the need for OEMs to include our products in their devices. For example, Microsoft’s inclusion ofcertain features permitting data synchronization between computers utilizingthe Windows Mobile and Exchange**operatingsystem may have the effect of reducing revenue from our software if users ofthese operating systems perceive that their messaging and synchronization needsare adequately met by Microsoft. Furthermore, current or potential competitorshave established or may establish financial and strategic relationships among themselvesor with existing or potential customers or other third parties to increase theability of their products to address the needs of customers. Accordingly, it ispossible that new competitors or alliances among competitors could emerge andrapidly acquire significant market share, which would harm our business.

 

Also, refer to the discussion below under the caption *“Risk Factors—We face intense competition in the market for mobilecomputing synchronization products and services, which could reduce our marketshare and revenue.”*

 

**RESEARCH AND 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 andservices. Our engineering group also works closely with our sales and marketingand professional services groups to develop products that meet real customerneeds.

 

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. In addition,the companies we acquired from our recent acquisitions have given us expandedresearch and development capabilities with employees that have extensiveknowledge and experience in the synchronization and mobile infrastructuresoftware 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 and 2003, research anddevelopment expenses were $14.6 million, $11.5 million and $7.4 million,respectively. Research and development is important to our future success, andwe expect that research and development expenses will increase in futureperiods. Although we plan our budget for research and development based onplanned product introductions and enhancements, actual expenditures 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.”*

 

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**PROFESSIONAL SERVICESGROUP**

** **

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 emerging technologies into robust,reliable, revenue-producing products and services, our professional servicesgroup has the expertise to develop enterprise solutions that combine handheld,mobile, wireless, desktop, internet, synchronization, back-office applicationsand database technologies. Our professional services team works across multiplephases of development projects: business analysis and strategic technologyconsulting, project management, design, engineering, quality assurance,software testing, localization and technical writing. The group’s clients haveincluded 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 of high-technology companies isinherently risky. These risks are more fully discussed in the risk factorsbelow under the captions “*Our recent and any potential acquisitions could require significantmanagement attention and prove difficult to integrate with our business, whichcould distract our management, disrupt our business, dilute stockholder valueand adversely affect our operating results*.” Refer to thediscussions under the caption “*Acquisitions”*set forth in Item 7, Part II of this Annual Report on Form 10-K/A formore information on the acquisitions.

 

**PROPRIETARY TECHNOLOGYAND 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 product developments,frequent product enhancements and name recognition are essential toestablishing 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 many subtletiespresented by the wide range of capabilities among the various PDAs, MobileDevices, PIMs, enterprise applications and data bases 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, whetheror not being currently challenged by applicable governmental patent examiners,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.

 

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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 the discussion below under the captions*“Risk Factors—We may be unable to adequatelyprotect our proprietary rights;” “Risk Factors—We may be subject tointellectual property infringement claims, which are costly to defend and couldlimit our ability to use certain technologies in the future” and “RiskFactors—We have been, are and may in the future be involved in litigation thatcould 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 key personnel have substantialexperience in our industry and would be difficult to replace. Competition forqualified personnel in our industry is intense. We believe that our futuresuccess will depend in part on our continued ability to hire, train and retainqualified personnel. Also, refer to the discussion below under the caption “*Risk Factors—We depend on key employees in a competitive market forskilled personnel.”*

 

**RISK FACTORS**

** **

*Thefollowing risks and uncertainties may have a material and adverse effect on ourbusiness, financial condition or results of operations. You should carefullyconsider these risks and uncertainties, together with all of the otherinformation included or incorporated by reference in this Annual Report onForm 10-K/A. If any of the material risks or uncertainties we face were tooccur, the trading price of our securities could decline.*

* *

***We have historically incurred losses and weexpect these losses to continue in the future. We may not be able to sustainconsistent future revenue growth on a quarterly or annual basis, or achieve ormaintain profitability.***

 

We have not been profitable since fiscal 1998.Although we have reported record revenue for fiscal 2005, we cannot be certainthat our revenue will continue to grow, that we will produce sufficient revenueto achieve profitability or that our revenue will not decline in the future. We have experienced losses of $13.4million, $9.5 million and $7.7 million for fiscal 2005, 2004 and 2003,respectively. At July 31, 2005, we had an accumulated deficit of $144.5million. To become profitable and sustain profitability, we will need togenerate additional revenues to offset our expenses. We may not achieve orsustain revenue growth and our losses may continue or increase in the future.The synchronization market is evolving, and as a result we cannot accuratelypredict either the future growth rate, if any, or the ultimate size of themarket for our products and services. Because our operating expenses arerelatively fixed in the short term, any shortfalls in revenues would materiallyaffect our results of operations.

 

***Our quarterly revenue and operating results aresubject to significant fluctuations, and our stock price may decline if we donot meet the expectations of investors and analysts.***

*** ***

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:

 

•       growth inthe market for enterprise synchronization applications and our ability tosuccessfully address this market;

 

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•       our relianceon international sales and growth;

 

•       our abilityto penetrate the international market;

 

•       market acceptanceof products in which our software is integrated by original equipment manufacturers, or OEMs;

 

•       our abilityto realize our goals with respect to recent and potential future acquisitions;

 

•       our need andability to generate and manage growth;

 

•       rapidevolution of technology;

 

•       our evolvingbusiness model;

 

•       litigation-relatedexpenses;

 

•       fluctuationsin gross margins;

 

•       the seasonalnature of the market for some of our products;

 

•       changes inthe market for mobility and identity search/screening software;

 

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

 

•       the recentdecline in the market for traditional personal digital assistants;

 

•       changes inour mix of sources of revenue; and

 

•       entrenchedand substantial competition.

 

Additionally, we generally derive our technologylicensing revenue from multi-year contracts with enterprise and other customersthat frequently include license fees, professional services fees, royaltypayments and maintenance. We typically earn both the license fees and theprofessional services in the initial one or two quarters subsequent to thesigning of a contract. We periodically have large professional servicesimplementations that individually contribute as much as 5% or more to quarterlyrevenue. Combined with related license revenue, total revenue from individualcustomers in the initial quarters of a contract may exceed the revenue we earnduring subsequent periods covered by the contract. To the extent that we do notsecure additional contracts with the same customer or secure comparably sizedcommitments from other customers, we may not be able to sustain or grow ourrevenue.

 

***We may incur significant stock-basedcompensation charges related to certain stock options and restricted stock infuture periods.***

*** ***

The Financial Accounting Standards Board (FASB) issuedin December 2004 Statement of Financial Accounting Standards (SFAS)No. 123R, “*Share-Based Payment, an amendment of FASBStatements Nos. 123 and 95*,” that addresses the accountingtreatment for employee stock options and other share-based paymenttransactions. The statement eliminates the ability to account for share-basedcompensation transactions using Accounting Principles Board (APB) OpinionNo. 25, “*Accounting for Stock Issued to Employees*,”and generally requires that such transactions be accounted for using afair-value-based method and recognized as expenses. The statement and thechange in accounting treatment will result in our reporting increased operatingexpenses beginning for our next fiscal quarter ending October 31, 2005,which would decrease any reported net income or increase any reported net loss,and could adversely affect the market price of our common stock.

 

***We face intense competition in the market formobile computing synchronization products and services, which could reduce ourmarket 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

 

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with respect to our Intellisync Handheld Edition, Intellisync HandheldEdition for Enterprise, Intellisync Mobile Suite, Intellisync SyncML and IdentitySearch Servers.

 

•       IntellisyncMobile Suite enterprise server software—CommonTime, GoodTechnology, Inc., Research In Motion Limited, Sybase Inc.’s iAnywhere, andothers.

 

•       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 wireless messaging and mobilecomputing synchronization industry may strengthen our competitors’ position inour market. Consolidation of our competitors has occurred, and we expect it tocontinue to occur in the foreseeable future. Acquisitions may furtherstrengthen our competitors’ financial, technical and marketing resources.

 

***If we fail to develop and sell products designedfor OEMs, enterprises and mobile carriers, our revenue and operating resultswill be adversely affected.***

*** ***

We have recently made substantial investments todevelop and offer an expanded range of enterprise synchronization applications,including our acquisition of PDAapps, Tourmaline, Synchrologic and IdentitySystems. Our operating plans assume revenue growth from the enterprise market.Enterprise sales present a variety of challenges that are different from thoseinherent in our historical licensing and consumer business model, and we havelimited experience addressing these challenges. For example, enterprise salestypically involve large up-front license fees, which can result in lengthysales cycles and uncertainties as to the timing of sales driven by customers’budgetary processes. As a result, we generally have less visibility into futureenterprise sales than is typically the case in our royalty-based technologylicensing business. In addition, while enterprise sales generally result inongoing maintenance revenue and may lead to follow-on purchases or upgrades, weare typically dependent on sales to new customers for a significant portion ofour enterprise revenue in a given quarter. If our product and service offeringsfail to achieve market acceptance, or if enterprise sales fail to meet ourexpectations in a particular quarter, our revenue and operating results may bematerially and adversely affected.

 

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***Our business and prospects depend, to asignificant degree, on demand for wireless and other mobile 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 of wirelessand other mobile computing devices, including handheld computers, smart phones,pagers and other mobile devices. In addition, our markets face criticalunresolved issues concerning the commercial use of wireless and other mobilecomputing devices, including security, reliability, cost, ease of access anduse, 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:

 

•       growth insales 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;

 

•       emergence ofa viable and sustainable market for wireless and mobile computing services;

 

•       our productand service differentiation and quality;

 

•       thedevelopment of technologies that facilitate interactive communication betweenorganizations;

 

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

 

•       the growthin access to, and market acceptance of, new interactive technologies;

 

•       increases inbandwidth for data transmission;

 

•       theeffectiveness of our marketing strategy and efforts;

 

•       our industryreputation; and

 

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

 

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 and mobile computing servicesmarket does develop, our products and services may not achieve widespreadmarket acceptance. If our target customers do not adopt, purchase andsuccessfully deploy our other current and planned products and services, ourrevenue will not grow significantly and our business, results of operations andfinancial condition will be seriously harmed.

 

***We are exposed to potential risks and we willcontinue to incur increased costs as a result of the internal control testingand evaluation process mandated by Section 404 of the Sarbanes-Oxley Act of2002.***

*** ***

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.

 

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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 of companies, some of which mayhave operations outside the United States, may provide us with challenges inimplementing the required processes, procedures and controls in our acquiredoperations. Acquired companies may not have disclosure controls and proceduresor internal control over financial reporting that are as thorough or effectiveas those required by securities law in the United States. Although we intend todevote substantial time and incur substantial costs, as necessary, to ensureongoing compliance, we cannot be certain that we will be successful incomplying with Section 404.

 

***We are placing increasing emphasis on ourhosting services, of which potential growth may be difficult to manageeffectively, and, as a result, our results of operations could be adverselyaffected.***

*** ***

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:

 

•       increase ourcapital investments and further build our infrastructure to meet the demands ofour carrier customers;

 

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

 

•       effectivelyoversee and manage our outsourced hosting center.

 

There can be no assurance that our systems, proceduresand controls will be adequate to support rapid expansion of our hostingservices. If we are unable to manage such growth successfully, our business andresults of operations could be harmed.

 

***Revenue from hosting services may carry lowergross margins and an overall increase in such revenue as a percentage of totalrevenue could have an adverse impact on our business.***

*** ***

Our commitment to providing quality services to ourenterprise and mobile carrier customers may result in our hosting servicerevenue having a lower gross margin than other services and license revenue.Due to the lower margin, an increase in the hosting service revenue as apercentage of total revenue could have a detrimental impact on our overallgross margins and could adversely affect operating results. In addition, achange in the mix between services that are provided by our own employees andthose services provided by third-party vendors may negatively affect our grossmargins.

 

***System failures or accidental or intentionalsecurity breaches could disrupt our operations, cause us to incur significantexpenses, expose us to liability and harm our reputation.***

*** ***

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

 

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in our services, we might be required to expend significant resourcesto protect against, or to alleviate, problems caused by hackers. We might alsoface liability to persons harmed by misappropriation of secure information ifit is determined that we did not exercise sufficient care to protect oursystems.

 

Systems failure or damage could cause an interruptionof our services and result in loss of customers, difficulties in attracting newcustomers and could adversely impact our operating results. In addition, if thenumber of customers who purchase our hosting services increases over time, oursystems must be able to accommodate increased usage. If we are unable to increaseour capacity to accommodate growth in usage, we could encounter systemperformance issues, which could harm our relationships with customers and ourreputation.

 

***We expect that we may become increasinglydependent on mobile carriers for the success of our wireless 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:

 

•       the degreeto which mobile carriers facilitate the introduction of and actively promote,distribute and resell our products;

 

•       testing ofour products on mobile carriers’ networks;

 

•       quality andcoverage area of wireless services offered by the mobile carriers;

 

•       the extentto which mobile carriers require specific hardware and software features on ourproducts 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 and serviceopportunities or modify or improve our products in response to changes intechnology, 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 potential rapid growth of ourbusiness, as we become more dependent on mobile carriers, may place a strain onour management, operations, employees, or resources. We may not be able tomaintain a rapid growth rate, effectively manage our expanding operations, orachieve planned growth on a timely or profitable basis. If we are unable tomanage our growth effectively, we may experience operating inefficiencies, andour net income may be materially adversely affected.

 

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***Most sales with mobile carriers and enterpriseshave a long sales cycle process, which increases the cost of completing salesand renders completion of sales less predictable.***

*** ***

The sales cycle process with mobile carriers could belong, making it difficult to predict the quarter in which we may recognizerevenue from a sale, if at all. The general length of the sales cycle increasesour costs and may cause license revenue and other operating results to varysignificantly from period to period. Our products or technology often are partof significant strategic decisions by our customers regarding their informationsystems. Accordingly, the decision to license our products typically requiressignificant pre-purchase evaluation. We spend substantial time providinginformation to prospective customers regarding the use and benefits of ourproducts. During this evaluation period, we may expend significant funds insales and marketing efforts. If anticipated sales from a specific customer fora particular quarter are not realized in that quarter, our operating resultsmay be adversely affected.

 

***Our stock price has historically been and maycontinue to be volatile, which may cause you to lose money and could lead tocostly litigation against us that could divert our resources.***

*** ***

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;

 

•       changes infinancial estimates by securities analysts; and

 

•       other eventsbeyond our control, including general market conditions.

 

Furthermore, our operating results and prospects fromtime to time may be below the expectations of public market analysts orinvestors. Any negative change in the public’s perception of companies in the wirelesscommunications market could depress our stock price regardless of our operatingresults. Recently, companies experiencing high volatility or significant dropsin their stock prices have faced securities class action lawsuits when themarket price of a stock has been volatile. Holders of that stock have ofteninstituted securities class action litigation against the company that issuedthe stock when such stock declines. If any of our stockholders brought such alawsuit against us, we could incur substantial costs defending the lawsuit. Wemaintain some level of insurance for such matters however we cannot guaranteethat such insurance will be available or will cover the amount of any award.The lawsuit could also divert the time and attention of our management.Further, any settlement of such a lawsuit could adversely affect us.

 

***We may be unable to adequately protect ourproprietary rights.***

*** ***

The rights we rely upon to protect our intellectualproperty underlying our products and services may not be adequate, which couldenable third parties to use our technology and would reduce our ability tocompete in the market. To protect our proprietary rights, we rely on acombination 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 subject to intellectual propertyinfringement claims, which are costly to defend and could limit our ability touse certain technologies in the future.***

*** ***

Third parties may assert infringement or otherintellectual property claims against us. From time to time, we receive noticesfrom third parties alleging that our products or services infringe proprietaryrights held by them. For example, as we announced in August 2004, NCRCorporation filed a complaint alleging patent infringement in the U.S. DistrictCourt for the Southern District of Ohio Western Division (Dayton). In thecomplaint, NCR alleged that certain of our products infringe upon three of NCR’spatents. That case was settled and dismissed by mutual agreement inJuly 2005. Our customers may receive notices of patent or otherinfringement from third parties and ask for indemnification in the future. Wecannot predict whether third parties will assert claims of infringement againstus, or whether any past, present or future claims will prevent us from offeringproducts or operating our business as planned.

 

Due to the inherently uncertain nature of intellectualproperty protection and the competitive area in which we operate our business,it is possible that some or all of our products and services could be found tobe infringing on the intellectual property of others. We may have to paysubstantial damages, including treble damages, for past infringement if it isultimately determined that our products or services infringe a third party’sproprietary rights. We may have to comply with injunctions, or stopdistributing our products and services while we re-engineer them or seeklicenses to necessary technology, which might not be available on reasonableterms, or at all. We could also be subject to claims for indemnificationresulting from infringement claims made against

 

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our customers, which could increase our defense costs and potentialdamages. Even if the claims are without merit, defending a lawsuit takes significanttime, may be expensive and may divert management’s attention from otherbusiness concerns.

 

***We have been, are and may in the future beinvolved in litigation that could result in significant costs to us.***

*** ***

In order to protect our proprietary rights, we maydecide to sue other companies. Litigation proceedings are inherently uncertain,and we may not prevail in our defenses or claims. In addition, such litigationis expensive and time-consuming, and management has been in the past and may inthe future be required to spend significant time in the prosecution of suchsuits. If we do not prevail in our claims, we might be forced to accept anunfavorable settlement or judgment and even be required to reimburse othercompanies in a suit for their legal expenses in defending the suit. Anunfavorable settlement or judgment could also materially harm our ability touse existing intellectual property and severely harm our business as a result.

 

***Future sales of our common stock, including theshares underlying the convertible senior notes we recently issued, may depressour 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 andFebruary 2006 under 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 of some or all of the$60,000,000 aggregate principal amount of convertible subordinated notes thatwe issued in March 2004 will dilute the ownership interests of investors.Any sales in the public market of the common stock issuable upon suchconversion could adversely affect prevailing market prices for our commonstock.

 

***If we fail to maintain our existingrelationships or enter into new relationships with OEM and business developmentorganizations, or if products offered by our OEM partners fail to achieve or maintainmarket acceptance, our brand awareness, the sales of our products and use ofour 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;

 

•       increase theuse of our technology licensing components;

 

•       build brandawareness through product marketing; and

 

•       market ourproducts 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

 

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decline and our business would suffer. For example, if growth in thenumber of devices sold by our OEM partners is delayed or did not occur, ourbusiness 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 resellersgenerally are nonexclusive and may be terminated on short notice by eitherparty without cause. Furthermore, our OEMs, distributors and resellers are notwithin our control, are not obligated to purchase products from us, and mayrepresent other lines of products, including competing products. A reduction insales effort or discontinuance of sales of our products by our OEMs,distributors, and resellers could lead to reduced sales and could materiallyadversely affect our operating results.

 

***Our market changes rapidly due to evolution intechnology and industry standards. If we do not adapt to meet the sophisticatedneeds of our customers, our business and prospects 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;

 

•       we may nothave 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

 

•       we may nothave 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 determine that new technologies andequipment are required to remain competitive, the development, acquisition andimplementation of these technologies and equipment are likely to continue torequire significant capital investment by us. Moreover, we cannot be certainthat we can develop, market and deliver new products and technology on a timelybasis. Sufficient capital may not be available for this purpose in the future,and even if it is available, investments in new technologies may not result incommercially viable technological processes and there may not be commercialapplications for such technologies. If we do not develop, acquire and introducenew products and services and achieve market acceptance in a timely manner, ourbusiness and prospects will suffer.

 

***Ifwe fail to maintain an effective system of internal controls, we may not beable to detect fraud or report our financial results accurately, which couldharm our business.***

*** ***

Effective internal controls are necessary for us toprovide reliable financial reports and to detect and prevent fraud. Weperiodically assess our system of internal controls, and the internal controlsof service providers upon which we rely, to review their effectiveness andidentify potential areas of improvement. These assessments may conclude thatenhancements, modifications or changes to our system of internal controls arenecessary. In addition, from time to time we acquire businesses, many of whichhave limited infrastructure and systems of internal controls. Performingassessments of internal controls, implementing necessary changes, andmaintaining an effective internal controls process is expensive and requiresconsiderable management attention, particularly in the case of newly acquiredentities. Internal control systems are designed in part upon assumptions aboutthe likelihood of future events, and all such systems, however well designed andoperated, can provide only

 

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reasonable, and not absolute, assurance that the objectives of thesystem are met. Because of these and other inherent limitations of controlsystems, there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions, regardless of howremote. If we fail to implement and maintain an effective system of internalcontrols or prevent fraud, we could suffer losses, could be subject to costlylitigation, investors could lose confidence in our reported financialinformation and our brand and operating results could be harmed, which couldhave a negative effect on the trading price of our common stock.

 

***We are dependent on our international operationsfor 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 continue to expand internationally, we are increasingly subject to risksof doing business 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

 

•       an adverseeffect on our provision for income taxes based on the amount and mix of incomefrom international customers.

 

Our international sales growth will be limited if we,in the future, are unable to expand international sales channel management andsupport, customize products for local markets, and develop relationships withinternational service providers, distributors and device manufacturers. Forexample, in recent quarters we have invested substantially in expanding salesoperations, and these investments may not generate offsetting increases inrevenue. Even if we are able to expand international operations successfully,we cannot be certain that we will succeed in maintaining or expandinginternational market demand for our products.

 

***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 engineering facility in Delhi, India,gained through our acquisition of PDAapps, and we established engineeringfacilities in Sofia, Bulgaria and Cluj-Napoca, Romania. In the future, we mayfurther expand our engineering or sales operations to other geographic areaswithin the United States and internationally. Our expansion may cause us toincur various costs and expenses, and may place a significant strain upon ouroperating and financial systems and resources that could materially adverselyaffect our financial results following such an expansion. We also facesignificant business risks related to the difficulty in assimilating newoperations and the diversion of management’s attention from other business.Additionally, if we fail to align employee skills and populations with revenueand market requirements, it may have a material adverse impact on our businessand operating results. Moreover, these newly established operations may notcontribute significantly to our sales or earnings.

 

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

 

We believe that in the future, an increasing portionof our costs will be denominated in foreign currencies as we increaseoperations in Europe and open offices in other countries. We currently do notengage in foreign

 

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exchange hedging activities and, although we have not yet experiencedany material losses due to foreign currency fluctuation, a portion of ourinternational revenue are currently subject to the risks of foreign currencyfluctuations, and these risks will increase as our international revenueincreases.

 

***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 makeinvestments in complementary companies, products or technologies. We recentlyacquired PDAapps, Inc. (June 2005), Tourmaline Networks, Inc.(in March 2005), SoftVision SRL’s workforce (through a transfer inJune 2004), Identity Systems (in March 2004), Synchrologic, Inc.(in December 2003) and Spontaneous Technology, Inc. (inSeptember 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:

 

•       failure tointegrate management information systems, personnel, research and developmentand 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;

 

•       failure todevelop further the acquired company’s technology successfully, resulting inthe potential impairment of amounts capitalized as intangible assets under SFASNo. 142, “*Goodwill and Other 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 issued common stock and paid cash forrecent acquisitions and may have to pay cash, incur debt or issue equitysecurities to pay for any future acquisition, each of which could affect ourfinancial condition or the market price of our common stock. The sale ofadditional equity or debt to finance such future acquisitions could result indilution to our stockholders. The incurrence of indebtedness would result inincreased fixed obligations and could also include covenants or otherrestrictions that would impede our ability to manage our operations.

 

***Goodwill and other intangibles resulting fromour acquisitions could become impaired.***

 

As of July 31, 2005, our goodwill, developed andcore technology and other intangibles amounted to $94,420,000, net of accumulatedamortization. We ceased to amortize our existing goodwill upon our adoption ofSFAS No. 142 in the beginning of fiscal 2003. We will amortizeapproximately $8,616,000, $7,980,000, $4,404,000, $2,190,000 and $2,756,000 forfiscal 2006, 2007, 2008, 2009 and thereafter, respectively, of developed andcore technology and other intangibles. We expect, however, that amortizationexpense may increase significantly as a result of any future acquisitions. Tothe extent we do not generate sufficient cash flows

 

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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 key employees in a competitivemarket for skilled personnel.***

 

The success of our business will continue to dependupon certain key technical and senior management personnel, including ourpresident and chief executive officer, chief operating officer, chief marketingofficer, chief financial officer and other key senior executives, many of whomwould be extremely difficult to replace. Competition for such personnel isintense, and we cannot be certain that we will be able to retain our existingkey managerial, technical, or sales and marketing personnel. The loss of theseofficers and other or key employees in the future might adversely affect ourbusiness and impede the achievement of our business objectives. We believe ourability to achieve increased revenue and to develop successful new products andproduct enhancements will depend in part upon our ability to attract and retainhighly skilled sales and marketing and qualified product development personnel.In addition, competition for employees in our industry and geographic locationcould be intense. We may not be able to continue to attract and retain skilledand experienced personnel on acceptable terms. Our ability to hire and retainsuch personnel will depend in part upon our ability to raise capital or achieveincreased revenue levels to fund the costs associated with such personnel.Failure to attract and retain key personnel may adversely affect our business.

 

***If we are unable to provide satisfactory andhigh quality services through our professional services group, customersatisfaction and demand for our products will suffer.***

*** ***

Many of our customers have been successful inimplementing our various technology initiatives without further provision oftechnical service. However, we believe that building strong relationships withour customers, as well as future growth in our product sales, depends on ourability to provide our customers with professional services, including customersupport, training, consulting and initial implementation and deployment of ourproducts when necessary. We have an in-house professional services group anduse international software development partners with a workforce that canperform these tasks and that also educates third-party systems integrators inthe use of our products so that these systems integrators can provide theseservices to our customers. If we are unable to develop sufficient relationshipswith third-party systems integrators and other customers, unable to completeproduct implementations in a timely manner, or unable to provide customers withsatisfactory and quality support, consulting, maintenance and other services,we could face customer dissatisfaction, damage to our reputation, decreasedoverall demand for our products and loss of revenue.

 

***We may have to spend substantial funds on salesand marketing in the future.***

*** ***

To increase awareness for our new and existingproducts, technology and services, we may have to spend significantly more onsales and marketing in the future. We also plan to continue to leverage ourrelationships with industry leaders and to expand and diversify our sales andmarketing initiatives to increase our sales to mobile carriers and enterprises.If our marketing strategy is unsuccessful, we may not be able to recover theseexpenses or even generate any revenue. We will be required to develop amarketing and sales campaign that will effectively demonstrate the advantagesof our products, technology and services. We may also elect to enter intoagreements or relationships with third parties regarding the promotion ormarketing of our products, technology and services. We cannot be certain thatwe will be able to establish adequate sales and marketing capabilities, that wewill be able to enter into marketing agreements or relationships with thirdparties on financially acceptable terms, or that any third parties with whom weenter into such arrangements will be successful in marketing and promoting theproducts, technology and services offered by us.

 

***Our products may contain errors that couldsubject us to product-related claims.***

*** ***

Our products may contain undetected errors orfailures, which can result in loss of or delay in market acceptance and couldadversely impact future operating results. Our insurance may not cover us forcertain claims related to product failures. Although our license agreementscontain provisions limiting our liability in the

 

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case of damages resultingfrom use of the software, in the event of such damages, we may be found liable,and in such event, such damages could materially affect our business, operatingresults and financial condition.

 

***Ourrevenue from consumer sales is subject to risks associated with the decliningwired PDA market and reliance on sales distribution channels.***

*** ***

Whilethe market for converged mobile devices or smartphones and other wirelessmobile devices has experienced growth recently, the market for traditionalpersonal digital assistants, or PDAs, has declined. The decline in traditionalPDA sales had a direct impact on sales of our Intellisync products through theconsumer and online channels, where sales of our synchronization softwaretypically occur at the same time a PDA is purchased, or shortly thereafter. Theincrease in demand for smartphones and other such devices may not offset thedecline in traditional PDA sales. Our consumer sales are also dependent upondistribution and marketing channels outside our control. There are also asignificant number of our customers that purchase our products and servicesthrough other resellers, and we anticipate they will continue to do so as weexpand our product offerings. Our sales, therefore, could also be negativelyaffected by disruptions in our relationships with resellers or disruptions inthe relationships between our resellers and customers. Resellers may alsochoose not to emphasize our products to their customers. If we are unable tooffset declining revenue from PDA-related software, or if we experiencedisruption in, or reduced selling efforts from, our distribution channels, ourrevenue derived from consumer sales would be adversely affected.

 

***Wemay need to raise additional capital in the future resulting in dilution to ourstockholders.***

*** ***

We mayneed to raise additional funds for our business operations and to execute ourbusiness strategy. We may seek to sell additional equity or debt securities orto obtain an additional credit facility. The sale of additional equity orconvertible debt securities could result in additional dilution to ourstockholders. If additional funds are raised through the issuance of debtsecurities, these securities could have rights that are senior to holders ofcommon stock and could contain covenants that would restrict our operations.Any additional financing may not be available in amounts or on terms acceptableto us, if at all.

 

***Wemay not have sufficient cash flow to make payments on any debt we may incur.***

*** ***

Ourability to pay principal and interest on our existing and any futureindebtedness and to fund our planned capital expenditures depends on our futureoperating performance. Our future operating performance is subject to a numberof risks and uncertainties that are often beyond our control, including generaleconomic conditions and financial, competitive and regulatory factors.Consequently, we cannot assure you that we will have sufficient cash flow tomeet our liquidity needs, including making payments on existing and any futureindebtedness.

 

***Thefundamental change redemption rights in our outstanding convertible seniornotes could discourage a potential acquirer.***

*** ***

If weengage in any transaction or event in connection with which all orsubstantially all of our common stock is exchanged for, converted into,acquired for or constitutes solely the right to receive, consideration which isnot all or substantially all common stock listed on a United States nationalsecurities exchange or approved for quotation on the Nasdaq National Market orany similar United States system of automated dissemination of quotations ofsecurities prices, or, if for any reason, our common stock is no longer listedfor trading on a United States national securities exchange nor approved fortrading on the Nasdaq National Market (a “fundamental change”), we may berequired to redeem all or part of the notes and this could discourage apotential acquirer. However, this redemption feature is not the result ofmanagement’s knowledge of any specific effort to obtain control of us by meansof a merger, tender offer or solicitation, or part of a plan by management toadopt a series of anti-takeover provisions. The term “fundamental change” islimited to specified transactions and may not include other events that mightadversely affect our financial condition or business operations. Our obligationto offer to redeem the notes upon a fundamental change would not necessarilyafford you protection in the event of a highly leveraged transaction, reorganization,merger or similar transaction involving us.

 

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***Wemay not have the ability to raise the funds necessary to finance thefundamental change redemption option associated with our outstanding convertiblesenior notes.***

*** ***

If weengage in any transaction or event in connection with which all orsubstantially all of our common stock is exchanged for, converted into,acquired for or constitutes solely the right to receive consideration which isnot all or substantially all common stock listed on a United States nationalsecurities exchange or approved for quotation on the Nasdaq National Market orany similar United States system of automated dissemination of quotations ofsecurities prices, or, if for any reason, our common stock is no longer listedfor trading on a United States national securities exchange nor approved fortrading on the Nasdaq National Market, we may be required to redeem all or partof the notes. We may not have enough funds to pay the redemption price for alltendered notes. In addition, any credit agreement or other agreements relatingto our indebtedness may contain provisions prohibiting redemption of the notesunder certain circumstances, or expressly prohibit our redemption of the notesupon a designated event or may provide that a designated event constitutes anevent of default under that agreement. Our failure to redeem tendered noteswould constitute an event of default under the indenture, which might alsoconstitute a default under the terms of our other indebtedness.

 

***Ourcertificate of incorporation, our bylaws, Delaware law and our stockholderrights plan contain provisions that could discourage a takeover.***

*** ***

Provisionsof our certificate of incorporation, our bylaws, Delaware law and ourstockholder rights plan contain provisions that may discourage, delay orprevent a merger or acquisition or other change of control that a stockholdermay consider favorable.

 

**EXECUTIVE OFFICERS AND DIRECTORS OF THEREGISTRANT**

 

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 president and chief executive officer of the Company in June 2002.He has also served as a director of the Company since joining the company.Prior to joining the Company, Mr. Hobbs served as a consulting executivefor the venture capital community, and as a strategic systems consultant tolarge corporations. From 1995 to 2002, Mr. Hobbs held the position ofinterim chief executive officer at the following companies: FaceTimeCommunications, a provider of instant messaging network-independent businesssolutions; Tradenable, Inc., an online escrow service company; BigBook, Inc.,a pioneer in the online yellow pages industry; and I/PRO Corporation, aleader in quantitative measurement of Web site usage. From 1993 to

 

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1994, Mr. Hobbsserved as chief executive officer of Tesseract Corporation, a human resourcesoutsourcing and software company. Mr. Hobbs spent the early part of hiscareer with Charles Schwab Corporation, a securities brokerage and financialservice company, as chief information officer and with Service Bureau, adivision of International Business Machines Corporation, or IBM, the world’slargest information technology company, as one of the developers and thedirector of operations of Online Focus, an online credit union system thatultimately served over 20 million members.

 

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*Mr. Eichler*became the chief financial officer of the Company in October 2005. Priorto joining the Company, Mr. Eichler was vice president of finance andchief financial officer of SiNett Corporation, an integrated chip and softwarecompany in the wireless network market from September 2004 to October 2005.From October 2002 to September 2004, Mr. Eichler was vicepresident of finance and chief financial officer of Tripath Technology, Inc.a fabless semiconductor company. Mr. Eichler was vice president offinance, chief financial officer and corporate secretary with Gadzoox Networks, Inc.,a supplier 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 operatingofficer of the Company in July 2004 overseeing corporate operations andthe sales of the Company’s products to leading enterprises, OEMs, and wirelessoperators. Mr. Foster previously served as senior vice president of salesand marketing since joining the Company in September 2002. From July 1999to September 2002, Mr. Foster served as president and chief executiveofficer of eConvergent, Inc., a next-generation customer data integrationsoftware company. Prior to founding eConvergent, Mr. Foster establishedand led the Global Solutions Services division of Aspect CommunicationsCorporation, a provider of business communications solutions from April 1996to June 1999. Previously, Mr. Foster held a variety of sales andprofessional services management positions during his 14 years at IBM. Mr. Fosterholds a BS degree in Mathematics from North Carolina State University.

 

*Mr. Gerber* became the chief marketing officer, overseeing all marketing,strategy, and e-commerce operations, of the Company in April 2004. Mostrecently, prior to joining the Company, Mr. Gerber served as managingdirector and group vice president of Carlson Marketing Group, a relationshipmarketing company. Mr. Gerber also held a variety of management andconsulting positions at Digitas, Inc., an integrated marketing agency,from 2001 to 2004; Deloitte Consulting, a global management consulting firm,from 1992 to 1995; and American Express Company, a diversified worldwidetravel, financial, and network services company, from 1987 to 1990. Mr. Gerberis the founder of and led @once, Inc., a private email messaging company,from 1995 to 2000. Previously, Mr. Gerber, served as chief marketing andstrategy officer of Commtouch Software Limited, an email infrastructurecompany. Mr. Gerber holds a BS in engineering degree from the Universityof Virginia and an MBA degree from Harvard University.

 

*Mr. Hankins*became the senior vice president of technology, clientdevelopment, of the Company in October 2005 responsible for ensuringIntellisync’s wireless messaging products offer the best possible userexperience 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 from Universityof Maryland.

 

*Mr. Hrastar*became the senior vice president of technology, servers andhosted services, of the Company in August 2005. Mr. Hrastarpreviously served as chief technical officer and vice president of engineeringfor AirDefense, Inc, a wirelessLAN security software vendor from October 2001 to August 2005. From October 2000to October 2001, Mr. Hrastar was vice president of engineering withLancope, Inc., a networksecurity intrusion detection software developer. From September 1997 to September 2000,Mr. Hrastar served as vice president of research and advanced technologydivision of Pathfire, Inc., adigital television distribution software-maker. Mr. Hrastar also served ina variety of engineering positions 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

 

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University and earnedboth M.S. and Ph.D. degrees in electrical engineering from the GeorgiaInstitute of Technology.

 

*Mr. Kitchen* became chief accountingofficer of the Company upon his resignation as chief financial officer,effective upon the appointment of his successor. Mr. Kitchen has agreed toremain with the Company as the Company’s principal accounting officer for an undeterminedamount of time following the appointment of his successor in order to providetransition services to the Company and the newly appointed chief financialofficer. Mr. Kitchen served as chief financial officer of the Company fromJuly 2004 to October 2005. Mr. Kitchen also served as vicepresident of finance and administration and chief accounting officer from August 2002to July 2004 and also as corporate controller since joining the Company inFebruary 2000 with the Company’s acquisition of NetMind Technologies, Inc.,a venture capital-funded Internet software company. Mr. Kitchen joinedNetMind in January 1999 as its controller and later became its vicepresident of finance and administration from July 1999 to February 2000.Mr. Kitchen also served in a variety of financial management positions atIntellect Electronics, Inc., a provider of electronic commerce and smartcard solutions, from March 1997 to December 1998, and at Bausch &Lomb, Inc., a global technology based healthcare company, from July 1990to March 1997. Previously, Mr. Kitchen served as certified publicaccountant with Ernst & Young LLP, a professional servicesorganization. Mr. Kitchen holds a bachelor of science in businessadministration degree from Bucknell University and is a graduate ofNorthwestern University’s Kellogg Graduate School of Management.

 

*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 ofmobile infrastructure 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.From 1983 to 1990, he was the chief executive officer of Samna Corporation, aword-processing software company founded by Mr. Mohammadioun in 1983.Samna was 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 gave notice to the Company of his intention to resign asa member of the Company’s Board of Directors, effective as of the end of hiscurrent term, which is scheduled to expire at the Company’s 2005 annual meetingof stockholders.

 

*Mr. Clair*became a director of the Company in December 1994 and has served aschairman of the board of the Company since March 1995. Since June 1995,Mr. Clair has served as an independent financial consultant. Mr. Clairwas a founder of SynOptics Communications (now Nortel Networks), a computernetworking company, and from January 1987 to November 1992, served asvice president of sales and marketing and then as senior vice president ofsales and customer service of SynOptics. Mr. Clair has more than 30 yearsof experience in data processing, data and voice communications and local areanetworking, as well as various wireless technologies. He spent the earlypart of his career with Tymshare, Inc., a computer time-sharing company,and ROLM, a manufacturer of digital PBX equipment, in a variety of sales andmarketing positions. He holds a BS degree in business and an MBA degree fromthe University 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 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 WaterhouseAustralia, a securities dealer; as chief executive officer of IntegratedDecisions and Systems, Inc., an application software company; as managingdirector of Eagleroo Proprietary Limited, a corporate advisor company; and invarious capacities with Charles Schwab & Company., Inc., asecurities and financial services brokerage, including serving as chieffinancial officer and as executive vice president—Strategy and CorporateDevelopment. Mr. Arnold holds a BS degree in psychology from StanfordUniversity.

 

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*Ms. Berg-Painter*became a director of the Company in August 2001. Since November 2000,Ms. Berg-Painter has served as an independent marketing consultant. From July 1998to October 2000, Ms. Berg-Painter served as senior vice president ofworldwide marketing 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 chartereddirector and became a director of the Company in May 2005. Since 2002, Mr. Cornellhas served as chief executive officer of Empower Interactive Ltd., a privatespecialized messaging platform company working globally with mobile operators.From 2001 to 2002, Mr. Cornell served as president of British TelecomWireless plc., a mobile telecommunications company, for its Europe operationsand in the same position in its spin-off, O2. Between May and October 2001,he served as interim chief executive officer for British Telecom’s ViagIntercom unit in Germany. From 1999 to 2001, Mr. Cornell worked forFirstmark Communications, a Pan-European broadband company, as a senior vicepresident of business development. From 1995 to 1999, Mr. Cornell servedin various capacities including as executive director and vice president ofinternational operations with Vodafone Airtouch International, Ltd. Previously,Mr. Cornell served as director or senior manager for various companiesincluding Airtouch Communications, Inc., a wireless communicationscompany, and Marakon Associates, a value-based strategy consultancy firm. Heholds a BS degree in engineering from Harvey Mudd College and an MBA degreefrom 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.From 1997 to November 2000, Mr. Valeski served in various capacitieswith British 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.He holds an EA degree in liberal arts from the University of Arizona. Mr. Valeskiis a director of several private companies.

 

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**ITEM 2.**                   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% ofproperty is subleased to a third-party for the duration of the lease term.

 

(2)             Subleased toa third-party for the duration of the lease term.

 

(3)             Availablefor sublease.

 

Theproperties located in Solano Beach, California and Delhi, India were leased in May 2006and July 2006 for the employees of our newly acquired subsidiariesTourmaline and PDAapps, respectively. We believe that these facilities areadequate to meet the present and future operational requirements of our newlyacquired subsidiaries.

 

Welease space in Los Gatos and Santa Cruz, California for offices that wereclosed as a result of the restructuring and cost reduction plans we implementedin previous fiscal years. Refer to the discussions under the caption “*Restructuring and Other Charges”* set forth in Item 7, Part IIof this Annual Report on Form 10-K/A for more information on therestructure charges related to these facilities. We have secured tenants forsome of our vacated facilities and are actively marketing to sublet theremainder. We have experienced difficulties, however, in subletting our vacatedoffice in Santa Cruz, California because of the continuing deterioration of thereal estate markets in that location.

 

Webelieve that our existing facilities are sufficient to meet our present andfuture foreseeable needs. We do not anticipate difficulty in renewing existingleases as they expire or in finding alternative facilities.

 

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**ITEM 3.**                   LEGAL PROCEEDINGS

** **

On October 5,2005, Plaintiff Spontaneous Technology, Inc. served the Company with acomplaint filed in the Third Judicial District Court, of Salt Lake County,State of Utah. In the Complaint, Plaintiff asserts a cause of action for breachof contract related to the calculation of an earnout payment in the AssetPurchase Agreement entered into between the parties on July 30, 2003.Plaintiff seeks compensatory damages in the amount of $673,750 and recovery ofits attorneys’ fees and costs. We believe the action has no merit and arevigorously defending against it. We cannot estimate any possible loss at thistime.

 

We areparty to various legal proceedings and claims, either asserted or unasserted,which arise in the ordinary course of business, including proceedings andclaims that relate to acquisitions we have completed or to companies we haveacquired, commercial, employment and other matters. While the outcome of thesematters cannot be predicted with certainty, we do not believe that the outcomeof any of these claims or any of the above mentioned legal matters will have amaterial adverse effect on our consolidated financial position, results ofoperations or cash flow. In accordance with generally accepted accountingprinciples, we make a provision for a liability when it is both probable that aliability 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, we believe that we have validdefenses with respect to the legal matters pending against Intellisync. It ispossible, nevertheless, that our consolidated financial position, cash flows orresults of operations could be affected by the resolution of one or more ofthese contingencies.

 

Referto the discussion set forth in Item 1 under the caption *“RiskFactors—We may be unable to adequately protect our proprietary rights;” “RiskFactors—We may be subject to intellectual property infringement claims, whichare costly to defend and could limit our ability to use certain technologies inthe future” and “Risk Factors—We have been, are and may in the future beinvolved in litigation that could result in significant costs to us.”*

 

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

** **

Nomatters were submitted to a vote of the Company’s security holders during thefourth quarter of the fiscal year ended July 31, 2005.

 

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**PART II**

 
| **ITEM 5.** | **MARKET FOR REGISTRANT’S  COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY  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,through July 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 approximately 433 stockholders of record of our common stockand 67,255,129 shares of common stock outstanding. Additionally, on such datethe last reported closing sale price of our common stock, as reported by theNasdaq National Market, was $4.27 per share.

 

Wehave never paid dividends on our capital stock. We currently intend to retainany future earnings for use in our business and do not anticipate paying anycash dividends in the foreseeable future.

 

Thedisclosure required by Item 201(d) of Regulation S-K is incorporated byreference to the definitive proxy statement for our 2005 Annual Meeting ofStockholders to be filed with the SEC pursuant to Regulation 14A no later than120 days after the end of the fiscal year covered by this form under thecaption “*Equity Compensation Plan Information.*”

 

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**ITEM6.**                   SELECTEDFINANCIAL DATA

** **

Thefollowing selected consolidated financial data are derived from ourconsolidated financial statements. Historical results should not be taken asindicative of the results that may be expected for any future period. Thissummary of our consolidated financial information for fiscal years 2001 to 2005should be read along with our audited consolidated financial statementscontained in this Annual Report on Form 10-K/A. The summarized financialinformation, other than the statements of operations data for fiscal 2001 and2002 and the balance sheets data at July 31, 2001, 2002 and 2003, wastaken from these financial statements.

 

Thissummary of consolidated financial statements includes the accounts ofIntellisync Corporation and our wholly owned subsidiaries.

 

Inaddition to the effect of acquisitions, there were a number of other items thataffected the comparability of this information:

 

•       The resultsof operations for fiscal year 2005 include the effects of charges recordedduring the fourth quarter of fiscal 2005, including $505,000 for the settlementof NCR Corporation’s patent infringement claim, which is more fully describedin note 9 to the consolidated financial statements set forth under Part IV,Item 15 of this Annual Report on Form 10-K/A, and various legal costs. Theresults of operations for fiscal 2005 also include $220,000 for purchased in-processresearch and development in connection with the acquisition of PDAapps, Inc.We also recorded a $25,000 recovery of non-cash stock compensation duringfiscal 2005 in connection with certain stock options accounted for usingvariable accounting.

 

•       The resultsof operations for fiscal year 2004 include the effect of charges including$600,000 for facilities cost adjustment relating to restructuring actionsimplemented in a prior year, $253,000 for severance costs, and $76,000 foroperating expenses relating to a potential acquisition that was subsequentlyabandoned. We recorded a charge of $3,667,000 for purchased in-process researchand development in connection with the acquisitions of Spontaneous Technology, Inc.,and acquisition of Synchrologic, Inc., and Identity Systems (formerlySearch Software America Pty. Ltd., or SSA). An additional charge of $745,000was incurred in connection with certain stock options accounted for usingvariable accounting. A net gain of $1,576,000 which resulted from thesettlement of patent litigation with Extended Systems was also recorded infiscal 2004.

 

•       The resultsof operations for fiscal year 2003 include the effect of charges including$379,000 for operating expenses relating to a potential acquisition that wassubsequently 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.

 

•       The resultsof operations for fiscal year 2002 include the effect of charges including$5,595,000 for severance and separation costs, facilities consolidation andassets held for disposal associated with the cost reduction program implementedduring the third and fourth quarters of fiscal 2002 and $5,249,000 forwrite-downs of impaired intangibles and assets related to our terminated onlineoperations. We recorded a charge for impairment of certain excess softwaredevelopment tools, a provision for rent reimbursement deemed uncollectible andan other-than-temporary impairment of investments of approximately $580,000,$330,000 and $380,000, respectively. Non-cash stock compensation expense of$367,000 was also recorded in connection with the options granted by NetMindprior to our acquisition of NetMind.

 

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•       The resultsof operations for fiscal year 2001 include the effect of a $1,417,000 chargefor severance costs, facilities consolidation and assets held for disposalassociated with the cost reduction programs implemented in the third and fourthquarters of fiscal 2001. Additional charges were incurred for write-downs ofimpaired intangibles 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, exceptper 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 |   |

 

***SummaryCondensed Quarterly Data***(unaudited,in thousands, except per common share data)

 
| ** **                                                            | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **July 31,  2005**          | ** ** | **April 30,  2005** | ** ** | **Jan 31,  2005** | ** ** | **Oct 31,  2004** | ** ** | **July 31,  2004** | ** ** | **April 30,  2004** | ** ** | **Jan 31,  2004** | ** ** | **Oct 31,  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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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

** **

*The following discussion includes a number offorward-looking statements. You should read this section in conjunctionwith the cautionary language applicable to such forward-looking statementsdescribed above in Item 1 found in Part I of this Annual Report on Form 10-K/A.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/A. Weundertake no obligation to release publicly any revisions to the forward-lookingstatements or reflect events or circumstances after the date of this document.*

* *

**BusinessOverview**

** **

Wedevelop, market and support desktop, enterprise and mobile carrier-classsoftware that enables consumers, business executives and information technologyprofessionals to extend the capabilities of enterprise groupware and verticalapplications, data-enabled mobile devices and other personal communicationplatforms. The primary software applications we developed and marketed includepush-email, data synchronization and systems management software. Our softwarealso enables organizations to search, find, match and synchronize identity datawithin their computer systems and network databases.

 

Wehave organized our operations into a single operating segment encompassing thedevelopment, marketing and support of software and services that providesynchronization, wireless messaging, mobile application development, databaseapplication/device management, real-time remote information access, secure VPN,and identity synchronization capabilities.

 

Welicense our software products directly to corporations, mobile carriers,original equipment manufacturers, or OEMs, and business developmentorganizations worldwide. In addition, we sell our retail products throughseveral distribution channels both in the United States and internationally,including major distributors, resellers, computer dealers, retailers andmail-order companies. Internationally, we are represented by over 150distributors, resellers and retailers in North America, Europe, theAsia-Pacific region, South America and Africa.

 

Onecomponent of our business strategy is to enhance stockholder value through theacquisition of companies and technologies that we can leverage to improve ourstrategic market position and growth potential in both emerging and establishedtechnologies. Our recent acquisitions, together with our internal developmentefforts, have been aimed at expanding our focus from cabled synchronization tosynchronization for wireless handhelds, smartphones, laptops and tablets, wherea number of industry analysts, such as International Data Corporation, or IDC,predict future growth. For details on our recent acquisitions, refer to thediscussion under the caption “*Acquisitions*”set forth under Liquidity and Capital Resources below.

 

Weintend to capitalize on the continued growth in demand for wireless servicesand the related infrastructure required, including hosting, application andother related services, to support that growth. As such, maintaining andcultivating relationships with mobile carriers is currently one of the criticalfocus areas of our research and development and sales and marketing groups. Webelieve that wireless services will continue to be one of the fastest growingsegments of the telecommunications industry and that mobile carriers will beunder increasing competitive pressure. As a result, we believe there will besignificant opportunities to provide mobile carriers with services that enablethem to focus internal resources on their core business activities whileincreasing revenues, improving service quality and reducing costs.

 

Weexpect to continue to implement our business development strategy in fiscal2006. To increase market share, we may also attempt to acquire or seekalliances with key competitors and other companies that may have importantproducts and synergies with our existing operations and products.

 

**Estimates,Assumptions and Critical Accounting Policies**

 

Thefollowing discussion and analysis of financial condition and results ofoperations are based on our consolidated financial statements and notes theretoset forth in Part IV of this Annual Report on Form 10-K/A. Ourconsolidated financial statements are prepared in accordance with generallyaccepted accounting principles,

 

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or GAAP, in the UnitedStates of America. These accounting principles require us to make certainestimates, 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 fees is recognizedwhen persuasive 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. If we were to assess thecollectibility of fees differently, the timing and amount of our revenuerecognition might differ substantially from previously estimated or reported.

 

Services revenue primarily comprisesrevenue 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 with multiple elements, andfor which vendor-specific objective evidence of fair value for the undeliveredelements exists, revenue is recognized for the delivered elements based uponthe residual contract value as prescribed by the American Institute ofCertified Public Accountants in Statement of Position (SOP) No. 98-9. Wehave accumulated relevant information from contracts to use in determining theavailability of vendor-specific objective evidence and believe that suchinformation complies with the criteria established in SOP No. 97-2, “*Software Revenue Recognition*” which provides guidance ongenerally accepted accounting principles for recognizing revenue on softwaretransactions. If we were to allocate the respective fair values of the aforementionedelements differently, the timing of our revenue recognition might differsubstantially from that previously estimated or reported.

 

License and services revenue associatedwith contracts that involve significant implementation of customization ofservices, which are essential to the functionality of the software, isrecognized over the period of each engagement, primarily using thepercentage-of-completion method. Costs incurred are generally used as themeasure of progress towards completion as prescribed by SOP No. 81-1, “*Accounting for Performance of Construction-Type and CertainProduct-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

 

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estimates of the total amount of workrequired to complete the engagement, the timing of our revenue recognition fromperiod to period, as well as the related margins, might differ substantiallyfrom that previously estimated or reported. We consider a project completed atthe go-live date. When we sell additional licenses, we recognize revenue afterthe go-live date if the products or seats have been delivered and no remainingobligations exist.

 

We license rights to use our intellectualproperty portfolio, whereby licensees, particularly OEMs, typically pay anon-refundable license fee in one or more installments and on-going royaltiesbased on their sales of products incorporating our intellectual property.Revenue from OEMs under minimum guaranteed royalty arrangements, which are notsubject to future obligations, is recognized when such royalties are earned andbecome payable. Royalty revenue is recognized as earned when reasonableestimates of such amounts can be made. Royalty revenue that is subject tofuture obligations is recognized when such obligations are fulfilled. Royaltyrevenue that exceeds minimum guarantees is recognized in the period earned. Ifwe were to assess the collectibility of royalties differently or make differentjudgments or utilize different estimates, the timing and amount of our revenuerecognition might differ substantially from previously estimated or reported.

 

•       *Channel inventory and product returns.*

 

The primary sales channel into which wesell our retail products is a network of distributors and value-added resellersin North America, Europe, Asia Pacific, South America and Africa. Agreementswith our distributors and resellers contain specific product return privilegesfor stock rotation and obsolete products that are generally limited tocontractual amounts. Reserves for estimated future returns are provided forupon revenue recognition. Product returns are recorded as a reduction ofrevenues. Accordingly, we have established a product returns reserve composedof 100% of product inventories held at our distribution partners, as well as anestimated amount for returns from customers of our distributors and other resellersas a result of stock rotation and obsolete products, among others.

 

We evaluate our product returns reserveon a quarterly basis. In estimating our product returns reserve, we evaluatethe following factors:

 

•        our demandforecast by product in each of our principal geographic markets, which isaffected 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.

 

In general, we would expect productreturns to increase following the announcement of new or upgraded versions ofour products or in anticipation of such product announcements, as ourdistributors and resellers seek to reduce their inventory levels of the priorversion of a product in advance of receiving the new version. Similarly, wewould expect that product inventory held by our distributors and resellerswould increase following the successful introduction of new or upgradedproducts, as these resellers stock the new version in anticipation of demand.In assessing the appropriateness of product inventory levels held by ourresellers and the impact on potential product returns, we may limit sales toour distributors and resellers in order to maintain inventory levels deemed bymanagement to be appropriate. We generally estimate and provide product returnsreserve based on anticipated level of returns and the criteria noted above.Accordingly, actual product returns may differ from our estimates and may havea material adverse effect on our revenues and consolidated results ofoperations in future periods due to factors including, but not limited to,market conditions and product release cycles.

 

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•       *Provision for doubtful accounts.*

 

Our provision for doubtful accountsrelates to customer accounts receivable. The provision for doubtful accounts isan estimate 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, ourhistorical write-off experience and other assumptions, when evaluating theadequacy of the provision for doubtful accounts. If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required. Likewise, should wedetermine that we would be able to realize more of our receivables in thefuture than previously estimated, an adjustment to the allowance would increaseincome in the period such determination was made. The provision for doubtfulaccounts is reviewed on a quarterly basis and adjustments are recorded asdeemed necessary.

 

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

 

We have accumulated over the years asignificant amount of goodwill, other intangible assets, long-term and otherlong-lived assets as a result of our investments and acquisitions.

 

Goodwill represents the excess of thepurchase price of acquired businesses over the fair value of the identifiablenet assets acquired and is tested for impairment at July 31 of each yearand written down only when impaired. Identifiable intangible assets result fromthe application of the purchase method of accounting for our acquisitions. Ouridentifiable intangible assets as of July 31, 2005, were composed of ourunamortized developed and core technology, patents, trademark, customer base,covenant not-to-compete, customer contracts and acquired workforce (notaccounted as a business combination). Developed and core technology, patentsand customer base are amortized over the period of benefit, generally three toseven years. Trademarks are amortized over the period of benefit of two orthree years. Covenants not-to-compete, customer contracts and acquiredworkforce are amortized over the period of benefit, ranging from nine months tothree years.

 

The ongoing evaluation for impairment ofcertain identifiable intangibles, investments and long-lived assets requiressignificant management estimation and judgment. We evaluate the carrying valueof these assets for impairment, when events and circumstances indicate that thecarrying amount of the underlying asset may not be recoverable as defined inthe 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 step measures the amount ofthe impairment loss, if any. Intangible assets with indefinite lives are testedfor impairment using a one-step process that compares the fair value to thecarrying 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 totalgoodwill amounted to $68,474,000. The annual impairment review for goodwill wascompleted on July 31, 2005, and did not identify any impairment. As of July 31,2005, other intangibles amounted to $25,946,000, net of accumulatedamortization. We expect to amortize approximately $8,616,000, $7,980,000,$4,404,000, $2,190,000 and $2,756,000 of our other intangibles

 

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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 assetsacquired through 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 totheir net 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 throughestablished valuation techniques and will incur future IPR&D charges ifthose products under development have not reached technical feasibility.

 

•       *Restructuring accruals.*

 

In recent years, we implemented severalcost-reduction plans as part of our continued effort to streamline ouroperations to properly size ongoing operating expenses. These plans resulted inrestructuring charges related to, among others, the consolidation of excessfacilities. These charges relate to facilities and portions of facilities we nolonger utilize and either seek to terminate early or sublease. Lease terminationcosts for the abandoned facilities were estimated for the remaining leaseobligations and brokerage fees offset by estimated sublease income. Estimatesrelated to sublease costs and income are based on assumptions regarding theperiod required to locate and contract with suitable sub-lessees and subleaserates which can be achieved using market trend information analyses provided bya commercial real estate brokerage retained by us. Each reporting period wereview these estimates and to the extent that these assumptions change due tocontinued negotiations with landlords or changes in the market, the ultimaterestructuring expenses for these abandoned facilities could vary by materialamounts.

 

•       *Loss contingencies.*

 

We are subject to the possibility of variousloss contingencies 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 of preparingconsolidated financial statements, we are required to estimate income taxes ineach of the jurisdictions in which we operate. This process involves estimatingour actual current

 

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tax exposure together with assessingtemporary differences resulting from differing treatment of items, such asdeferred revenue, for tax and accounting purposes. These temporary differencesresult in deferred tax assets and liabilities, which are included within ourconsolidated balance sheet. We then assess the likelihood that our deferred taxassets will be recovered from future taxable income and, to the extent webelieve that recovery is not likely, we establish a valuation allowance. To theextent that we establish or increase a valuation allowance in a period, thechange is included as an expense within the tax provision in the consolidatedstatement of income. Significant management judgment is required in determiningour provision for income taxes, our deferred tax assets and liabilities, andany valuation allowance recorded against our net deferred tax assets. Based onour estimates concerning future results of operation, we have recorded avaluation allowance for net operating losses and for foreign tax credits. Inthe event that actual results differ from these estimates or we adjust theseestimates in future periods, we may need to establish an additional valuationallowance, which could materially impact our financial position and results ofoperations. In addition, the estimation of our tax liabilities involves dealingwith uncertainties 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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**Resultsof Operations**

 

Thefollowing table sets forth items included in the consolidated statements ofoperations (Part IV of this Annual Report on Form 10-K/A) as a percentageof revenue for the periods 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 | )% |

 

***FiscalYear Ended July 31, 2005 as Compared to Fiscal 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 |   |
|               |            |                                                      |            |  |  |  |  |  |  |

 

Wederive revenue from two primary sources: software licenses and fees forservices. Fiscal 2005 reflected record revenue for Intellisync primarily duefrom revenue contributions of Synchrologic and Identity Systems product sales,both of which we acquired during fiscal 2004. The revenue increase was alsobrought about by new revenue streams as we launched new wireless products andramped up our wireless messaging solution with the global wireless market, aswell as by an increase in our sales and marketing efforts, both domesticallyand internationally.

 

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Whilethe market for smartphones and other wireless mobile devices has grownrecently, the market for wired or traditional personal digital assistants, orPDAs, has continued to face challenges. The overall decline in traditional PDAsales has had a direct impact on sales of our Intellisync products through theconsumer and online channels, where sales of our synchronization softwaretypically occur at the same time a PDA is purchased, or shortly thereafter. Dueto this decline, our retail revenue, which consists of sales to distributorsand direct sales to end-users, decreased during fiscal 2005.

 

Ouracquisitions of Spontaneous Technology, Synchrologic, Identity Systems, and,recently, Tourmaline and PDAapps have provided and are expected to furtherprovide us with access to new technology capabilities, potential access to newmarkets and customers and other revenue-generation opportunities. We expectrevenue and operational benefits over time through synergies in technology,product development and operations.

 

•       *License Revenue*

 

| ** **                      | ** ** | **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 anincrease in revenue of approximately $10,000,000 from licensing to ourenterprise customers and $3,800,000 from our mobile carrier customers. Asignificant portion of the increase in enterprise revenue was contributed bysales of Intellisync Mobile Suite and other products from Synchrologic(acquired in December 2003) and products from Identity Systems (acquiredin March 2004). The increase in license revenue was partially offset by a$3,500,000 decrease in our retail revenue as a result of overall decline insales of wired or traditional PDAs. We expect that the decreasing revenue fromPDAs will continue as more consumers move to smartphones and other wirelessmobile devices.

 

•       *Services revenue*

 

| ** **                      | ** ** | **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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Servicerevenue is derived from fees for services, including fixed-price andtime-and-materials professional services arrangements, amortization ofmaintenance contract programs and hosting fees. The increase in service revenuefor fiscal 2005 as compared with that for fiscal 2004 resulted from a totalincrease of approximately $9,000,000 brought about by an increase inamortization of our maintenance contract programs relating to the increase inlicense revenue, as well as revenue from our hosting services. This increasewas offset by a decrease of approximately $2,200,000 in professional servicerevenue associated with our technology licensing partners.

 

Inany period, service revenue from time and materials contracts is dependent,among other things, on license transactions closed during the current andpreceding quarters and customer decisions regarding implementations of licensedsoftware.

 

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*Revenueby 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 |   |

 

Ourenterprise and retail products revenue includes sales to retail distributionchannels, as well as direct sales of our personal and server products licensedto corporations for internal use. The increase in revenue from enterprise andretail for fiscal 2005 as compared with that for fiscal 2004 resulted from the full-yearrevenue from products of Synchrologic and Identity Systems, both acquiredduring fiscal 2004. Revenue from such products increased by approximately$13,500,000. The increase in revenue from enterprise and retail for fiscal 2005was also due to approximately $2,100,000 in revenue from amortization ofsupport and maintenance based on a higher license revenue base. This increasewas offset by a decrease of approximately $3,500,000 in revenue from retailsales of our Intellisync software. Enterprise sales frequently involve largeup-front license fees, which can result in lengthy sales cycles anduncertainties as to the timing of sales driven by customers’ budgetaryprocesses. As a result, we generally have less visibility into futureenterprise sales than is typically the case with OEMs in our royalty-basedtechnology licensing business. In addition, while enterprise sales generallyresult in ongoing maintenance revenue and may lead to follow-on purchases orupgrades, we are typically dependent on sales to new customers for asignificant portion of our enterprise revenue in a given quarter.

 

Fiscal2005 reflected a full-year revenue from our mobile carrier business. Therevenue increase from mobile carriers also reflected increased business volumefrom existing customers and increased number of new contracts signed during thefiscal year.

 

Thegrowth in revenue from enterprise and retail and mobile carriers was partiallyoffset by a decline in royalty revenue from our OEM customers. This decreasewas primarily a result of declining demand for the products of our OEMcustomers.

 

*InternationalRevenue*

 

| ** **                      | ** ** | **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 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.

 

45

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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 as internationalsoftware piracy as described more fully in “*Factors That May AffectFuture Operating Results*” set forth below. We believe that continuedgrowth will require further expansion in international markets. We haveutilized and will likely continue to utilize substantial resources both toexpand and establish international operations in the future.

 

*TopCustomers*

* *

Nocustomers accounted for more than 10% of our total revenue during fiscal 2005and 2004.

 

*Costof 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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Costof revenue consists of license costs, service costs and the amortization ofdeveloped and core technology. License costs comprise product-packagingexpenses such as product media and duplication, manuals, packing supplies, andshipping costs, as well as third party royalty fees. Service costs include thefollowing types of costs: personnel-related expenses such as salaries and otherrelated costs associated with work performed under professional servicecontracts and non-recurring engineering agreements; post-sales customer supportcosts and hosting costs associated with our technology licensing partners andend users. Hosting costs include expenses related to bandwidth for hosting,tape backup, security and storage, third-party fees and internal personnelcosts associated with logistics and operational support of the hostingservices. Service costs can be expected to vary significantly from period toperiod depending on the mix of services we provide.

 

Ingeneral, license revenue costs represent a smaller percentage of licenserevenue when compared with services revenue costs as a percentage of servicesrevenue; this is due to the high cost structure of services revenue.Additionally, license costs tend to be variable based on license revenuevolumes, whereas service costs tend to be fixed within certain services revenuevolume ranges. We would expect that an increase in services revenue as apercentage of our total revenue would generate lower overall gross margins as apercentage of total revenue. Also, given the high level of fixed costsassociated with the professional services group and our hosting operations, ourinability to generate revenue sufficient to absorb these fixed costs could leadto low or negative service gross margins.

 

•       *Cost of License 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 | % |
|                                   |            |                                                      |            |  |  |  |  |  |  |

 

Thedecrease in cost of license revenue in fiscal 2005 was attributed to lowerpackaging and distribution costs due to decrease in overall revenue from retailproducts.

 

46

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•       *Cost of Services 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.

 

•       *Amortization of 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 | % |
|                                               |            |                                                      |            |  |  |  |  |  |  |

 

Developedand core technology amounted to $14,552,000 and $15,867,000, 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,“*Accounting for the Impairment or Disposal ofLong-Lived Assets*,” reassess their useful lives and make anynecessary 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     |   |

 

Weexpect that we may acquire additional developed and core technology inconnection with any acquisitions we may complete in the future. As a result, wemay further increase our amortization expense of developed and core technology.

 

47

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*Researchand 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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Researchand development expenses consist primarily of salaries and other related costsfor research and development personnel, quality assurance personnel, productlocalization, fees to outside contractors and the cost of facilities anddepreciation of capital equipment. We invest in research and development bothfor new products and to provide continuing enhancements to existing products.Our engineering group is currently focused on developing new functionality forwireless handhelds, smartphones, laptops and tablets, on extending our coresynchronization technology to increase scalability and extensibility, and onsupporting next generation wireless technology and device platforms. Theincrease in research and development spending in absolute dollars was due tothe added headcount due to the acquisition of approximately 25 engineers fromacquisitions of Tourmaline and PDAapps during the second half of fiscal 2005and 71 additional engineers from the acquisitions of Spontaneous Technology,Synchrologic and Identity Systems during the first three quarters of fiscal2004. The decrease in research and development expense as a percentage ofrevenue was due to the overall increase in total revenue. We expect thatresearch and development expenses will increase in absolute dollars as wecontinue to increase associated costs to pursue additional new productdevelopment opportunities, but such expenses will fluctuate as a percentage ofrevenue due to changes in sales volume.

 

*Salesand 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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of salaries, commissions, promotionalexpenses (marketing and sales literature and presentations), marketing programs(trade shows, public relations) and other costs relating to sales and marketingemployees. Sales and marketing expenses also include costs relating totechnical support personnel associated with pre-sales activities such asbuilding brand awareness, performing product and technical presentations andanswering customers’ product and service inquiries. Sales and marketingexpenses increased year-over-year due to an increase in number of sales peopleworldwide as we increased our selling efforts in the Mobile Carrier saleschannel. We also added 22 new sales and marketing employees from the acquisitionsof Synchrologic and 11 sales and marketing personnel from Identity Systems. Theadded personnel costs resulted in an increase of approximately $6,094,000 infiscal 2005.

 

Theincrease in sales and marketing expenses was also due to an increase in marketingprograms and other related activities of approximately $3,627,000 to supportincreased revenue activities driven by our recent acquisitions and establishingstrategic relationships with our existing and prospective enterprise customers.Increased sales and marketing-related travel increased by approximately$1,290,000. We intend to increase awareness and market presence of our existingand new products, services or technology over time, which may require us tosubstantially increase the amount we spend on sales and marketing in futureperiods. We expect that our sales and marketing expenses will continue toincrease in terms of absolute dollars as we increase and expand our sales andmarketing efforts worldwide.

 

48

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*Generaland 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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Generaland administrative expenses consist primarily of salaries and other costsrelating to administrative, executive and financial personnel and outsideprofessional fees. The increase in general and administrative spending forfiscal 2005 was due to an increase in audit and consulting fees ofapproximately $1,200,000 which were related to complying with the new reportingrequirements under The Sarbanes-Oxley Act of 2002, plus the cost of threeadditional employees and other expenses amounting to approximately $1,761,000. Thisincrease was partially offset by a $675,000 reduction in non-cash variableaccounting charges associated with certain outstanding stock options and areduction of outside legal costs of $889,000, which was due to a settlement ofa patent infringement lawsuit. The decrease in general and administrativeexpense as a percentage of revenue for fiscal 2005 was due to the overallincrease in overall revenue.

 

In December 2004,the Financial 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. SFAS123(R) covers a wide range of share-based compensation arrangementsincluding share options, restricted shares, restricted share unitsperformance-based awards, and employee share purchase plans. Statement123(R) replaces FASB Statement No. 123, “Accounting for Stock-BasedCompensation,” and supersedes Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.” Statement 123(R), as amended, iseffective for our fiscal year 2006. As a result, we will be required toimplement SFAS 123R in thequarter ending October 31, 2005. We are presently studying SFAS No. 123Rand have not yet determined which method we will select for our adoption ofSFAS No. 123R. We expect that the adoption of SFAS No. 123 willhave a material impact on our annual earnings.

 

*In-ProcessResearch 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 | % |
|                                      |            |                                                      |            |  |  |  |  |  |  |

 

Thepurchase price of our recent acquisition of PDAapps was assigned to the fairvalue of the assets acquired, including the in-process research anddevelopment. As of the acquisition date, technological feasibility of thein-process technology had not been established and the technology had noalternative future use and , therefore, we expensed the in-process research anddevelopment of $220,000 at the date of the acquisition. 

 

Theamount of the purchase price allocated to in-process research and technologywas based on established valuation techniques used in the high-technologysoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-processprojects identified as of the acquisition date, estimated costs to complete theprojects, revenue contributions and expense projections assuming the resultingproduct has entered the market, and discount rate based on the risks associatedwith the development life cycle of the in-process technology acquired. Thediscount rate used in the present value calculations is normally obtained froma weighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful

 

49

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development of thein-process research and development, the expected profitability levels of suchtechnology, and the uncertainty of technological advances that couldpotentially impact the estimates. We assume the pricing model for the resultingproduct of the acquired in process research and technology to be standardwithin its industry. We, 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. 

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment from PDAapps are as follows (in thousands, 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% 

Firstperiod expected revenue: 2nd quarter of calendar year 2006

 

Thedevelopment of the above technology remains highly dependent on the remainingefforts to achieve technical viability, rapidly changing customer markets,uncertain standards for a new product, and significant competitive threats fromseveral companies. The nature of the efforts to develop this technology into acommercially viable product consists primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology can meet market expectations, including functionality and technicalrequirements. Failure to bring the product to market in a timely manner couldresult in a loss of market share or a lost opportunity to capitalize onemerging markets, and could have a material adverse impact on our business andoperating results. 

 

Subsequentto the acquisition of PDAapps, there have been no significant developments relatedto the current status of the acquired in-process research and developmentproject that would result in material changes to the assumptions.

 

Infiscal 2004 we recorded a charge of $3,667,000 for in-process research anddevelopment associated with the acquisitions of Spontaneous Technology,Synchrologic and Identity Systems. For more details, refer to the discussionunder the caption “*Fiscal Year Ended July 31,2004 as Compared to Fiscal Year Ended July 31, 2003*” set forthbelow.

 

If allthe above in-process research and development projects are not successfullydeveloped, our future revenues and profitability may be adversely affected.Failure to achieve the expected levels of revenue and net income from theseproducts will negatively impact the return on investment expected at the timethat the acquisitions were completed and may result in impairment charges.Additionally, the value of other intangible assets acquired may becomeimpaired.

 

*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 | % |
|                                          |            |                                                      |            |  |  |  |  |  |  |

 

Otherintangible assets, excluding developed and core technology, amounted to$11,394,000 and $13,961,000, net of accumulated amortization, as of July 31,2005 and 2004, respectively. We continue to amortize other intangible assets,review such assets for impairment under SFAS No. 144, reassess theiruseful lives and make any necessary adjustments. 

 

50

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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     |   |

 

Weexpect that we may acquire additional intangible assets associated with anyacquisitions we may complete in the future. As a result, we may furtherincrease our amortization expense of other intangible assets.

 

*Restructuringand 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 | % |

 

•       *Restructuring Charges and Accrual.  *Duringfiscal 2004, we implemented a number of cost-reduction plans aimed at reducingcosts that were not integral to our overall strategy and better aligning ourexpense levels with current revenue levels. These initiatives included areduction in workforce and facilities consolidation. 

 

During fiscal 2004, we implemented areduction in workforce affecting 17 employees in various business functions(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.

 

Also duringfiscal 2004, as a result of vacating ourremaining 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 brokeragefees. 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.

 

51

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The following table sets forth theactivities in the restructuring accrual account for the periods presented (inthousands):

 

| ** **                         | ** ** | **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 unpaid amount as of July 31,2005 of $86,000 related to the net lease expense due to the consolidation ofexcess facilities, 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.

 

We continually evaluate the balance ofthe restructuring reserve we recorded in prior periods based on the remainingestimated amounts to be paid. Differences, if any, between the estimatedamounts accrued and the actual amounts paid will be reflected in operatingexpenses in future periods.

 

We believe that the above restructuringshave contributed towards the improvement in our gross and operating incomeduring fiscal 2004 and 2005.

 

•       Othercharges.

 

*Litigation settlement and related costs.**  *During the fourth quarter of fiscal 2005,we made a cash payment of $600,000 for litigation settlement with NCRCorporation. This amount is amortized over the license period of certain NCRpatents determined to be between January 2002 and December 2010 basedon the greater of straight line amortization or in proportion to volume of thedeployed licenses. As a result, approximately $239,000 was expensed during thefourth quarter of fiscal 2005. The remaining $361,000 was recorded as “OtherAssets” in the consolidated balance sheet as of July 31, 2005. Inaddition, an expense of $116,000 was recorded for the litigation related costsincurred during the fourth quarter of fiscal 2005.

 

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

 

*InterestIncome*

 
| ** **                      | ** ** | **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 | % |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Interestincome represents interest earned on cash and short-term investments andrealized gains on miscellaneous investments. The increase in net interestincome was due to higher yield on higher cash balances of cash and investmentsmainly from the realized proceeds from issuance of convertible senior notesduring fiscal 2004. 

 

52

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*InterestExpense*

 
| ** **                      | ** ** | **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 | )% |
|                                 |            |                                                      |            |  |  |  |  |  |  |

 

Interestexpense for fiscal 2005 reflects primarily a full-year interest chargeassociated with the convertible senior notes we issued in March 2004.

 

Duringfiscal 2004, we entered into two interest rate swap agreements with a financialinstitution on a total notional amount of $60,000,000, whereby the Companyreceives fixed-rate interest of 3% in exchange for variable interest payments.The interest rate swaps expire upon the maturity of the Company’s $60,000,000,3% convertible senior notes in March 2009, and effectively convertfixed-rate notes into variable-rate borrowings. The interest rate is resetsemi-annually and is equal to the 6-month LIBOR rate less a rate spread. Thetotal variable interest rate, approximately 2.9% at July 31, 2005,resulted in interest expense savings relative 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 issuance costs, miscellaneous bank feesand charges and realized gain or loss on foreign exchange and investments.Other, net, for fiscal 2005 reflects $660,000 of debt issuance costsamortization expense associated with the convertible senior notes we issued in March 2004,$140,000 of bank charges and $119,000 of investment management fees, netrealized loss on foreign exchange and other expenses. Other, net, for fiscal2004 was $327,000. For more details on fiscal 2004 other, net, refer to thediscussion under the caption “*Fiscal YearEnded July 31, 2004 as Compared to Fiscal Year Ended July 31, 2003*”set forth below.

 

53

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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, 2005 and 2004, our deferred taxassets, with the exception of Australia as of July 31, 2005, were subjectto a full valuation allowance based on our determination that these assets willprobably not be realized. We have recorded a deferred tax asset of $242,000 inAustralia as of January 31, 2005.

 

***Fiscal Year Ended July 31, 2004 as Compared to Fiscal Year EndedJuly 31, 2003***

 

*Revenue*

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

 

Fiscal 2004reflected an increase in revenue primarily due from revenue contributions ofIntellisync 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.

 

•       *License Revenue.*

 
| ** **                     | ** ** | **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 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |

 

Asignificant portion of the increase in our license revenue for fiscal 2004 wascontributed by Synchrologic and Identity Systems. The increase in licenserevenue was also due to greater demand, as compared with the preceding fiscalyear, for certain of our customers’ products in which our technology isembedded. The increase in our customers’ sales provided us with increasedroyalty proceeds. As a percentage of total revenue, license revenue decreaseddue to significant increase in our revenue from professional services asdescribed below, as well as the general impact of the decline in wired ortraditional PDA sales to our retail revenue.

 

54

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•       *Services revenue.*

 
| ** **                     | ** ** | **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 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |

 

Theincrease in services revenue for fiscal 2004 as compared with that for fiscal 2003 resulted from an increase of$4,525,000 in professional service revenue associated with our technology licensingpartners. The increase in professional service revenue was attributable to newcustomer contracts primarily associated with our recent acquisitions andincreased sales effort. The increase in services revenue was also due toapproximately $3,500,000 increase in amortization of our maintenance contractprograms relating to increase in license revenue and a greater focus onrenewals.

 

*Revenueby 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 total revenue, revenue from bothenterprise and retail and OEMs decreased due to additional revenue receivedfrom Identity Systems (acquired in March 2004) and mobile carrier products(initial ramp-up in fiscal 2004). The decrease was also due to the generalimpact of the decline in wired or traditional PDA sales to our retail revenue.

 

*InternationalRevenue*

 
| ** **                     | ** ** | **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 | % |
|                                |            |                                                      |            |  |  |  |  |  |  |

 

55

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The year-over-year increase in our internationalrevenues accounted for 29% of our total revenue increase for fiscal 2004. Theincrease in our professional services revenue and the number of ourinternational technology licensing partners, particularly in Japan, resulted inan increase in our international revenue inabsolute 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.

 

*TopCustomers*

* *

No customers accounted for more than 10% of our totalrevenue for fiscal 2004. During fiscal 2003, Ingram Micro US, a distributor,accounted for 10% of our total revenue. No other customers accounted for morethan 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 of License 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 of license revenue infiscal 2004 resulted from the increase in overall revenue from enterprise andretail products, much of which was brought about by the assimilation ofproducts from our newly acquired subsidiaries. The cost of cables associatedwith our Intellisync Phone Edition product also contributed to an increase inour cost of license revenue.

 

•       *Cost of Services 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 | % |
|                                   |            |                                                      |            |  |  |  |  |  |  |

 

Theincrease in cost of services revenue in absolute dollars reflected the increasein professional services costs as a result of the Starfish Software, Inc.acquisition in the second half of fiscal 2003 and Spontaneous Technology,Synchrologic and Identity Systems in the first three quarters of fiscal 2004.The decrease in cost of services revenue as a percentage of services revenuewas due to low-cost maintenance contracts acquired as part of our acquisitionsparticularly of Identity Systems.

 

56

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•       *Amortization of 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 | % |
|                                               |            |                                                      |            |  |  |  |  |  |  |

 

Developedand core technology amounted to $15,867,000 and $1,920,000, net of accumulatedamortization, as of July 31, 2004 and 2003, respectively. The increase inthe amortization of developed and core technology for fiscal 2004 wereprimarily due to the impact of recently developed and core technology fromStarfish, Loudfire, Inc., Spontaneous Technology, Synchrologic andIdentity 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 research and development spending inabsolute dollars was due to acquired workforce of approximately 71 engineersfrom the acquisition of Spontaneous Technology, Synchrologic and IdentitySystems during the first three quarters of fiscal 2004. The decrease inresearch and development spending as a percentage of revenue for fiscal 2004resulted 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 marketing expenses increased year-over-yearin absolute dollars as a result of establishing strategic relationships withour existing and prospective enterprise customers, as well as increase in salescommissions and increase in marketing program spending to support increasedrevenue activities driven by our recent acquisitions. We also acquired 22 newsales and marketing employees from Synchrologic during the second quarter offiscal 2004 and 11 from Identity Systems. Sales and marketing expensesdecreased as a percentage of revenue due to an increase in our total revenue.

 

*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 the increase in general andadministrative spending in absolute dollars for fiscal 2004 include an increaseof $1,040,000 in outside services brought about primarily by legal costsassociated with our patent infringement lawsuits and an increase in accountingcosts. Also a major factor for an increase in general

 

57

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and administrative expenses was personnel-related costs of $271,000 asa result primarily of acquisitions of Synchrologic and Identity Systems.General and administrative expenses decreased as a percentage of revenue due toan increase in 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 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 did not include significant anticipated cost savings.

 

58

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

 

*SpontaneousTechnology*

 

Projectnames: Version upgrade of Spontaneous Technology’s secure Virtual PrivateNetwork, or sVPN

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

 

*Synchrologic*

 

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

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

 

*IdentitySystems*

 

Project names: SSA-NAME3 Version 3.0 and IDSVersion 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 the effortsto 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 SpontaneousTechnology, Synchrologic, Identity Systems and Starfish, there had been nosignificant developments related to the current status of the acquired in-processresearch and development projects that would result in material changes to theassumptions.

 

59

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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 coretechnology, amounted to $13,961,000 and $814,000, net of accumulatedamortization, as of July 31, 2004 and 2003, respectively. We continue toamortize other intangible assets, review such assets for impairment under SFASNo. 144, reassess their useful lives and make any necessary adjustments.The increase in the amortization of other intangible assets in fiscal 2004 wasprimarily due to the impact of recently acquired intangibles from Starfish,Loudfire, Spontaneous Technology, Synchrologic and Identity Systems.

 

*Restructuring and OtherCharges.*

 
| ** **                                | ** ** | **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.  *Duringfiscal 2004 and 2003, we implemented a number of cost-reduction plans aimed atreducing costs that were not integral to our overall strategy and betteraligning our expense levels with current revenue levels. These initiativesincluded a reduction in workforce and facilities consolidation.

 

Duringthe third quarter of fiscal 2004, we implemented a reduction in workforceaffecting 17 employees in various business functions (nine in research anddevelopment and eight in sales and marketing). The program was completed by theend of April 2004, and the associated severance costs incurred wereapproximately $253,000, none of which remained unused as of July 31, 2004.

 

During the second quarter of fiscal 2004, as a resultof vacating our remaining office space inSanta Cruz, 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. Wetherefore recorded total facilities costs of $600,000, inclusive of the costsof $250,000 for vacating a floor of our office facility in San Jose, California.

 

Infiscal 2003, we incurred approximately $257,000 for severance and separationcosts relating to recent termination of 19 of our engineering and productmanagement employees. We also incurred a charge of approximately $159,000 for arevised estimated lease exit cost due to additional time required to subleasethe facilities. This revision was attributable to the high vacancy rates in thecorporate real estate market in Northern California.

 

60

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The followingtable sets forth the activities in the restructuring accrual account for theperiods 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 |   |

 

Theremaining unpaid amount as of July 31, 2004 of $1,080,000 related to thenet lease expense due to the consolidation of excess facilities, will be paidover the respective lease terms through June 2006 using cash fromoperations.

 

Thecurrent and long-term portions of the restructuring accrual of $820,000 and$260,000 are classified as “Accrued Liabilities” and “Other Liabilities,”respectively, in the consolidated balance sheet as of July 31, 2004.

 

Refer to the discussion under the caption “*Fiscal Year Ended July 31, 2005 as Compared toFiscal Year Ended July 31, 2004*” set forth above for theremaining unpaid amount as of July 31, 2005 and other details associatedwith 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 net interest income for fiscal 2004was due to lower rate of interest on reduced balances of cash and investments,particularly during the first two quarters of fiscal 2004.

 

*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                                             | )%         |   |   | — | % |
|                                |            |                                                  |            |  |  |  |  |  |  |

 

61

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Interest expense for fiscal 2004 reflects interestcharge associated with the convertible senior notes we issued inMarch 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 relatedexpenses incurred, in the third quarter of fiscal 2004 resulted from thesettlement 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 fiscal 2004 reflects $242,000 of debtissuance costs amortization expense associated with the convertible seniornotes we issued in March 2004 and $87,000 of bank charges and investmentmanagement fees, net realized gain on foreign exchange and other expenses.Other, net for fiscal 2003 reflects mainly bank charges and investmentmanagement 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, we disposed our limitedpartnership interest in Azure Venture Partners, LLP, a venture capital fund.The disposal of the interest allowed us to avoid commitments for furtherinvestments in equity instruments of various privately-held companies madethrough Azure, many of which had not generated adequate returns. In addition, thedisposal was in line with our strategy of focusing resources and efforts moreon our core operations. Consequently, we recorded an other-than-temporaryimpairment charge of $2,394,000. Total proceeds of $75,000 from the sale of theinterest were received in May 2003, which approximated the carrying valueof the investment 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 | )% |
|                                |            |                                                  |            |  |  |  |  |  |  |

 

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The increase in the provision for income taxes forfiscal 2004 was due to increase in royalty revenue received from internationalOEM customers, as well as accrued income and various taxes for our newlyacquired foreign subsidiaries.

 

**Recently Issued Accounting Pronouncements**

 

*The Effect of Contingently Convertible Debt onDiluted Earnings per Share*

 

In October 2004, the Emerging Issues Task Force(EITF) 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 EITFNo. 04-08 would be on a retroactive basis and would require restatement ofprior period diluted earnings per share, subject to certain transitionprovisions. It is effective for all periods ending after December 15,2004. Due to the losses we incurred for fiscal 2005, diluted net loss per sharedoes not differ from basic net loss per share, since potential shares of commonstock issuable upon the conversion of the convertible debt are anti-dilutivefor all periods presented. EITF No. 04-8 could have a future impact on ourresults of operations in the event that the potential shares of common stockissuable upon conversion of the convertible debt were included in the dilutedearnings 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.

 

Staff Accounting Bulletin(SAB) No. 107,*“Share-Based Payment.”*OnMarch 29, 2005, the Securities and Exchange Commission, or the SEC, staffissued SAB No. 107 to express the views of the staff regarding theinteraction 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. We are currently in theprocess of implementing SFAS No. 123R, effective as of the first quarterof fiscal 2006, and will take into consideration the additional guidanceprovided by SAB No. 107 in connection with the implementation of SFASNo. 123R.

 

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

* *

In December 2004, the FASB issued FSPNo. 109-2, “Accounting and Disclosure Guidance for the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004”. TheAmerican Jobs Creation Act introduces a special one-time dividends receiveddeduction on the repatriation of certain foreign earnings to a U.S. taxpayer(repatriation provision), provided certain criteria are met. This positionprovides accounting and disclosure guidance for the repatriation provision. Wedo not believe the Foreign Earnings Repatriation Provision within the AmericanJobs Creation Act of 2004 nor the FSP will have a material impact on ourfinancial condition or results of operations.

 

*Accounting forConditional Asset Retirement Obligations, an interpretation of FASB StatementNo. 143*

* *

In March 2005, the FASB issued Interpretation(FIN) No. 47, *“Accounting forConditional 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 afterDecember 15, 2005. We are currently assessing the impact that theinterpretation may have on our consolidated financial position and results ofoperations.

 

*Accounting Changes andError Corrections*

* *

In June 2005, the FASB issued SFAS No. 154, “*Accounting Changes and Error Corrections*,”which replaces APB Opinion No. 20, “*AccountingChanges*,” and SFAS No. 3, “*ReportingAccounting Changes in Interim Financial Statements*.” SFASNo. 154 changes the requirements for the accounting and reporting of achange in accounting principle. APB Opinion No. 20 previously requiredthat most voluntary changes in an accounting principle be recognized byincluding the cumulative effect of the new accounting principle in net incomeof the period of the change. SFAS No. 154 now requires retrospective applicationof changes in an accounting principle to prior period financial statements,unless it is impracticable to determine either the period-specific effects orthe cumulative effect of the change. The Statement is effective for fiscalyears beginning after December 15, 2005. We do not expect the adoption ofthis statement will have a material impact on our financial statements.

 

*Other-Than-TemporaryImpairment*

* *

In June 2005, the FASB decided not to provideadditional guidance on the meaning of other-than-temporary impairment, anddirected the staff to issue proposed FSP EITF 03-1-a, “*Implementation Guidance for the Application ofParagraph 16 of EITF Issue No. 03-1*,” as final. The final FSPwill supersede EITF Issue No. 03-1, “*TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments*,” and EITF Topic No. D-44, “*Recognition of Other-Than-Temporary Impairment uponthe Planned Sale of a Security Whose Cost Exceeds Fair Value*.” Thefinal FSP (retitled FSP FAS No. 115-1, “*TheMeaning of Other-Than-Temporary Impairment and Its Application to CertainInvestments”*) will replace the guidance set forth in paragraphs 10-18of EITF No. 03-1 with references to existing other-than-temporaryimpairment guidance, such as SFAS No. 115, “*Accounting for Certain Investments in Debt and Equity Securities*,”SEC Staff Accounting Bulletin No. 59, “*Accountingfor Noncurrent Marketable Equity Securities*,” and APB OpinionNo. 18, “*The Equity Method of Accounting for Investments in Common Stock.”*FSPFAS No. 115-1 will codify the guidance set forth in EITF Topic D-44 andclarify that an investor should recognize an impairment loss no later than whenthe impairment is deemed other than temporary, even if a decision to sell hasnot been made. FSP FAS No. 115-1 will be effective forother-than-temporary impairment analysis conducted in periods beginning afterSeptember 15, 2005. We do not believe the adoption of FSP FAS No. 115-1will have a significant impact on our consolidated results of operations orfinancial position.

 

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*Amortization Period for Leasehold Improvements*

 

In June 2005, the EITF reached a consensus onIssue No. 05-06, “*Determining theAmortization 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*

 

The followingsummarizes our cash and cash equivalents, short-term investments and workingcapital:

 
| ** **                | ** ** | **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 in accountspayable and deferred revenue at July 31, 2005, resulted in a decrease inworking capital and current ratio.

 

The significant factor underlying the increase incash, cash equivalents and investments during fiscal 2004 was the net proceedsfrom issuance of convertible senior notes of $57,052,000, offset byacquisitions of $18,939,000 and net cash flow used in operations of $7,546,000.This increase in cash, cash equivalents and short-term investments resulted inan increase in working capital and current ratio.

 

*Cash Flows*

 

*Operating Activities.**  *Significant items included in cash flowsfrom operating 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.Offsetting the net decrease in working capital was an increase in deferredrevenue of $1,830,000. We have not experienced any significant trends inaccounts receivable other than changes relative to the increase in our revenue.Fluctuations in accounts receivable from period to period relative to changesin revenue are a result of timing of customer invoicing and receipt of

 

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payments from customers. Days sales outstanding (average collectionperiod) increased to 78 days in fiscal 2005 compared with 70 days in fiscal2004.

 

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.Offsetting the net decrease in working capital was an increase in deferredrevenue of $632,000.

 

*Investing Activities.  *Significantitems included in cash flows from investing activities are as follows (in thousands):

 
| ** **                                                | ** ** | **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.

 

*Financing Activities.**  *Significant items included in cash flowsfrom financing 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 convertible senior notes issued in fiscal 2004.

 

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*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 ofJuly 31, 2005, the Company has not accrued the contingent earnout paymentamount. Any earnout 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 statements include the effectof 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 purchase agreement.

 

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, thecontingency 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 Spontaneous Technologyadditional consideration of up to $7,000,000 in shares of our common stock. Theearnout period ended on September 30, 2004 with our aggregate revenue onproducts associated with Spontaneous Technology amounting to less than thegiven earnout threshold. Consequently, no additional consideration was paid toSpontaneous Technology.

 

We believe the acquisitionof PDAapps, Tourmaline, Identity Systems, Synchrologic and SpontaneousTechnology has brought and may continue to bring modest improvement inour cash flows from operating activities with the realization of synergisticbenefits and revenue opportunities.

 

*Effects of Inflation*

* *

We believe that our financial results have not beensignificantly impacted by inflation and price changes during fiscal 2005, 2004and 2003.

 

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*Commitments*

* *

*CapitalLeases.**  *During thefirst 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.Current and long-term portions of the capital leases amounted to $153,000 and$206,000, respectively, at July 31, 2005.

 

*OperatingLeases.*   We lease our facilities underoperating leases that expire at various dates through December 2008. Theleases provide 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 which generally involve a transaction withrespect to our common stock. The notes are redeemable at a redemption priceequal to 100% of the principal amount of the notes to be redeemed plus accruedinterest to, but excluding, the redemption date. The notes bear interest at arate of 3% per annum. Interest on the notes is paid on March 1 and onSeptember 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 receivefixed-rate interest of 3% in exchange for variable interest payments. Theinterest rate swaps expire upon the maturity of the $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. Under theprovisions of SFAS 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 ofJuly 31, 2005, the fair value of the interest rate swaps was approximately$2,469,000 and recorded in “Other Liabilities” with an equal adjustmentrecorded to the carrying value of the $60,000,000 convertible senior notes.

 

The followingtable summarizes our material obligations and commitments to make futurepayments, for which we anticipate using cash from operations, under certaincontracts, 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)             Representsour 3% convertible senior notes and the associated interest rate swap. Intereston the senior notes and interest rate swap is payable in cash on March 1and September 1 of each year. The senior notes mature on March 1,2009.

 

(2)             Includesinterest payments due.

 

*ContingentEarnout Consideration.**  *Refer todiscussion above, under Acquisitions, regarding cash earnout consideration ofup to $2,600,000 and $2,881,918 associated with the acquisitions of PDAapps andTourmaline, respectively.

 

*Other.**  *In the event of early termination of ourservice agreement with eˆdeltacom, a division of ITC^DeltaCom, Inc. and amanaged service provider, we may be required to pay eˆdeltacom a penalty fee ofup to approximately $45,000.

 

*Capital Expenditures*

 

We expect total capital expenditures of approximately$4,500,000 for fiscal 2006 principally for support of the hosting operationsand purchase of computers and other various system 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 byMr. Goldberg for twelve months following the effective date of theagreement.

 

On October 15, 2005, we entered into a severanceagreement and mutual release with our Chief Technology Officer, SaidMohammadioun, in connection with Mr. Mohammadioun’s resignation fromemployment by Intellisync effective October 15, 2005. Pursuant to theterms of the agreement, Mr. Mohammadioun will receive, among other items,a lump sum payment of $46,875, two and a half months of accelerated vesting ofhis options to purchase registrant’s common stock, the right to exercise hisvested options until six months following his termination date and two and ahalf months of COBRA premiums paid by Intellisync. The agreement includes ageneral mutual release by Intellisync and Mr. Mohammadioun and anon-solicitation agreement by Mr. Mohammadioun for twelve months followingthe 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. Theholders of the letters of credit are able to draw on each respective letter ofcredit in the event that we are found to be in default of our obligations undereach of our operating leases.

 

Under the terms of the interest rate swap agreementinto which we entered during fiscal 2004, we must provide collateral to matchany unfavorable mark-to-market exposure (fair value) on the swap. The amount ofcollateral required totals a minimum of $1,800,000 plus an amount equal to theunfavorable mark-to-market exposure on the swap. Generally, the requiredcollateral will rise as interest rates rise. As of July 31, 2005, we haveposted approximately $4,181,000 of collateral under this swap agreement whichis included in “Restricted Cash” in our consolidated balance sheet.

 

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*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 betweenJanuary 2002 and December 2010 based on the greater of straight lineamortization or in proportion 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 consolidatedbalance sheet as of July 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 for capital.

 

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.

 

70

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**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to a variety of risks, includingchanges in interest rates and foreign currency fluctuations, which could impactour results of operations and financial condition.

 

*Interest Rate Risk*

* *

In addition to our cash holdings of $11,336,000, atJuly 31, 2005, we had an investment portfolio of mostly fixed incomesecurities, 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.

 

The table belowpresents the carrying value (which approximates fair value) and relatedweighted average coupon interest rates for our investment portfolio atJuly 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        | % |

 

*Debtand Interest Expense.**  *We incurred$60,000,000 of principal indebtedness from the issuance of convertible seniornotes in March 2004. The fair market value of these 3% convertible seniornotes is sensitive to changes in interest rates and to the prices of our commonstock into which it can be converted as well as our financial stability. Inorder to manage interest costs and risk, we entered into an interest rate swapagreement during fiscal 2004 with a financial institution on a total notionalamount of $50,000,000 and $10,000,000, whereby we receive fixed-rate interestof 3% in exchange for variable interest payments. The interest rate swapsexpire upon the maturity of our $60,000,000, 3% convertible senior notes inMarch 2009, and effectively converts those 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. Under theprovisions of SFAS 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 $2,469,000with an equal adjustment recorded to the carrying value of the $60,000,000convertible senior notes. Assuming a one percentage point increase in theprevailing LIBOR rate, holding other terms of the swap constant, the fair valueof the interest rate swap and the underlying senior notes would change byapproximately $1,960,000.

 

*Foreign Currency Risk*

* *

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

 

71

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may become subject to significant currency fluctuations based uponchanges in exchange rates of certain currencies in relation to the UnitedStates dollar.

 

We are also exposed to foreign currency exchange rate fluctuationsas the financial statements of foreign subsidiaries are translated into UnitedStates dollar in consolidation. As exchange rates vary, these results, whentranslated, may vary from expectations and adversely impact overall expectedprofitability. Assets and liabilities of most of our subsidiaries aretranslated into U.S. dollars at exchange rates in effect as of the applicablebalance sheet date and any resulting translation adjustments are included as anadjustment to stockholders’ equity. Revenue and expenses generated from thesesubsidiaries are translated at average monthly exchange rates during thequarter the transactions occur. Gains and losses from these currencytransactions are included in net earnings. Recently, we have increasingly generateda portion of our revenue and incurred a portion of our expenses 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 expand internationally in thefuture and become increasingly subject to other risks of doing businessinternationally including, but not limited to, differing economic conditions,changes in political climate, differing tax structures, and other regulationsand restrictions. We will also be exposed to increased risk of non-payment byour customers in foreign countries, especially those of highly inflationaryeconomies. Accordingly, our future results could be materially adverselyimpacted by changes in these and other factors. Furthermore, to the extent thatwe engage in international sales denominated in United States dollars, anincrease in the value of the United States dollar relative to foreigncurrencies could make our products and services less competitive ininternational markets.

 

**ITEM8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements, together with the reportthereon of PricewaterhouseCoopers LLP dated October 28, 2005 are herebyincorporated by reference to Part IV of this Annual Report on Form 10-K/A.

 

**ITEM 9.     CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A.**          CONTROLSAND PROCEDURES

 

**Evaluation of DisclosureControls and Procedures.**

 

Based on our management’s evaluation (with theparticipation of our principal executive officer and principal financialofficer), as of the end of the period covered by this Annual Report onForm 10-K/A, our principal executive officer and principal financialofficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended, or the Exchange Act) are accumulated and communicatedto management on a timely basis to allow timely decisions regarding appropriatedisclosure and are effective to ensure that information required to bedisclosed by us in reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms.

 

**Reports of Management**

** **

*Statement of Management’sResponsibility*

* *

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

 

72

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that the financial information that we provide is timely, complete,relevant, and accurate. Management is responsible for the fair presentation ofIntellisync’s consolidated financial statements, prepared in accordance withaccounting principles generally accepted in the United States of America(GAAP), and has full 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 governance requirementsof the Sarbanes-Oxley Act of 2002.

 

We are committed to enhancing shareholder value andfully understand and embrace our fiduciary oversight responsibilities. We arededicated to ensuring that our high standards of financial accounting andreporting are maintained. Our culture demands integrity and we have the highestconfidence in our processes, our internal controls, and our people, who areobjective in their responsibilities and who operate under the highest level ofethical 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) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

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 the participation of the principalexecutive officer and principal financial officer) conducted an evaluation ofthe effectiveness of Intellisync’s internal control over financial reportingbased on the framework in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that Intellisync’s internal control over financial reporting waseffective as of July 31, 2005. Management’s assessment of theeffectiveness of Intellisync’s internal control over financial reporting as ofJuly 31, 2005 has been audited by PricewaterhouseCoopers LLP, an independentregistered public accounting firm, as stated in their report which is includedherein 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.

 

73

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There were no other changes in our internal controlover financial reporting during the fourth quarter of fiscal 2005 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 9B.**          OTHER INFORMATION

 

None.

 

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**PART III**

 

**ITEM10.**            DIRECTORSAND EXECUTIVE OFFICERS 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 withSection 16(a) of the Exchange Act is incorporated by reference to thedefinitive proxy statement for Intellisync’s 2005 Annual Meeting ofStockholders to be filed with the SEC pursuant to Regulation 14A, or ProxyStatement, no later than 120 days after the end of the fiscal year covered bythis form, or the Proxy Statement, under the captions “*Board Meetings and Committees*” and “*Section 16(a) Beneficial Ownership Reporting Compliance*.”

 

Pursuant to General Instruction G(3) ofForm 10-K, the information required by this item relating to our executiveofficers is included under the caption “Executive Officers of the Registrant”in Part I of this report.

 

We have adopted the Code of Ethics for PrincipalOfficers and Financial Professionals of Intellisync Corporation, a code ofethics that applies to our Chief Executive Officer, Chief Financial Officer andother finance organization employees. The Code of Ethics for Principal Officersand Financial Professionals of Intellisync Corporation is publicly available onour Website at *www.intellisync.com*. The code ofethics may be found from our main Web page by clicking first on “Company”and then on “Investors,” and finally on “Corporate Governance.” If we make anysubstantive amendments to this code of ethics or grant any waiver, includingany implicit waiver, from a provision of the code to our Chief ExecutiveOfficer or Chief Financial Officer, we will disclose the nature of suchamendment or waiver on that Website or in a report on Form 8-K.

 

**ITEM11.**            EXECUTIVECOMPENSATION

 

The information required by Item 11 is incorporated byreference to the Proxy Statement under the caption “*ExecutiveCompensation and Other Matters*.”

 

**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The information required by Item 12 is incorporated byreference to the Proxy Statement under the caption “*StockOwnership of Certain Beneficial Owners and Management and Related StockholderMatters*.”

 

**ITEM13.**            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The information required by Item 13 is incorporated byreference to the Proxy Statement under the caption “*CertainTransactions*.”

 

**ITEM14.**            PRINCIPALACCOUNTANT FEES AND SERVICES

 

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

 

75

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**PART IV**

 

**ITEM15.**            EXHIBITS,FINANCIAL STATEMENT SCHEDULES

 

(a)    1.   Financial Statements

 

The following consolidated financial statementsof Intellisync Corporation are filed as part of this Annual Report onForm 10-K/A:

 
| • | Report of Independent  Registered Public Accounting Firm                                                                                   |   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                                                       |   |
| • | Consolidated Balance  Sheets at July 31, 2005 and 2004                                                                                |   |
|   |                                                                                                                                       |   |
| • | Consolidated  Statements of Operations for the fiscal years ended July 31, 2005, 2004  and 2003                                       |   |
|   |                                                                                                                                       |   |
| • | Consolidated  Statements of Stockholders’ Equity and Comprehensive Loss for the fiscal  years ended July 31, 2005, 2004 and 2003 |   |
|   |                                                                                                                                       |   |
| • | Consolidated  Statements of Cash Flows for the fiscal years ended July 31, 2005, 2004  and 2003                                       |   |
|   |                                                                                                                                       |   |
| • | Notes to Consolidated  Financial Statements                                                                                                |   |

 

2.      Supplemental Schedule

 

Financial Statement Schedules have been omittedbecause the required information is contained in the consolidated financialstatements and the notes thereto, or because such schedules are not required orapplicable.

 

3.      Exhibits

 

The exhibits listed on the accompanying index toexhibits immediately preceding the financial statement schedules are filed aspart of, or incorporated by reference into, this Annual Report on Form 10-K/A.

 

(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.                                                                                                                                                           |

 

76

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| **Exhibit Number** | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                           |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                             |
| 2.9(29)                 |       | Agreement  and Plan of Merger, dated as of November 15, 2005, by and among Nokia Inc.,  Jupiter Acquisition Corporation and Intellisync Corporation.                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                             |
| 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.                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                             |
| 4.4(27)                 |       | Amendment No. 1 to the  Preferred Shares Rights Agreement between Intellisync and Computerhsare  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).      |
|                    |       |                                                                                                                                                                                                                                                                                                             |
| 4.5(28)                 |       | Amendment No. 2 to the  Preferred Shares Rights Agreement between Intellisync 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).      |
|                    |       |                                                                                                                                                                                                                                                                                                             |
| 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.                                                                                                                                                                                                                    |

 

77

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| **Exhibit Number** | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                            |
|-------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                                                                              |
| 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.                                                                                                                                                                                           |

 

78

----

 
| **Exhibit Number** | ** ** | **Exhibit Title**                                                                                                                                                                                                         |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                           |
| 10.42 (29)              |       | Form  of Voting Agreement, dated November 15, 2005, among Intellisync Corporation,  Nokia Inc., and certain parties                                                                                                            |
|                    |       |                                                                                                                                                                                                                           |
| 21.1(30)                |       | Subsidiaries of the  Registrant.                                                                                                                                                                                               |
|                    |       |                                                                                                                                                                                                                           |
| 23.1(30)                |       | Consent of  PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                         |
|                    |       |                                                                                                                                                                                                                           |
| 24.1(26)                |       | Power of Attorney  (reference page 83 of the Form 10-K filed by the Registrant with  the SEC on October 28, 2005).                                                                                                   |
|                    |       |                                                                                                                                                                                                                           |
| 31.1(30)                |       | Certifications of  Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                |
|                    |       |                                                                                                                                                                                                                           |
| 31.2(30)                |       | Certifications of Principal  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                |
|                    |       |                                                                                                                                                                                                                           |
| 32.1(30)                |       | 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(30)                |       | 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.                                                              |

 

----

| *      | Management contract or  compensatory plan or arrangement.                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                          |
| +      | Confidential treatment  has been granted or requested for portions of this exhibit.                                                                           |
|   |                                                                                                                                                          |
| (1)    | Incorporated by  reference to the Company’s Report on Form 8-K filed on April 11,  2003.                                                       |
|   |                                                                                                                                                          |
| (2)    | Incorporated by  reference to the Company’s Report on Form 8-K filed on August 6,  2003.                                                       |
|   |                                                                                                                                                          |
| (3)    | Incorporated by  reference to the Company’s Report on Form 8-K filed on October 2,  2003.                                                      |
|   |                                                                                                                                                          |
| (4)    | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended April 30, 2004 filed on June 14, 2004.    |
|   |                                                                                                                                                          |
| (5)    | Incorporated by  reference to the Company’s Registration Statement on Form S-1  (No. 333-011445).                                              |
|   |                                                                                                                                                          |
| (6)    | Incorporated by  reference to the Company’s Annual Report on Form 10-K for fiscal year  ended July 31, 2002 filed on October 17, 2002.    |
|   |                                                                                                                                                          |
| (7)    | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended January 31, 2001 filed on March 19, 2001. |

 

79

----

 
| (8)    | Incorporated by  reference to the Company’s Report on Form S-8 filed on December 3,  2004.                                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                             |
| (9)    | Incorporated by  reference to the Company’s Report on Form 8-A12G filed on  January 15, 2003.                                                     |
|   |                                                                                                                                                             |
| (10)   | Incorporated by  reference to the Company’s Report on Form S-3 filed on June 3,  2004.                                                            |
|   |                                                                                                                                                             |
| (11)   | Incorporated by  reference to the Company’s Report on Form 8-K filed on February 18,  2004.                                                       |
|   |                                                                                                                                                             |
| (12)   | Incorporated by  reference to the Company’s Report on Form S-8 filed on August 27,  2002.                                                         |
|   |                                                                                                                                                             |
| (13)   | Incorporated by  reference to the Company’s Annual Report on Form 10-K for fiscal year  ended July 31, 1999 filed on October 29, 1999.       |
|   |                                                                                                                                                             |
| (14)   | Incorporated by  reference to the Company’s Report on Form S-8 filed on November 1,  1999.                                                        |
|   |                                                                                                                                                             |
| (15)   | Incorporated by  reference to the Company’s Report on Form S-8 filed on February 24,  2000.                                                       |
|   |                                                                                                                                                             |
| (16)   | Incorporated by  reference to the Company’s Report on Form S-8 filed on October 27,  2000.                                                        |
|   |                                                                                                                                                             |
| (17)   | Incorporated by  reference to the Company’s Report on Form S-8 filed on February 6,  2001.                                                        |
|   |                                                                                                                                                             |
| (18)   | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended April 30, 2001 filed on June 16, 2001.       |
|   |                                                                                                                                                             |
| (19)   | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended April 30, 2002 filed on June 13, 2002.       |
|   |                                                                                                                                                             |
| (20)   | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended October 31, 2002 filed on December 16, 2002. |
|   |                                                                                                                                                             |
| (21)   | Incorporated by  reference to the Company’s Annual Report on Form 10-K for fiscal year  ended July 31, 2003 filed on October 21, 2003.       |
|   |                                                                                                                                                             |
| (22)   | Incorporated by  reference to the Company’s Report on Form 10-Q/A for the quarterly  period ended October 31, 2003 filed on March 19, 2004.  |
|   |                                                                                                                                                             |
| (23)   | Incorporated by  reference to the Company’s Report on Form 10-Q for the quarterly period  ended January 31, 2004 filed on March 15, 2004.    |
|   |                                                                                                                                                             |
| (24)   | Incorporated by  reference to the Company’s Annual Report on Form 10-K for fiscal year  ended July 31, 2004 filed on October 14, 2004.       |
|   |                                                                                                                                                             |
| (25)   | Incorporated by reference  to the Company’s Report on Form 8-K filed on April 1, 2005.                                                            |
|   |                                                                                                                                                             |
| (26)   | Incorporated by  reference to the Company’s Report on Form 10-K for the year ended July 31,  2005 filed on October, 28, 2005.                               |
|   |                                                                                                                                                             |
| (27)   | Incorporated by  reference to the Company’s Report on Form 8-A/A filed on March 11, 2004.                                                                   |
|   |                                                                                                                                                             |
| (28)   | Incorporated by  reference to the Company’s Report on Form 8-A/A filed on November 16, 2005.                                                                |
|   |                                                                                                                                                             |
| (29)   | Incorporated by  reference to the Company’s  Current Report on Form 8-K filed on November 17, 2005.                                               |
|   |                                                                                                                                                             |
| (30)   | Filed herewith.                                                                                                                                                  |
|   |                                                                                                                                                             |
|   | (b)                                                                                                                                                              | Financial Statement  Schedules. |
|   |                                                                                                                                                             |   |
|   |                                                                                                                                                             | Refer to Item 15  (a) above. |

 

80

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Form 10-K/A to be signed on itsbehalf by the undersigned thereunto duly authorized, on this  23rd day of November, 2005.

 
|                               | INTELLISYNC  CORPORATION |
|-------------------------------|--------------------------|
|                          |                     |
|                          |                     |
| Date:  November 23, 2005 | By:                      | /s/  DAVID P. EICHLER |   |
| ** **                    | ** **               | **David P. Eichler** | ** ** |
| * *                      | * *                 | *Chief Financial Officer and  Principal Accounting Officer* | * * |

 

81

----

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Form 10-K/Ahas 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                  |       | November 23, 2005 |       |
| Woodson Hobbs        |                            | Director (Principal  Executive Officer)                  |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Chief  Financial Officer (Principal  Accounting Officer) |       | November 23, 2005 |       |
| David P. Eichler     |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/*                 |                            | Chairman  of the Board                                   |       | November 23, 2005 |       |
| Michael M. Clair     |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Director                                                 |       | November 23, 2005 |       |
| Richard Arnold       |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Director                                                 |       | November 23, 2005 |       |
| Kirsten Berg-Painter |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Director                                                 |       | November 23, 2005 |       |
| Keith A. Cornell     |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Director                                                 |       | November 23, 2005 |       |
| Said Mohammadioun    |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| /s/ *                |                            | Director                                                 |       | November 23, 2005 |       |
| Terrence E. Valeski  |                            |                                                     |       |                   |       |
|                 |                            |                                                     |       |                   |       |
| *                    | By:                             | /s/ WOODSON  HOBBS                                       |       |                   |       |   |   |
|                 | Woodson Hobbs  Attorney-in-fact |                                                     |       |                   |       |   |
|                      |                                 |                                                          |            |                        |            |  |  |

 

82

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**INDEX TO FINANCIAL STATEMENTS**

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

 

F-1

----

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Stockholdersof Intellisync Corporation:

 

Wehave completed an integrated audit of Intellisync Corporation’s 2005consolidated financial statements and of its internal control over financialreporting as of July 31, 2005 and audits of its 2004 and 2003 consolidatedfinancial statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Our opinions, based on our audits,are presented below.

 

*Consolidated financial statements*

* *

Inour opinion, the consolidated financial statements listed in the indexappearing under Item 15(a)(1) present fairly, in all materialrespects, the financial position of Intellisync Corporation and itssubsidiaries at July 31, 2005 and 2004, and the results of theiroperations and their cash flows for each of the three years in the period endedJuly 31, 2005 in conformity with accounting principles generally acceptedin the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe 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.

 

*Internalcontrol over financial reporting*

* *

Also,in our opinion, management’s assessment, included in Management’s Report onInternal Control Over Financial Reporting appearing under Item 9A, that theCompany maintained effective internal control over financial reporting as of July 31,2005 based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO), is fairly stated, in allmaterial respects, based on those criteria. Furthermore, in our opinion, theCompany maintained, in all material respects, effective internal control overfinancial reporting as of July 31, 2005, based on criteria established in *Internal Control—Integrated Framework* issued by the COSO.The Company’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to expressopinions on management’s assessment and on the effectiveness of theCompany’s internal control over financial reporting based on our audit. Weconducted our audit of internal control over financial reporting in accordancewith the standards of the Public Company Accounting Oversight Board (UnitedStates). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects. An audit of internal controlover financial reporting includes obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we consider necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinions.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (ii) providereasonable assurance that transactions are recorded as necessary to permit preparationof financial 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

 

F-2

----

 

assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| San  Jose, California           |
| October 28,  2005          |

 

F-3

----

 

**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 consolidatedfinancial statements.

 

F-4

----

 

**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 consolidatedfinancial statements.

 

F-5

----

 

**INTELLISYNCCORPORATION**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYAND**

**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     | )          |
|                                                                                  |            |                       |            |             |            |                |            |                  |            |                  |            |                   |            |                        |            |                   |            |            |            |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-6

----

 
| ** **                                                   | ** ** | ** **            | ** ** | ** **  | ** ** | ** **     | ** ** | ** **       | ** ** | ** **       | ** ** | ** **        | ** ** | **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 | ) |
|                                                              |            |                       |            |             |            |                |            |                  |            |                  |            |                   |            |                        |            |                   |            |            |            |  |  |  |  |  |  |  |  |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

F-7

----

 

**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 consolidatedfinancial statements.

 

F-8

----

 

**INTELLISYNC CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**Note1   The Company and a Summary of its Significant Accounting Policies**

** **

*TheCompany*

* *

IntellisyncCorporation (Intellisync or the “Company”) 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 the Company developed and marketed include push-email, datasynchronization and systems management software. The Company’s software alsoenables organizations to search, find, match and synchronize identity datawithin their computer systems and network databases.

 

*Liquidityand Capital Resources*

* *

TheCompany has incurred losses and negative cash flows since inception. TheCompany incurred a net loss of approximately $13,414,000 and negative cashflows from operations of approximately $4,602,000 for fiscal 2005. The Company’scash balances may decline further, although the Company believes that theeffects of its strategic actions implemented to improve revenue as well ascontrol costs along with existing cash resources will be adequate to fund itsoperations for at least the next 12 months. Failure to generate sufficientrevenues or control spending could adversely affect the Company’s ability toachieve its business objectives.

 

*Basisof Presentation 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., and PDAapps, Inc., theassets purchased from Loudfire, Inc., and the engineering employeestransferred from SoftVision SRL in accordance with an employee transferagreement. Refer to Note 4, Acquisitions, for additional details. Allsignificant inter-company balances and transactions have been eliminated inconsolidation. Certain amounts in prior periods have been reclassified toconform to the current presentation.

 

*Useof Estimates and Assumptions*

* *

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires the Company to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reporting period. On anon-going basis, the Company evaluates its estimates, including those related toprovision for doubtful accounts, channel inventory and product returns,valuation of goodwill and intangibles, investments and other long-lived assets,restructuring accruals, valuation of income taxes, license and services revenuerecognition and contingencies. The Company bases its estimates on variousfactors and information which may include, but are not limited to, history andprior experience, experience of other enterprises in the same industry, newrelated events, 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 and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

F-9

----

 

*Translationof Financial Statements of Foreign Entities*

* *

Thefunctional currency of the Company and most of its subsidiaries is theapplicable local currency in accordance with Statement of Financial AccountingStandards (SFAS) No. 52, *“ForeignCurrency Translation,”* while the Company’s reporting currency is theU.S. dollar. Assets and liabilities of the Company and its subsidiaries withfunctional currencies other than the U.S. dollar are translated into U.S.dollar equivalents at the rate of exchange in effect on the balance sheet date.Revenues and expenses are translated at the weighted average monthly exchangerates throughout the year. Translation gains or losses are recorded as aseparate component of stockholders’ equity and transaction gains and losses arereflected in net income.

 

Forfiscal 2005 and 2004, the Company recorded net translation gain of $63,000 andnet translation loss of $259,000, respectively. For fiscal 2005, 2004 and 2003,the Company realized net transaction losses of $134,000, $19,000 and $4,000,respectively. The Company does not currently undertake any foreign currencyhedging activities. Due to the number of currencies involved, the constantchange in currency exposures and the substantial volatility of currencyexchange rates, the effect of exchange rate fluctuations upon the Company’sfuture operating results could be significant.

 

*RevenueRecognition*

* *

Revenueis derived from software licenses and related services, which includeimplementation 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.

 

•       The Companycharges standard hourly rates for consulting services, when such services aresold separately, based upon the nature of the services and experience of theprofessionals 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.

 

Revenuefrom license fees is recognized when persuasive evidence of an arrangementexists, delivery of the product has occurred, no significant Companyobligations 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 cashcollection. Payments from customers received in advance of revenue recognitionare recorded as deferred revenue.

 

Servicerevenue primarily comprises revenue from consulting fees, maintenancecontracts, training and hosting fees. Service revenue from consulting, hostingand training is recognized as the service is performed. Maintenance contractsinclude the right to unspecified upgrades and ongoing support. Maintenancerevenue is deferred and recognized ratably as services are provided over themaintenance period.

 

Licenseand service revenue on contracts involving significant implementation,customization or services, that are essential to the functionality of thesoftware is recognized over the period of each engagement, primarily using thepercentage-of-completion method. Costs incurred are generally used as themeasure of progress towards

 

F-10

----

 

completionas prescribed by SOP 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).

 

TheCompany currently licenses its products directly to individuals, smallbusinesses and corporations, to original equipment manufacturers, or OEMs, andto distributors and value-added resellers in North America, Europe, theAsia-Pacific region, South America and Africa. Revenue from productsdistributed indirectly through major distributors and resellers is recognizedon a sell through basis. Agreements with the Company’s major distributors andresellers contain specific product return privileges for stock rotation andobsolete products that are generally limited to contractual amounts. Reservesfor estimated future returns are provided for upon revenue recognition. Productreturns are recorded as a reduction of revenue. Accordingly, the Company hasestablished a product returns reserve composed of 100% of product inventoriesheld at the Company’s distribution partners, as well as an estimated amount forreturns from customers of the distributors and other resellers as a result ofstock rotation and obsolete products. 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.

 

TheCompany licenses rights to use its technology portfolio, whereby licensees,particularly OEMs, typically pay a non-refundable license fee in one or moreinstallments and on-going royalties based on their sales of productsincorporating the Company’s technology. Revenue from OEMs under minimumguaranteed royalty arrangements, which are not subject to future obligations,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.

 

*Cashand Cash Equivalents*

* *

TheCompany considers all highly liquid investments with an original maturity ormaturity at date of purchase of three months or less to be cash equivalents.

 

*ShortTerm Investments*

* *

TheCompany considers cash invested in highly liquid financial instruments withoriginal maturities greater than three months to be short-term investments,which are accounted for in accordance with SFAS No. 115, “*Accounting for Certain Investments in Debt and Equity Securities*.”SFAS No. 115 requires the Company to classify debt and equity securitiesinto one of three categories: held to maturity, trading or available-for-sale.As of July 31, 2005 and 2004, the Company’s short-term investments includeauction rate preferred stock, auction rate receipts, municipal bonds andfixed-income annuities which are valued using the amortized cost method whichapproximates market value due to short maturities of these instruments.Short-term investments also include United States government backed securitiesand equity securities, which carried at fair value, with the unrealized gainsand losses reported as a separate component of stockholders’ equity. TheCompany intends to make such funds readily available for operating purposes. Realizedgains and losses on sales of investment securities are included in theconsolidated statements of operations. The cost of securities sold is based onthe specific identification method. Refer to Note 3 for more details on short-terminvestments. The Company

 

F-11

----

 

monitorsits investments for impairment by considering current factors including theeconomic environment, market conditions and operational performance and otherspecific factors relating to the business underlying the investment, andrecords reductions in carrying values when necessary. Changes in value of theseinvestments are primarily related to changes in interest rates and areconsidered temporary in nature. Except for declines in fair value that are notconsidered temporary, net unrealized gains or losses on these investments arereported as a component of accumulated comprehensive income or loss inaccumulated other comprehensive loss.

 

*Inventories*

* *

Inventoriesconsist principally of cables, software and related documentation, which arestated at the lower of cost (first-in, first-out) or market. Market is “netrealizable value”, which, for finished goods is the estimated selling price,less costs to complete and dispose of the inventory. For raw materials, it isreplacement cost or the cost of acquiring similar products from the Company’svendors.

 

TheCompany initially records its inventory at cost and each quarter evaluates thedifference, if any, between cost and market. The determination of the marketvalue of inventories is primarily dependent on estimates of future demand forthe Company’s products, which in turn is based on other market estimates suchas technological change, competitor actions and estimates of future sellingprices.

 

TheCompany records write-downs for the amount that cost of inventory exceeds itsestimated market value. No adjustment is required when market value exceedscost.

 

*SoftwareDevelopment Costs*

* *

Softwaredevelopment costs incurred prior to the establishment of technologicalfeasibility are included in research and development and are expensed asincurred. The Company defines establishment of technological feasibility at thepoint which product reaches beta (testing for errors and usability ofinterface). Software development costs incurred subsequent to the establishmentof technological feasibility through the period of general market availabilityof the product are capitalized in accordance with SFAS No. 86, “*Accounting for the Costs of Computer Software to be Sold, Leased orOtherwise Marketed*.” During fiscal 2005, 2004 and 2003, all softwaredevelopment costs have been expensed as incurred due to the period of timebetween beta and making them generally available has been short.

 

*Propertyand Equipment*

* *

Propertyand equipment are stated at cost. Depreciation and amortization is computedusing the straight-line method over the estimated useful lives of the assets. Computer equipment and software are depreciatedgenerally over three years; furniture and office equipment are depreciatedgenerally over four years; and leaseholdimprovements are amortized over the estimated useful lives, or the termof the related leases, whichever is shorter.Repair and maintenance costs are charged to operations as incurred andmajor improvements are capitalized. The Company reviews the carrying amount offixed assets whenever events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. The Company, therefore,evaluates the remaining life and recoverability of such equipment in light ofcurrent market conditions. Upon disposal, the assets and related accumulateddepreciation are removed from the Company’s accounts and resulting gains andlosses are recorded in other, net.

 

TheCompany follows the provisions of the AICPA’s SOP No. 98-1 “*Accounting for the Costs of Computer Software Developed or Obtained forInternal Use*,” in determining the amount of developed in-housesoftware costs to be capitalized. The Company applies the provisions of theFinancial Accounting Standards Board (FASB) Emerging Issues Task Force Issue(EITF) No. 00-02 “*Accounting for WebsiteDevelopment Costs*” in determining the amount of Website developmentcosts to be capitalized. These standards require capitalization of certaindirect development costs associated with internal use software and Websitedevelopment costs. Costs to be capitalized include internal and external directproject costs including, among others, payroll and labor, material, andservices. These costs are being amortized over the estimated useful life. Costsincurred on new projects in a preliminary phase and projects that contractnegotiations have not begun, as well as maintenance, and training costs arecharged to expense as incurred.

 

F-12

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TheCompany’s capitalized software costs were $1,773,000 and $1,519,000 withrelated accumulated depreciation of $1,416,000 and $1,260,000 at July 31,2005 and 2004, respectively. Capitalized software costs are included inproperty and equipment and are amortized generally over three years.

 

*BusinessCombinations and Asset Purchases*

* *

BusinessCombinations are accounted for in accordance with SFAS No. 141, *“Business Combinations”* which effectivelyrequires that the purchase method of accounting for business combinations befollowed. In accordance with SFAS 141, the Company determines the recognitionof intangible assets based on the following criteria: (1) the intangibleasset arises from contractual or other rights, or (2) the intangible isseparable or divisible from the acquired entity and capable of being sold,transferred, licensed, returned or exchanged. In conjunction with businesscombinations, the Company may record restructuring liabilities of the acquiredcompany in accordance with EITF No. 95-3, *“Recognitionof Liabilities in Connection with a Purchase Business Combination.”*Thesecosts represent liabilities that are recorded as part of the purchase priceallocation for the acquisition. Accordingly, the Company’s recent acquisitionsof Synchrologic and Identity Systems were accounted for using the guidance inSFAS No. 141 and EITF No. 95-3.

 

EITFNo. 98-3, *“Determining Whether aNonmonetary Transaction Involves Receipt of a Productive Asset or of a Business,*”defines the elements necessary to evaluate whether a business has been receivedin a nonmonetary exchange transaction. EITF No. 98-3 defines a business asa self-sustaining integrated set of activities and assets conducted and managedfor the purpose of providing a return to investors. A business consists of (a) inputs,(b) processing applied to those inputs, and (c) resulting outputsthat are used to generate revenues. Pursuant to EITF No. 98-3, since theacquisitions of certain assets of SoftVision in fiscal 2004 and Loudfire infiscal 2003 did not have all the required elements to be considered thepurchase of a business, the Company recorded the transactions as an assetpurchase.

 

*Goodwilland Intangible Assets*

* *

Goodwillrepresents the excess of purchase price, including acquisition costs, ofacquired businesses over the fair value of the identifiable net assetsacquired. Goodwill is evaluated in terms of its fair value annually in thefourth fiscal quarter or more frequently if impairment indicators arise and anyimpairment recognized at that time. Refer to “*Impairmentof Long-Lived Assets*” below.

 

Impairmentof goodwill is tested at the reporting unit level by comparing the reportingunit’s carrying amount, including goodwill, to the fair value of the reportingunit. The Company has two reporting units and estimates the each unit’s fairvalue using the present value of expected future cash flows. Cash flowforecasts used in evaluation of goodwill were based on trends of historicalperformance and management’s estimate of future performance. If the carryingamount of a reporting unit exceeds its fair value, goodwill is consideredimpaired and a second step is performed to measure the amount of impairmentloss, if any.

 

TheCompany reviews goodwill for potential impairment as of July 31 each yearand was not required to record a goodwill impairment charge as a result of thereview. The Company will continue to perform the goodwill impairment reviewannually or more frequently if facts and circumstances warrant a review.

 

Otherintangible assets result from the application of the purchase method ofaccounting for the Company’s acquisitions and are composed of the unamortizedidentifiable assets including acquired developed and core technology, patents, trademarks,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. Covenant not-to-compete, customer contracts andacquired workforce are amortized over the period of benefit, ranging from ninemonths to three years.

 

Referto Note 5 for more details on goodwill and other intangible assets.

 

F-13

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*Impairmentof Long-Lived Assets*

* *

TheCompany evaluates long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable in accordance with SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets*.” An asset isconsidered impaired if its carrying amount exceeds the future net cash flow theasset is expected to generate. If such asset is considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the asset exceeds its fair market value. The Company assesses therecoverability of its long-lived and intangible assets by determining whetherthe unamortized balances can be recovered through undiscounted future net cashflows of the related assets. The amount of impairment, if any, is measuredbased on projected discounted future net cash flows using a discount ratereflecting the Company’s average cost of capital.

 

Duringfiscal 2003, the Company disposed its limited partnership interest in AzureVenture Partners, LLP, a venture capital fund. The disposal of the interestallowed the Company to avoid commitments for further investments in equityinstruments of various privately-held companies made through Azure, many ofwhich had not generated adequate returns. In addition, the disposal is in linewith the Company’s strategy of focusing resources and efforts more on its coreoperations. Consequently, the Company recorded an other-than-temporaryimpairment charge of $2,394,000. Total proceeds of $75,000 from the sale of theinterest were received in May 2003, which approximated the carrying valueof the investment after the writedown.

 

*Long-TermInvestments*

* *

Long-terminvestments that are not represented by marketable securities are carried atcost less write-downs for declines in value that are judged to beother-than-temporary. Declines in fair value are consideredother-than-temporary when: (i) the carrying value of the investmentsexceeds the fair value of such investments using current assumptions and (ii) thetiming and/or extent of cash flows expected to be received on the investmentshas adversely changed from the previous valuation date. Dividends are recordedin other, net, when received.

 

*RestrictedCash*

* *

Cashand investments that are restricted for use, for legal or other contractualreasons, are segregated and classified as restricted cash. The Company’srestricted cash consists of cash held by a financial institution as collateralunder the terms of the interest rate swap agreement, into which the Companyentered during fiscal 2004, , which is more fully explained in footnote 7, tomatch any unfavorable mark-to-market exposure (fair value) on the swap. Theamount of collateral required totals a minimum of $1,800,000 plus an amountequal to the unfavorable mark-to-market exposure on the swap. Generally, therequired collateral will rise as interest rates rise. As of July 31, 2005and 2004, the Company has posted approximately $4,181,000 and $3,736,000,respectively, of collateral under the swap agreement which is included in “RestrictedCash” in the consolidated balance sheet.

 

Restrictedcash also includes cash held by financial institutions as collateral on lettersof credit in connection with the Company’s certain operating lease obligations.This portion of the restricted cash was $125,000, net of current portion of$196,000 at 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 areclassified as “Other Current Assets” and “Restricted Cash,” respectively, inthe consolidated balance sheets.

 

*Contingencies*

* *

TheCompany evaluates contingent 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

 

F-14

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reviseits estimates. Any revisions in the estimates of potential liabilities couldhave a material impact on its results of operations and financial position.

 

*AdvertisingExpense*

* *

Inaccordance with the EITF No. 01-09, “Accounting for Consideration Given bya Vendor to a Customer”, the Company carefully evaluates the substance of anyco-op advertising support. To the extent that the co-op advertising supportrelates to the acquisition of advertising material which the Company couldobtain independently, these costs are considered advertising or sales andmarketing expense. To the extent that they relate to promotional support forthe Company’s customers’ advertising activities, they are considered reductionsof revenue, in accordance with the EITF 01-09. The Company evaluates co-opadvertising commitments on a customer by customer basis considering actionstaken throughout the course of the year, and the Company’s prior history indealing with customer co-op advertising issues. Costs accounted for asreductions of revenue amounted to $65,000, $152,000 and $179,000 in fiscal2005, 2004 and 2003, respectively.

 

Otheradvertising costs, approximately $2,055,000, $1,072,000 and $626,000 for fiscal2005, 2004 and 2003, respectively, are charged to sales and marketing expenseas incurred.

 

*IncomeTaxes*

* *

Incometaxes are computed using an asset and liability approach, which requires therecognition of taxes payable or refundable for the current year and deferredtax assets and liabilities for the future tax consequences of events that havebeen recognized in the Company’s consolidated financial statements or taxreturns. The measurement of current and deferred tax assets and liabilities arebased on provisions of the enacted tax law and the effects of future changes intax laws or rates are not anticipated. Deferred tax assets are reduced, ifnecessary, by the amount of any tax benefits that are not expected to berealized based on available evidence. The Company is subject to income tax auditsin all of the jurisdictions in which it operates and, as a result, must alsoassess exposures to any potential issues arising from current or future auditsof current and prior years tax returns. Accordingly, the Company must assesssuch potential exposure and, where necessary, provide a reserve to cover anyexpected loss. To the extent that the Company establishes such a reserve, theprovision for income taxes would be increased. If the Company ultimatelydetermines that payment of these amounts is unnecessary, it reverses theliability and recognizes a tax benefit during the period in which it determinesthat the liability is no longer necessary. The Company records an additionalcharge in the provision for income taxes in the period in which it determinesthat the recorded tax liability is less than it expects the ultimate assessmentto be.

 

*ComprehensiveIncome (Loss)*

* *

TheCompany has adopted the accounting treatment prescribed by SFAS No. 130.Comprehensive income (loss) is defined as a change in equity of a companyduring a period from transactions and other events and circumstances excludingtransactions resulting from investments by owners and distributions to owners.The primary difference between net income (loss) and comprehensive income (loss)for the Company arises from foreign currency translation adjustments and netunrealized gains/(losses) on available-for-sale securities.

 

*Concentrationof Supply and Credit Risk*

* *

TheCompany depends on development tools provided by a limited number of thirdparty vendors. Together with application developers, the Company reliesprimarily upon software development tools provided by companies in the personalcomputer (PC) and mobile computing device industries. If any of these companiesfail to support or maintain these development tools, the Company will have tosupport the tools itself or transition to another vendor. Any maintenance orsupport of the tools by the Company or transition to other tools could be timeconsuming, could delay product release and upgrade schedule and coulddelay the development and availability of third party applications used on theCompany’s products. Failure to procure the needed software development tools orany delay in availability of third party applications could negatively impactthe Company’s ability and the ability of third party application developers torelease and support the Company’s products or they

 

F-15

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couldnegatively and materially affect the acceptance and demand for the Company’sproducts, business and prospects.

 

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist principally of cash, cash equivalents, investments andtrade accounts receivable. The Company places its cash, cash equivalents andshort-term investments primarily in auction rate preferred stock, auction ratereceipts, certificates of deposit, commercial paper, fixed-income annuities,government notes and bonds and money market accounts. At July 31, 2005,the Company held its depository accounts with six financial institutions in theUnited States, three financial institutions in Japan, and eleven financialinstitutions in other parts of the world. Deposits with these institutions mayexceed the amount of insurance provided on such deposits. The Company has nothistorically experienced any losses on deposits held at these institutions. TheCompany, by policy, limits the amount of credit exposure for cash equivalentsand investments to any one issuer.

 

Accountsreceivable are typically unsecured and are derived from revenues earned fromcustomers located throughout the world, which minimizes the concentration ofcredit risk. The Company performs ongoing credit evaluations of its customersand maintains allowances for potential credit losses. Historically, such losseshave been within management’s expectations.

 

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 |   |

 

VerizonWireless accounted for 10% of the total accounts receivable balance at July 31,2005 and 2004. No other customers accounted for more than 10% of total ofaccounts receivable during the same periods. No customer accounted for morethan 10% of the total revenue for fiscal 2005 and 2004. Ingram Micro USaccounted for 10% of the total revenue for fiscal 2003. In accordance with theCompany’s revenue recognition policy, such revenue from a major distributorrepresents revenue recognized at the time the Company’s products were sold toend-user customers. No end-user customers, direct or through distributors andresellers, accounted for more than 10% of total revenue during the sameperiods.

 

Historically,the Company’s sales are generally denominated in United States dollars.Recently, as a result primarily of its recent acquisitions, the Company hasincreasingly generated a portion of its revenues and incurred a portion of itsexpenses in Euros, British pounds, the Japanese Yen and Australian dollars. TheCompany currently does not have any hedging or similar foreign currencycontracts to mitigate its exposure to the risk of changes in foreign currencyrates.

 

*FairValue of Financial Instruments*

* *

Thecarrying amounts of cash and cash equivalents, short-term investments, accountsreceivable, accounts payable and accrued expenses approximate their respectivefair values because of the short-term maturity of these items. The carryingvalue of long-term debt and capital lease obligations approximates fair value.

 

*Stock-BasedCompensation*

* *

TheCompany accounts for non-cash stock-based employee compensation using theintrinsic method in accordance with Accounting Principles Board (APB) Opinion No. 25,“*Accounting for Stock Issued to Employees andRelated Interpretations*,” and complies with the disclosureprovisions of SFAS No. 123, “*Accounting for Stock-BasedCompensation*” and SFAS No. 148, “*Accountingfor Stock-Based Compensation, Transition and Disclosures*.” Stock andother equity instruments issued to non-employees is accounted for in accordancewith SFAS No. 123 and EITF No. 96-18, “*Accountingfor Equity Instruments Issued to Other than Employees for*

 

F-16

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*Acquiring, or in Conjunction with Selling Goods orServices*” and valued using the Black Scholes model. Expenseassociated with stock-based compensation is being amortized on an acceleratedbasis over the vesting period of the individual award consistent with the methoddescribed in FASB Interpretation (FIN) No. 28.

 

F-17

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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 | ) |

 

Becausethe Black-Scholes option valuation model was developed for traded options andrequires the input of subjective assumptions and the number of future shares tobe issued or cancelled is not known, the resulting pro forma compensation costmay not be representative of that to be expected 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 |   |

 

Startingin the first quarter of fiscal 2006, the Company will account for stock optionsunder SFAS No. 123(R), *“Share-Based Payment.”* Refer to Note 2, Recently IssuedAccounting Pronouncements, for further details.

 

*DerivativeInstruments*

* *

TheCompany applies SFAS No. 133, “*Accounting for DerivativeInstruments and Hedging Activities*,” as amended, which establishesaccounting and reporting standards for derivative instruments and for hedgingactivities. SFAS No. 133 requires that an entity recognize derivatives aseither assets or liabilities on the balance sheet and measure those instrumentsat fair value. The accounting for changes in the fair value of a derivativedepends on the intended use of the derivative and the resulting designation.The Company designates its derivatives based upon criteria established by SFAS No. 133.For a derivative designated as a fair value hedge, the gain or loss isrecognized in earnings in the period of change together with the offsettingloss or gain on the hedged item attributed to the risk being hedged. For aderivative designated as a cash flow hedge, the effective portion of thederivative’s gain or loss is initially reported as a component of accumulatedother comprehensive

 

F-18

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incomeand subsequently reclassified into earnings when the hedged exposure affectsearnings. The ineffective portion of the gain or loss is reported in earningsimmediately. Refer to Note 7 for details on the Company’s only derivativeinstruments.

 

*NetIncome (Loss) Per Common Share*

* *

Netincome (loss) per common share is computed in accordance with SFAS No. 128.Basic net income (loss) per common share is computed using the weighted averagecommon shares outstanding during the period. Diluted net income (loss) percommon share is computed using the weighted average common shares and dilutivecommon equivalent shares outstanding during the period.

 

InOctober 2004, the EITF reached a consensus on EITF No. 04-8 “*The Effect of Contingently Convertible Debt on Diluted Earnings perShare,*” that the dilutive effect of contingent convertible debtinstruments (“CoCo’s”) must be included in diluted earnings per shareregardless of whether the triggering contingency has been satisfied, ifdilutive. Adoption of EITF No. 04-08 would be on a retroactive basis andwould require restatement of prior period diluted earnings per share, subjectto certain transition provisions. It is effective for all periods ending after December 15,2004. Due to the losses the Company incurred for fiscal 2005, diluted net lossper share does not differ from basic net loss per share, since potential sharesof common stock issuable upon the conversion of the convertible debt areanti-dilutive for all periods presented. EITF No. 04-8 could have a futureimpact on the Company’s results of operations in the event that the potentialshares of common stock issuable upon conversion of the convertible debt wereincluded in the diluted earnings per share calculation.

 

**Note2   Recently Issued Accounting Pronouncements**

** **

*Share-BasedPayment*

* *

InDecember 2004, the FASB issued SFAS No. 123R, *“Share-Based Payment, an amendment ofFASB Statements No. 123 and 95.”* The principal effect ofSFAS No. 123R will be to require the inclusion in the earnings of acompensation expense for stock option grants and employee stock plan purchasesthat previously was only reported as a disclosure in a note to the Company’sconsolidated financial statements. The Company is required to adopt the provisionsof SFAS No. 123R in the first quarter of fiscal 2006 ending October 31,2005. The Company is presently evaluating SFAS No. 123R and has not yetdetermined which method it will select for its adoption of SFAS No. 123R.The Company expects that the adoption of SFAS No. 123R will have amaterial impact on its annual earnings.

 

Staff Accounting Bulletin (SAB) No. 107,*“Share-Based Payment.”*On March 29,2005, the Securities and Exchange Commission (SEC) staff issued SAB No. 107to express the views of the staff regarding the interaction between SFAS No. 123Rand certain SEC rules and regulations and to provide the staff’s viewsregarding the valuation of share-based payment arrangements for publiccompanies. The Company is currently in the process of implementing SFAS No. 123R,effective as of the first quarter of fiscal 2006, and will take intoconsideration the additional guidance provided by SAB No. 107 inconnection with the implementation of SFAS No. 123R.

 

*ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*

* *

InDecember 2004, the FASB issued FSP No. 109-2, “Accounting andDisclosure Guidance for the Foreign Earnings Repatriation Provision within theAmerican Jobs Creation Act of 2004”. The American Jobs Creation Act introducesa special one-time dividends received deduction on the repatriation of certainforeign earnings to a U.S. taxpayer (repatriation provision), provided certaincriteria are met. This position provides accounting and disclosure guidance forthe repatriation provision. The Company does not believe the Foreign EarningsRepatriation Provision within the American Jobs Creation Act of 2004 nor theFSP will have a material impact on its financial condition or results ofoperations.

 

*Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143*

* *

InMarch 2005, the FASB issued FIN No. 47, *“Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143, ‘Accounting for Asset Retirement Obligations.’”*FIN No. 47 clarifies

 

F-19

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whenan entity would be required to recognize a liability for the fair value of anasset retirement obligation that is conditional on a future event if theliability’s fair value can be reasonably estimated. Uncertainty surrounding thetiming and method of settlement that may be conditional on events occurring inthe future would be factored into the measurement of the liability rather thanthe recognition of the liability. FIN No. 47 is effective for fiscal yearsending after December 15, 2005. The Company is currently assessing theimpact that the interpretation may have on its consolidated financial positionand results of operations.

 

*AccountingChanges and Error Corrections*

* *

InJune 2005, the FASB issued SFAS No. 154, “*Accounting Changes and Error Corrections*,” which replacesAPB Opinion No. 20, “*Accounting Changes*,”and SFAS No. 3, “*Reporting AccountingChanges in Interim Financial Statements*.” SFAS No. 154 changesthe requirements for the accounting and reporting of a change in accountingprinciple. APB Opinion No. 20 previously required that most voluntarychanges in an accounting principle be recognized by including the cumulativeeffect of the new accounting principle in net income of the period of thechange. SFAS No. 154 now requires retrospective application of changes inan accounting principle to prior period financial statements, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. The Statement is effective for fiscal years beginningafter December 15, 2005. The Company does not expect the adoption of thisstatement will have a material impact on its financial statements.

 

*Other-Than-TemporaryImpairment*

* *

InJune 2005, the FASB decided not to provide additional guidance on themeaning of other-than-temporary impairment, and directed the staff to issueproposed FSP EITF 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 and Its Application toCertain Investments”*) will replace the guidance set forth inparagraphs 10-18 of EITF No. 03-1 with references to existingother-than-temporary impairment guidance, such as SFAS No. 115, “*Accounting for Certain Investments in Debt and EquitySecurities*,” SEC Staff Accounting Bulletin No. 59, “*Accounting for Noncurrent Marketable Equity Securities*,”and APB Opinion No. 18, “*The Equity Method of Accounting for Investmentsin Common Stock.”* FSP FAS No. 115-1 will codify the guidanceset forth in EITF Topic D-44 and clarify that an investor should recognize animpairment loss no later than when the impairment is deemed other thantemporary, 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 on itsconsolidated results of operations or financial position.

 

*AmortizationPeriod for Leasehold Improvements*

* *

InJune 2005, the EITF reached a consensus on Issue No. 05-06, “*Determining the Amortization Period for Leasehold Improvements.*”The guidance requires that leasehold improvements acquired in a businesscombination or purchased subsequent to the inception of a lease be amortizedover the lesser of the useful life of the assets or a term that includesrenewals that are reasonably assured at the date of the business combination orpurchase. The guidance is effective for periods beginning after June 29,2005. The adoption of EITF No. 05-06 is not expected to have an impact onthe Company’s financial position, results of operations or cash flows.

 

F-20

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**Note3   Balance Sheet Components**

** **

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

 
| ** **                   | ** ** | **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 |   |

 

TheCompany invests excess cash in fixed income securities, consisting of bothcorporate and government securities, that are highly liquid, of high-qualityinvestment grade. The Company intends to make such funds readily available foroperating purposes, if needed. The Company expects to realize the full value ofall these investments upon maturity or sale.

 

Thefollowing table summarizes the fair value and gross unrealized losses of theCompany’s short-term investments, aggregated by type of investment instrumentand length of time that individual securities have been in a continuousunrealized loss 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 | ) |

 

F-21

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TheCompany’s investment portfolio consists of government securities that have amaximum maturity of two years. The longer the duration of these securities, themore susceptible they are to changes in market interest rates and bond yields.As yields increase, those securities purchased with a lower yield-at-cost showa mark-to-market unrealized loss. All unrealized losses are due to changes ininterest rates and bond yields. The Company expects to realize the full valueof all these investments upon maturity or sale.

 

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

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

 

Therealized loss on sales of securities was $10,000 for fiscal 2005. The realizedgain on sales of securities was zero and $43,000 for fiscal 2004 and 2003,respectively. During fiscal 2005, 2004 and 2003, the Company did not record anycash equivalents- or short-term investment-related impairment 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 |   |

 

F-22

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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 |   |

 

Thedepreciation and amortization expense for fiscal 2005, 2004 and 2003 was$1,258,000, $1,037,000 and $1,358,000, respectively.

 

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

 

Accruedliabilities consist of the following (in thousands):

 
| ** **                               | ** ** | **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 (in thousands):

 
| ** **                                    | ** ** | **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 |   |

 

**Note4   Acquisitions**

 

TheCompany acquired PDAapps, Inc. and Tourmaline Networks, Inc., duringfiscal 2005, SoftVision SRL’s workforce through a transfer agreement, IdentitySystems (formerly Search Software America Pty. Ltd.), Synchrologic, Inc.,and Spontaneous Technology, Inc. during fiscal 2004 and substantially allof the 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.*

* *

OnJune 23, 2005, the Company completed its acquisition of all of the issuedand outstanding stock of PDAapps, Inc., makers of Intellisync IM (formerlyVeriChat), the mobile instant messaging solution for all Palm OS devices,Pocket PC devices, Symbian devices and RIM Blackberry devices. Under the termsof an Agreement and Plan of Merger, dated as of June 23, 2005, theoutstanding shares of PDAapps common stock were converted

 

F-23

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intothe right to receive (i) an aggregate of approximately $4,000,000 inaggregate initial cash consideration and (ii) an aggregate of up to$2,600,000 in cash earnout consideration (based on future revenue generated bythe Company from the former PDAapps client base), subject to the deposit of$1,000,000 in escrow 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. As of July 31, 2005, the Company has notaccrued the contingent earnout payment amount. Any earnout consideration paidwill 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  |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $976,000 have beenrecorded for the tax effect of the amortizable intangible assets. Deferred taxassets of $976,000 have also been recorded by the Company to account for thetax effect of the Company’s net operating loss and credit carryforwards.

 

Tangibleassets acquired, which includes $46,000 of cash, 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.

 

Anestimate of $1,709,000 has been allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets,” goodwill is not amortized but is tested forimpairment at least annually.

 

Ofthe total purchase price, $2,484,000 was allocated to amortizable intangiblesincluded in the above list. The developed and core technology and customer baseare being amortized in proportion with the expected cash flows to be receivedfrom the underlying assets over their estimated useful life of five and sevenyears, respectively. The covenant-not-to-compete is being amortized using thestraight-line method over the estimated useful life of the asset of 30 months.Refer to Note 5.

 

Asof the acquisition date, technological feasibility of the in-process technologyhad not been established and the technology had no alternative future use.Accordingly, the Company expensed the in-process research and development atthe date of the acquisition.

 

Theamount of the purchase price allocated to in-process research and technologywas based on established valuation techniques used in the high-technologysoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-processprojects identified as of the acquisition date, estimated costs to complete the

 

F-24

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projects,revenue contributions and expense projections assuming the resulting producthas entered the market, and discount rate based on the risks associated withthe development life cycle of the in-process technology acquired. The discountrate used 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 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.

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment from PDAapps are as follows (in thousands, 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 of acquisition date:30-50%

Estimated costs to complete technology atacquisition date: $900

Risk-adjusted discount rate: 25%

First period expected revenue: 2nd quarter of calendar year 2006

 

Thedevelopment of the above technology remains highly dependent on the remainingefforts to achieve technical viability, rapidly changing customer markets,uncertain standards for a new product, and significant competitive threats fromseveral companies. The nature of the efforts to develop this technology into acommercially viable product consists primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology can meet market expectations, including functionality and technicalrequirements. Failure to bring the product to market in a timely manner couldresult in a loss of market share or a lost opportunity to capitalize onemerging markets, and could have a material adverse impact on the Company’sbusiness and operating results.

 

Subsequentto the acquisition of PDAapps, there have been no significant developmentsrelated to the current status of the acquired in-process research anddevelopment project that would result in material changes to the assumptions.

 

*TourmalineNetworks, Inc.*

* *

OnMarch 1, 2005, the Company completed its acquisition of all of the issuedand outstanding stock of Tourmaline Networks, Inc., a privately helddeveloper and marketer of mobile email based on QUALCOMM’s BREW® solutionheadquartered in San Diego, California. Under the terms of an Agreement andPlan of Merger, dated as of February 9, 2005, the outstanding shares ofTourmaline common stock were converted into the right to receive (i) anaggregate of approximately $4,118,000 in aggregate initial cash considerationand (ii) an aggregate of up to $2,881,918 in cash earnout consideration(based on future revenue generated by the Company from the former Tourmalineclient base), subject to the deposit of a certain portion of the initial cashconsideration and earnout consideration in escrow to be available to compensateIntellisync pursuant to the indemnification obligations of the holders ofTourmaline 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.

 

F-25

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Theconsolidated financial statements include the results of operations of Tourmalinesince the date of acquisition. Under the purchase method of accounting, thetotal purchase price was allocated to Tourmaline’s net tangible and intangibleassets based upon their estimated fair value as of the acquisition date. Theinitial purchase price of $4,218,000 (including estimated acquisition costs of$100,000) was assigned to the fair value of the assets acquired, including thefollowing (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  |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $803,000 have beenrecorded for the tax effect of the amortizable intangible assets. Deferred taxassets of $803,000 have also been recorded by the Company to account for thetax effect of the Company’s net operating loss and credit carryforwards.

 

Tangibleassets acquired, which includes $23,000 of cash, 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.

 

Anestimate of $1,772,000 has been allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, “Goodwill andOther Intangible Assets,” goodwill will not be amortized but will be tested forimpairment at least annually.

 

Ofthe total purchase price, $2,243,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using an accelerated method according to the expected cash flows tobe received from the underlying assets over their respective estimated usefullife of three to six years. Refer to Note 5.

 

*SoftVisionSRL*

* *

OnJune 14, 2004, the Company completed the transfer of 91 employees fromSoftVision SRL, an offshore software development company with headquarters inCluj-Napoca, Romania, pursuant to an Employee Transfer Agreement dated as of February 5,2004. Under the terms of the agreement, the Company paid cash of approximately$693,000 and assumed certain employee-related liabilities of approximately$31,000. The SoftVision workforce acquisition was accounted for as an assetpurchase. The consolidated financial statements include the effect ofadditional employees the Company acquired from SoftVision since the date ofacquisition.

 

Thefull amount of the preliminary purchase price of $724,000 was assigned to thefair value of the acquired workforce. The amortizable acquired workforce isbeing amortized using the straight-line method over its estimated useful lifeof two years. Refer to Note 5.

 

*IdentitySystems (formerly Search Software America)*

* *

OnMarch 16, 2004, the Company completed its acquisition of all of the issuedand outstanding stock of SPL Worldgroup Software, Inc., SPL WorldgroupLtd. and Search Software America Pty. Ltd., or collectively SSA , privatelyheld divisions of SPL WorldGroup and headquartered in Sydney, Australia,pursuant to a Stock Purchase Agreement dated as of February 24, 2004. SSA,now called Identity Systems, with operations in the

 

F-26

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UnitedStates, United Kingdom, and Australia, is a developer of solutions that enhancethe ability to find, match and group (synchronize) identity data withincomputer systems and network databases. Under the terms of the stock purchaseagreement, 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 the following(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 |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $646,000 have beenrecorded for the tax effect of the amortizable intangible assets. In addition,during fiscal 2005, deferred tax assets of $242,000 have also been recorded bythe Company to account for the tax effect of the credit carryforwards. Thedeferred tax asset adjusted goodwill accordingly by the same amount.

 

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.

 

Tangibleassets acquired, which includes $2,146,000 of cash, and liabilities assumedwere valued at their respective carrying amounts as the Company believes thatthese amounts approximated their current fair values at the acquisition date.The valuation of identifiable intangible assets acquired was based onmanagement’s estimates, currently available information and reasonable andsupportable assumptions. This allocation was generally based on the fair valueof these assets determined using the income approach.

 

$7,777,000,as adjusted per above, was allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, “*Goodwill and Other Intangible Assets*,” goodwill will not beamortized but will be tested for impairment at least annually.

 

Ofthe total purchase price, $14,290,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using an accelerated method according to the expected cash flows tobe received from the underlying assets over their respective estimated usefullife of seven to ten years. Refer to Note 5.

 

Asof the acquisition date, technological feasibility of the in-process technologyhad not been established and the technology had no alternative future use.Accordingly, the Company expensed the in-process research and development atthe date of the acquisition.

 

Theamount of the purchase price allocated to in-process research and technologywas based on established valuation techniques used in the high-technologysoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-processprojects identified as of the acquisition date, estimated costs to complete theprojects, revenue contributions and expense projections assuming the resultingproduct has entered the market, and discount rate based on the risks associatedwith the development life cycle of the in-process technology

 

F-27

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acquired.The discount rate used in the present value calculations are normally obtainedfrom a weighted-average cost of capital analysis, adjusted upward to accountfor the inherent uncertainties surrounding the successful development of thein-process research and development, the expected profitability levels of suchtechnology, and the uncertainty of technological advances that couldpotentially impact the estimates. The Company assumes the pricing model for theresulting product of the acquired in process research and technology to bestandard within its industry. The Company, however, did not take intoconsideration any consequential amount of expense reductions from integratingthe acquired in-process technology with other existing in-process or completedtechnology. Therefore, the valuation assumptions do not include significantanticipated cost savings.

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment from Identity Systems are as follows (in thousands):

 

Project names: SSA-NAME3Version 3.0 and IDS Version 3.0

Percent completed as ofacquisition date: 10%

Estimated costs tocomplete technology at acquisition date: $600

Risk-adjusted discountrate: 25%

First period revenue: June 2005

 

Thedevelopment of the above technology was highly dependent on the efforts toachieve technical viability, rapidly changing customer markets, uncertainstandards for a new product, and significant competitive threats from severalcompanies. The nature of the efforts to develop this technology into acommercially viable product consisted primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology could meet market expectations, including functionality andtechnical requirements. Failure to bring the product to market in a timelymanner could have resulted in a loss of market share or a lost opportunity tocapitalize on emerging markets, and could have had a material adverse impact onthe Company’s business and operating results.

 

Subsequentto the acquisition of Identity Systems, there had been no significantdevelopments related to the acquired in-process research and developmentproject that would result in material changes to the assumptions.

 

F-28

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*Synchrologic, Inc.*

 

OnDecember 29, 2003, the Company completed its acquisition of all of theissued and outstanding stock of Synchrologic, Inc. headquartered inAtlanta, Georgia pursuant to an Agreement and Plan of Merger, dated as of September 14,2003. Synchrologic’s product line provides mobile access to enterpriseapplications, email and personal information management, or PIM, data, filecontent, intranet sites, and Web content, while giving IT groups the tools tomanage mobile devices remotely.

 

Inthe merger, all outstanding shares of Synchrologic common stock and preferredstock were converted into the right to receive a total of 15,130,171 shares ofthe Company’s common stock. In addition, all outstanding options to purchaseSynchrologic common stock were converted into options to purchase a total of1,018,952 shares of the Company’s common stock. The total number of sharesissued was determined by dividing $60,000,000 by the average closing price of$5.22 of the shares of the Company’s common stock for the thirty consecutivetrading days ending on the last complete trading day immediately preceding theclosing date of the merger (which amount was subject to adjustment based on thetransaction expenses incurred by Synchrologic in connection with the merger),provided that the number of shares did not exceed 19,800,000 or be fewer than16,200,000 (in each case subject to adjustment based on the transactionexpenses incurred by Synchrologic in connection with the merger). The shareswere valued at approximately $62,125,000 using the five-trading-day averageprice surrounding the date the acquisition was announced of $4.11 per share,and the options were valued at approximately $4,123,000 using the Black-Scholesoption pricing model. The following assumptions were used to perform thecalculations of the fair market value of stock options issued: fair value ofCompany’s common stock of $4.05, expected life of 3.9 years, risk-free interestrate of 3.4%, expected volatility of 132% and no expected 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 net tangibleand intangible assets based upon the fair value as of the acquisition date. Thepurchase price of $67,037,000 (comprising the value of the shares and optionsdescribed above and the estimated acquisition costs of $900,000 and net of a$111,000 adjustment for writing-off a certain liability due to Synchrologic)was assigned to the fair value of the assets acquired, including the 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 |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $6,094,000 havebeen recorded for the tax effect of the amortizable intangible assets. Deferredtax assets of $6,094,000 have also been recorded by the Company to account forthe tax effect of Synchrologic’s net operating loss and credit carryforwards.

 

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.

 

Approximately$50,760,000, as adjusted, was allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”* goodwill associatedwith Synchrologic acquisition will not be amortized but will be tested forimpairment at least annually.

 

F-29

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Ofthe total purchase price, $15,301,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using the straight-line method over the estimated useful life of therespective assets of four years. Refer to Note 5.

 

Asof the acquisition date, technological feasibility of the in-process technologyhad not been established and the technology had no alternative future use.Accordingly, the Company expensed the in-process research and development atthe date of the acquisition.

 

Theamount of the purchase price allocated to in-process research and technologywas based on established valuation techniques used in the high-technologysoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-process projectsidentified as of the acquisition date, estimated costs to complete theprojects, revenue contributions and expense projections assuming the resultingproduct has entered the market, and discount rate based on the risks associatedwith the development life cycle of the in-process technology acquired. Thediscount rate used in the present value calculations are normally obtained froma weighted-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.

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment 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%

Firstperiod revenue: calendar year 2004

 

Thedevelopment of the above technology was highly dependent on the efforts toachieve technical viability, rapidly changing customer markets, uncertainstandards for a new product, and significant competitive threats from severalcompanies. The nature of the efforts to develop this technology into acommercially viable product consisted primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology could meet market expectations, including functionality andtechnical requirements. Failure to bring the product to market in a timelymanner could have resulted in a loss of market share or a lost opportunity tocapitalize on emerging markets, and could have had a material adverse impact onthe Company’s business and operating results.

 

Subsequentto the acquisition of Synchrologic, there had been no significant developmentsrelated to the acquired in-process research and development project that wouldresult in material changes to the assumptions.

 

Theliabilities assumed by the Company included Synchrologic’s outstanding balanceof approximately $1,764,000 under a credit facility agreement with a bank. TheCompany fully paid the outstanding balance during fiscal 2004. The bank creditfacility agreement was automatically terminated upon the Company’s acquisitionof Synchrologic.

 

*SpontaneousTechnology, Inc.*

 

OnSeptember 17, 2003, the Company consummated the acquisition of SpontaneousTechnology, Inc. of Salt Lake City, Utah, a provider of enterprise secureVirtual Private Network, or sVPNTM, software designed to extendexisting corporate applications to most wireless devices. Under the terms ofthe agreement, the Company issued a total of 869,259 shares of Intellisync’scommon stock valued at approximately $2,999,000 using the

 

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five-trading-dayaverage price surrounding the date the acquisition was announced of $3.45 pershare, less registration costs. The number of shares were calculated using theaverage price of the Company’s common stock for ten consecutive trading daysended three business days prior the date of acquisition. Later during fiscal2004, Intellisync paid cash of approximately $752,000 for the satisfaction ofanother pre-acquisition clause related to an acquired customer contract. Therewere also 224,417 additional shares released from escrow during fiscal 2005that were issued upon satisfaction of a pre-acquisition clause. Additionally,Intellisync was required to pay Spontaneous Technology additional considerationof up to $7,000,000 in shares of Intellisync’s common stock. The additionalconsideration was contingent upon the amount of Intellisync’s revenue associatedwith sales of its products including certain technology of SpontaneousTechnology during the period ended September 30, 2004. The earnout periodended with Intellisync’s aggregate revenue on products associated withSpontaneous Technology amounting to less than the given earnout threshold.Consequently, no additional consideration was paid to Spontaneous Technology.

 

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  |   |

 

Tangibleassets acquired and liabilities assumed were valued at their respectivecarrying amounts as the Company believes that these amounts approximated theircurrent fair values at the acquisition date. The valuation of identifiableintangible assets acquired was based on management’s estimates, currentlyavailable information and reasonable and supportable assumptions. Thisallocation was generally based on the fair value of these assets determinedusing the income approach.

 

Approximately$3,754,000, as adjusted, was allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, *“Goodwill and Other Intangible Assets,”* goodwill will not beamortized but will be tested for impairment at least annually.

 

Ofthe total purchase price, $1,556,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using the straight-line method over the estimated useful life of therespective assets of four years. Refer to Note 5.

 

Asof the acquisition date, technological feasibility of the in-process technologyhad not been established and the technology had no alternative future use.Accordingly, the Company expensed the in-process research and development atthe date of the acquisition.

 

Theamount of the purchase price allocated to in-process research and technologywas based on established valuation techniques used in the high-technologysoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-processprojects identified as of the acquisition date, estimated costs to complete theprojects, revenue contributions and expense projections assuming the resultingproduct has entered the market, and discount rate based on the risks associatedwith the development life cycle of the in-process technology

 

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acquired.The discount rate used in the present value calculations are normally obtainedfrom a weighted-average cost of capital analysis, adjusted upward to accountfor the inherent uncertainties surrounding the successful development of thein-process research and development, the expected profitability levels of suchtechnology, and the uncertainty of technological advances that couldpotentially impact the estimates. The Company assumed the pricing model for theresulting product of the acquired in process research and technology to bestandard within its industry. The Company, however, did not take intoconsideration any consequential amount of expense reductions from integratingthe acquired in-process technology with other existing in-process or completedtechnology. Therefore, the valuation assumptions do not include significantanticipated cost savings.

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment from Spontaneous Technology were as 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%

Firstperiod revenue: calendar year 2004

 

Thedevelopment of the above technology was highly dependent on the efforts toachieve technical viability, rapidly changing customer markets, uncertainstandards for a new product, and significant competitive threats from severalcompanies. The nature of the efforts to develop this technology into acommercially viable product consisted primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology could meet market expectations, including functionality andtechnical requirements. Failure to bring the product to market in a timelymanner could have resulted in a loss of market share or a lost opportunity tocapitalize on emerging markets, and could have had a material adverse impact onthe Company’s business and operating results.

 

Subsequentto the acquisition 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.

 

*Loudfire, Inc.*

 

InJuly 2003, the Company signed and closed an agreement to acquiresubstantially all of the assets of Loudfire, Inc. of Tulsa, Oklahoma,developer of LoudPCTM software. LoudPC software allows anyone with an Internetbrowser or Web-enabled phone to enjoy real-time access to email and PIM datalocated in either Microsoft Outlook or Outlook Express. The product alsoprovides secure access to pre-specified files residing on a host PC. Under theterms of the asset purchase agreement, the Company paid $1,000,000 in cash andissued $500,000 worth of shares of the Company’s common stock. The 134,445shares issued were calculated using the average price of the Company’s commonstock for a ten-day period ended three business days prior the date ofacquisition.

 

Additionally,the Company was required to pay Loudfire additional consideration of up to$3,500,000 in cash or, at the Company’s election, shares of its common stock dependingupon the Company’s revenues associated with sales of its products includingcertain technology of Loudfire during the 12 months following the closing ofthe asset purchase. During such period, however, Company’s revenue on productsassociated with Loudfire amounted to less than the earnout threshold.Consequently, no additional consideration was paid to Loudfire.

 

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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  |   |

 

Theintangible assets acquired are amortized using the straight-line method overthe estimated useful life of the assets ranging from nine months to four years.

 

Duringthe fourth quarter of fiscal 2004, the Company recorded an adjustment to theprovisional purchase price allocation, which increased the amount of theacquisition costs by $54,000, thereby ratably increasing all the intangibleassets acquired. The changes had no impact on goodwill as no goodwill resultedfrom the acquisition of Loudfire.

 

*StarfishSoftware, Inc.*

 

InMarch 2003, the Company signed and closed a purchase agreement withMotorola, Inc. of Schaumburg, Illinois to acquire all of capital stock ofStarfish Software, Inc., a wholly owned subsidiary of Motorolaheadquartered in Scotts Valley, California. Starfish is a provider ofend-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.

 

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  |   |

 

Tangibleassets acquired and liabilities assumed were valued at their respectivecarrying amounts as the Company believes that these amounts approximated theircurrent fair values at the acquisition date. The valuation of identifiableintangible assets acquired was based on management’s estimates, currentlyavailable information and reasonable and supportable assumptions. Thisallocation was generally based on the fair value of these assets determinedusing the income approach.

 

Duringthe third quarter of fiscal 2004, the Company recorded a number of adjustmentsto the provisional purchase price allocation following the resolution ofcertain contingencies totaling approximately $73,000, which decreased the fairvalue of acquired developed and core technology, customer base, patents andtrademarks by

 

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approximately$41,000, $17,000, $12,000 and $3,000, respectively. The changes had no impacton goodwill as no goodwill resulted from the acquisition of Starfish.

 

Ofthe total purchase price, $1,205,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using the straight-line method over the estimated useful life of therespective assets of nine months to four years.

 

Asof the acquisition date, technological feasibility of the in-process technologyhad not been established and the technology had no alternative future use.Accordingly, the Company expensed the in-process research and development atthe date of the acquisition.

 

Theamount of the purchase price allocated to in process-research and technologywas based on established valuation techniques used in high-technology computersoftware industry. The fair value assigned to the acquired in-process researchand development was determined using the income approach, which discountsexpected future cash flows to present value. The key assumptions used in thevaluation include, among others, expected completion date of the in-processprojects identified as of the acquisition date, estimated costs to complete theprojects, revenue contributions and expense projections assuming the resultingproduct have entered the market, and discount rate based on the risksassociated with the development life cycle of the in-process technology acquired.The discount rate used in the present value calculations are normally obtainedfrom a weighted-average cost of capital analysis, adjusted upward to accountfor the inherent uncertainties surrounding the successful development of thein-process research and development, the expected profitability levels of suchtechnology, and the uncertainty of technological advances that couldpotentially impact the estimates. The Company assumes the pricing model for theresulting product of the acquired in process research and technology to bestandard within its industry. The Company, however, did not take intoconsideration any consequential amount of expense reductions from integratingthe acquired in-process technology with other existing in-process or completedtechnology. Therefore, the valuation assumptions do not include significantanticipated cost savings.

 

Thekey assumptions underlying the valuation of acquired in-process research anddevelopment from Starfish are as follows (in thousands):

 

Project name: Mercuryplatform technology

Percentcompleted as of acquisition date:  70%

Estimatedcosts to complete technology at acquisition date: $375

Risk-adjusteddiscount rate:  30%

Firstperiod revenue:  calendar year 2004

 

Thedevelopment of the above technology was highly dependent on the efforts toachieve technical viability, rapidly changing customer markets, uncertainstandards for a new product, and significant competitive threats from severalcompanies. The nature of the efforts to develop this technology into acommercially viable product consisted primarily of planning, designing,experimenting, and testing activities necessary to determine that thetechnology could meet market expectations, including functionality andtechnical requirements. Failure to bring the product to market in a timelymanner could have resulted in a loss of market share or a lost opportunity tocapitalize on emerging markets, and could have had a material adverse impact onthe Company’s business and operating results.

 

Subsequentto the acquisition of Starfish, there had been no significant developmentsrelated to the acquired in-process research and development project that wouldresult in material changes to the assumptions.

 

*Pro FormaResults*

 

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

 

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period presented. Inaddition, these results are not intended to be a projection of future resultsand do not reflect any synergies that might be achieved from the combinedoperation (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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**Note 5****   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  Average  Useful Life** | ** ** | **July 31, 2005** | ** **                    | **July 31, 2004** | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|-----------------------------|-------------------------------|-----------------------------|------------|
| ** **                    | ** ** | ** **                              | **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 |   |

 

Otherintangible assets as of July 31, 2005 include a total of approximately$4,727,000 amortizable identifiable intangibles obtained from the Company’sacquisition of PDAapps and Tourmaline during fiscal 2005. The additions to otherintangibles and associated accumulated depreciation during fiscal 2005 wereoffset by a write-off of $202,000 of expired, fully-amortized existingcontracts. The foreign exchange effects on non-US dollar-denominatedintangibles and associated accumulated depreciation were $294,000 and $19,000,respectively, for fiscal 2005.

 

Theamortization of developed and core technology amounted to $4,683,000,$2,693,000 and $628,000 for fiscal 2005, 2004 and 2003, respectively. Theamortization 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****   RelatedParty Transactions**

 

InJuly 2004, the Company entered into severance arrangement with its formerchief technology officer. Under this arrangement, the Company paid outseverance of approximately $52,000 during the fourth quarter of fiscal 2004.

 

InApril 2004, the Company underwent a reduction in workforce resulting in 17individuals, including two executive officers, departing employment with theCompany. Severance pay for affected officers was approximately $100,000 andrecorded within “*Restructuring and Other Charges*”in the consolidated statements of operations for fiscal year ended July 31,2004.

 

TheCompany had a full-recourse promissory note used by its chief executive officerto purchase shares of the Company’s common stock with a principal amount ofapproximately $310,000. The loan carried an interest rate of 4.75% per annumand was payable on June 14, 2008. During fiscal 2004, the promissory notewas fully paid, together with the accrued interest.

 

OnSeptember 30, 2003, the Company’s board of directors approved change ofcontrol agreements with three of the Company’s officers that provides for 12months acceleration of vesting of each individual’s options held at the time ofa change of control. In addition, the Company granted these individuals optionsto purchase an aggregate of an additional 425,000 shares of the Company’scommon stock. As of the date of grant, the option shares will vest over fouryears, with 25% vesting after one year and then 1¤48th vestingmonthly thereafter. The Company accounts for these options using the guidanceprescribed by APB Opinion No. 25, “*Accounting for StockIssued to Employees and Related Interpretations*,” and EITF No. 00-23,“*Issues Relating to Accounting for StockCompensation Under APB Opinion No. 25 and FIN No. 44*.”

 

Asa result, the Company determined that the approval of the change of controlagreement would result in a new measurement date for the calculation ofstock-based compensation expense under FIN No. 44 because the modificationmay allow the officers to vest in an option or award that would otherwise havebeen forfeited pursuant to the award’s original terms. As of July 31,2005, no change of control had occurred and the Company is unable to determinethe number of options that the officers will ultimately retain that wouldotherwise have been forfeited, absent the modification. As a result, nocompensation expense has been recognized in relation to those awards as of July 31,2005.

 

Referto Note 16, Subsequent Events, for recent related-party transactions.

 

**Note 7****   Long-TermDebt**

 

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 |   |

 

*3%Convertible Senior Notes*

 

Duringfiscal 2004, the Company completed the offering of $60,000,000 of convertiblesenior notes to qualified institutional buyers in reliance on Rule 144Aunder the Securities Act. The notes are senior unsecured obligations ofIntellisync and rank junior to any future secured debt, on a parity with all ofthe Company’s other existing and future senior unsecured debt and prior to anyexisting or future subordinated debt. As of July 31, 2005, the Company hadno other senior or subordinated debt, except for ordinary course tradepayables. The

 

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Companymay not redeem any of the notes prior to their maturity. Holders, however, mayrequire the Company to repurchase the notes upon some types of change in controltransactions. The notes will mature on March 1, 2009 unless earlierconverted or redeemed. Neither the Company nor any of its subsidiaries aresubject to any financial covenants under the indenture. In addition, neitherthe Company nor any of its subsidiaries are restricted under the indenture frompaying dividends, incurring debt, or issuing or repurchasing its securities.

 

Thenotes are convertible into shares of common stock of the Company at the holdersoption any time prior to the close of business on the final maturity date ofthe notes, subject to prior redemption of the notes. The initial conversionrate is 250.0000 shares per each $1,000 principal amount of notes whichrepresents an initial conversion price of $4.00 per share. The conversion rateis subject to adjustment for certain events, including the payment ofdividends, and other events specified in the indenture.

 

Holdersof the notes may require the Company to redeem all or any portion of the notesupon the occurrence of certain designated events which generally involve atransaction with respect to its 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.

 

Allcosts and expenses incurred with the issuance of the above offering have beencapitalized within “Other Assets” and amortized over five years, the life ofthe respective debt. Such costs amounted to approximately $3,185,000 and$2,949,000 with related accumulated amortization of $902,000 and $242,000 as ofJuly 31, 2005 and 2004, respectively.

 

*InterestRate Swap*

 

Duringfiscal 2004, the Company entered into two interest rate swap agreements with afinancial institution on a total notional amount of $60,000,000, whereby theCompany receives fixed-rate interest of 3% in exchange for variable interestpayments. The interest rate swaps expire upon the maturity of the Company’s$60,000,000, 3% convertible senior notes in March 2009, and effectivelyconvert fixed-rate notes into variable-rate borrowings. The interest rate isreset semi-annually and is equal to 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 savings relative to fixed rates of approximately$499,000 for fiscal 2005. Under the provisions of SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities*,”as amended, this arrangement has been designated and qualifies as an effectivefair value hedge of interest rate risk related to the $60,000,000 convertiblesenior notes. As the terms of the swaps match those of the underlying hedgeddebt, the changes in the fair value of these swaps are offset by correspondingchanges in the carrying value of the hedged debt, and therefore do not impactthe Company’s net earnings. As of July 31, 2005, the fair value of theinterest rate swaps was approximately $2,469,000 and recorded in “OtherLiabilities” with an equal adjustment recorded to the carrying value of the$60,000,000 convertible senior notes.

 

Referto Note 9 for the description of the collateral required on the interest rateswap.

 

**Note8**   Employee401(k) Plan

 

TheCompany has adopted a plan to provide retirement and incidental benefits forits employees. As allowed under Section 401(k) of the InternalRevenue Code, the 401(k) plan provides tax-deferred salary deductions foreligible employees. Employees may contribute from 1% to 70% of their annualcompensation, limited to a maximum annual amount as set periodically by theInternal Revenue Service. The Company matches 50% of employee contributions upto a maximum of $1,500 per year per person. Employee contributions vestimmediately, whereas Company matching contributions vest at a rate of 25% peryear after the first year of employment. At the direction of each employeeparticipant, the trustee of the 401(k) plan invests the contributions tothe 401(k) plan in selected investment options. The Company’s matchingcontributions to the 401(k) plan were approximately $206,000, $152,000 and$119,000 in fiscal 2005, 2004 and 2003, respectively.

 

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**Note 9****   Commitmentsand Contingencies**

 

*Leases*

 

Duringfiscal 2005, the Company entered into a capital lease agreement for computerperipherals, which expires in September 2007. In addition, during fiscal2004, the Company 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.Assets and future obligations related to the capital leases are included in theaccompanying consolidated balance sheet as of July 31, 2005 in propertyand equipment and in the respective liability accounts, respectively. Currentand long-term portions of the capital leases amounted to $153,000 and $206,000,respectively, at July 31, 2005. Depreciation of assets held under thecapital leases is included in depreciation and amortization expense.

 

TheCompany leases its facilities under operating leases that expire at variousdates through December 2008. The total amount of rental payments due overthe lease term is being charged to rent on the straight-line method over theterm of the lease. The difference between rent expense recorded and the amountpaid is credited or charged to “deferred rent” which is included in currentliabilities in the accompanying balance sheets. Deferred rent was approximately$259,000 and $435,000 at July 31, 2005 and 2004, respectively. Total rentexpense 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 |   | $ | — |   |

 

----

(1)             Includesinterest payments due (interest rates ranging from 2.4% to 12.7%).

 

*Acquisitionsand Potential Earnout Payments*

 

InJune 2005, we completed our acquisition of all of the issued andoutstanding stock of PDAapps. Under the terms of an Agreement and Plan ofMerger, dated as of June 23, 2005, the outstanding shares of PDAappscommon stock were converted into the right to receive (i) an aggregate ofapproximately $4,000,000 in aggregate initial cash consideration and (ii) anaggregate of up to $2,600,000 in cash earnout consideration (based on futurerevenue generated by the Company from the former PDAapps client base), subjectto 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.

 

InMarch 2005, we completed our acquisition of all of the issued andoutstanding stock of Tourmaline. Under the terms of an Agreement and Plan ofMerger, dated as of February 9, 2005, the outstanding shares of Tourmalinecommon stock were converted into the right to receive (i) an aggregate ofapproximately $4,118,000 in aggregate initial cash consideration and (ii) anaggregate of up to $2,881,918 in cash earnout consideration (based on futurerevenue generated by the Company from the former Tourmaline client base),subject to the deposit of a certain portion of the initial cash considerationand earnout 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.

 

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Asof July 31, 2005, the Company has not accrued any contingent earnoutpayment amounts discussed above. Any earnout consideration paid will berecorded as additional goodwill associated with the respective acquisition.

 

*Guarantees*

 

TheCompany has three letters of credit that collateralize certain operating leaseobligations and total approximately $321,000 and $397,000 at July 31, 2005and 2004, respectively. The Company collateralizes these letters of credit withcash deposits made with two of its financial institutions and has classifiedthe short-term and the long-term portions of approximately $196,000 and$125,000 at July 31, 2005, and $101,000 and $296,000 at July 31, 2004as “Other Current Assets” and “Restricted Cash,” respectively, in theconsolidated balance sheets. The long-term portion expires through June 2006.The holders of the letters of credit are able to draw on each respective letterof credit in the event that the Company is found to be in default of itsobligations under each of its operating leases.

 

Underthe terms of the interest rate swap agreement into which the Company enteredduring fiscal 2004, the Company must provide collateral to match anyunfavorable mark-to-market exposure (fair value) on the swap. The amount ofcollateral required totals a minimum of $1,800,000 plus an amount equal to theunfavorable mark-to-market exposure on the swap. Generally, the requiredcollateral will rise as interest rates rise. As of July 31, 2005, and July 31,2004, the Company has posted approximately $4,181,000 and $3,736,000,respectively, of collateral under this swap agreement which is included in “RestrictedCash” in its consolidated balance sheet.

 

Inthe event of early termination of the Company’s service agreement witheˆdeltacom, a division of ITC^DeltaCom, Inc. and a managed serviceprovider, the Company may be required to pay eˆdeltacom a penalty fee of up toapproximately $45,000.

 

*Warranties*

 

TheCompany generally provides a warranty for its software products and services toits customers for a period of 90 days. The Company’s software products’ mediaare generally warrantied to be free of defects in materials and workmanshipunder normal use and the products are also generally warrantied to performsubstantially as described in certain Company documentation. The Company’sservices are generally warrantied to be performed in a professional manner andto conform materially to the specifications set forth in a customer’s signedcontract. In the event there is a failure of such warranties, the Companygenerally corrects or provides a reasonable work around or replacement product.The Company believes such obligations do not significantly affect the Company’sfinancial position or results of operations.

 

TheCompany accrues for warranty expenses at the time revenue is recognized andmaintains a warranty accrual for the estimated future warranty obligation basedupon the relationship between historical and anticipated costs. In otherinstances, additional amounts are recorded when such costs are probable and canbe reasonably estimated. The warranty accrual is reviewed at least quarterly.As of July 31, 2005, the warranty accrual was $200,000, which approximatesthe balance as of July 31, 2004.

 

*IndemnificationObligations*

 

Oncertain occasions, the Company provides to its customers intellectual propertyindemnification, subject to certain limitations, in its arrangements for theCompany’s software products or services. Typically these obligations providethat the Company will indemnify, defend and hold the customers harmless againstclaims by third parties that its software products or services infringe uponthe copyrights, trademarks, patents or trade secret rights of such thirdparties. As of July 31, 2005, there has been no significant claim made byany third party with regard to the Company’s software products or services. Theliability reserve for indemnification obligations is not significant.

 

Section 145of the Delaware 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,

 

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officers,employees, and agents to the full extent permitted by Delaware Law, includingin circumstances in which indemnification is otherwise discretionary underDelaware law. In addition, the Company has entered into separateindemnification agreements with its directors and officers which would requirethe Company, among other things, to indemnify them against certain liabilitieswhich may arise by reason of their status or service (other than liabilitiesarising from willful misconduct of a culpable nature). These indemnificationprovisions may be sufficiently broad to permit indemnification of the Company’sofficers and directors for liabilities (including reimbursement of expensesincurred) arising under the Securities Act, as amended. At present, there is nopending litigation or proceeding involving a director, officer, employee orother agent of the Company in which indemnification is being sought nor is theCompany aware of any threatened litigation that may result in a claim forindemnification by any director, officer, employee or other agent of theCompany.

 

Theoffering memorandum and registration statement associated with the 3%Convertible Senior Notes Due 2009 include indemnification provisions thatobligate the Company to indemnify and hold harmless each initialpurchaser of the notes against any and all losses, claims, damages andliabilities (including, without limitation, any legal or other expensesreasonably incurred in connection with defending or investigating any suchaction or claim) caused by any untrue statement or alleged untrue statement ofa material fact contained in such memorandum or the registration statement. Asof July 31, 2005, the Company does not believe it is probable that it willhave to make any material payments for claims that could result fromsuch provisions in the future. As such, no amounts have been recorded underthese indemnifications as of July 31, 2005.

 

*Litigation*

 

InAugust 2004, a patent-infringement claim was filed against the Company byNCR Corporation in the U.S. District Court for the Southern District of Ohio.In the complaint, NCR alleged certain of the Company’s products infringe threeof its patents which allegedly cover technology for synchronizing databasesbetween personal digital assistants and host computers. On July 5, 2005,the case was dismissed pursuant to a settlement between the Company and NCRwhereby the Company paid NCR $600,000. 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.

 

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TheCompany is party to various legal proceedings and claims, either asserted orunasserted, which arise in the ordinary course of business, includingproceedings and claims that relate to acquisitions it has completed or tocompanies it has acquired, commercial, employment and other matters. While theoutcome of these matters cannot be predicted with certainty, the Company doesnot believe that the outcome of any of these claims or any of the abovementioned legal matters will have a material adverse effect on its consolidatedfinancial position, results of operations or cash flow. In accordance withgenerally accepted accounting principles, the Company make a provision for aliability when it is both probable that a liability has been incurred and theamount of the loss can be reasonably estimated. These provisions are reviewedat least quarterly and adjusted to reflect the impacts of negotiations,settlements, rulings, advice of legal counsel, and other information and eventspertaining to a particular case. Litigation is inherently unpredictable.However, the Company believes that it has valid defenses with respect to thelegal matters pending against Intellisync. It is possible, nevertheless, thatthe 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.The plan 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:

 

•       the rightsbecome exercisable only upon the occurrence of certain events specified in theplan, including the acquisition of 15% of the Company’s outstanding commonstock by a person or group;

 

•       each rightentitles 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;

 

•       subject tocertain limitations, the terms of the rights may be amended by a resolution ofthe Board of Directors without the consent of the holders of the rights; and

 

•       the right maybe redeemed at a price of $0.001 per right.

 

**Note 11****   Stockholders’Equity**

 

*PreferredStock*

 

TheCompany has authorized 2,000,000 shares of preferred stock, par value $0.001per common share. The Company’s Board of Directors has authority to provide forthe issuance of the shares of preferred stock in series, to establish fromtime-to-time the number of shares to be included in each such series and to fixthe designation, powers, preferences and rights of the shares of each suchseries and the qualifications, limitations or restrictions thereof, without anyfurther vote or action by the shareholders. As of July 31, 2005 and 2004,no shares of preferred stock have been issued.

 

*CommonStock*

 

TheCompany has authorized 160,000,000 shares of common stock, par value $.001 percommon share. As of July 31, 2005 and 2004, 66,639,299 and 65,592,118respectively, shares of common stock have been issued.

 

*StockOption Plans*

 

InMarch 2000, the Board of Directors adopted the 2000 Supplemental StockOption Plan, or the SSOP. The SSOP provides for granting of NSOs to purchase sharesof common stock to non-executive officers, employees and consultants of theCompany. To date, the Company has not granted any significant options toconsultants or

 

F-42

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advisors.In accordance with the SSOP, the stated exercise price shall not be less than85% 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 eachmonth thereafter for the next 36 months. The SSOP provides that, in the eventof certain 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.

 

InJanuary 2001, the Company’s Board of Directors approved a cancellation andregrant program for outstanding options. Under the program, holders ofoutstanding options granted after July 24, 1996, with exercise prices inexcess of $15.00 per share were given the choice of retaining these options orobtaining in substitution repriced options for the same number of shares thatwould be issued on a date which was at least six months plus one day from thecancellation date. Holders of approximately 2,676,000 shares elected toparticipate in the program and received the new options. The re-grants forexecutive officers and directors were priced at $2.10 (the fair market value onJuly 30, 2001, the date of the new grant). The re-grants for employeeswere priced at $1.78 (85% of the underlying market price on July 30,2001). The new options vest according to their original grant schedules.

 

InSeptember 2001, the Company’s Board of Directors approved a new proposalto offer its employees, officers and directors the opportunity to cancel stockoptions granted to them between September 1999 and June 2001 inexchange for an equal number of new options. The new options were granted on April 24,2002, six months and two days following the close of the tender offer on October 22,2001, and priced at $1.11 (the fair market value on the grant date). Holders ofoptions exercisable for approximately 845,000 shares elected to participate inthe program and received the new options. The new options vest according totheir original grant schedules.

 

InDecember 2002, the Company’s Board of Directors and stockholders adoptedthe 2002 Stock Option Plan, or the 2002 Plan, to replace the 93 Plan whichexpired in October 2003. The 2002 Plan provides for granting of ISOs andNSOs to purchase shares of common stock to employees, directors, consultantsand advisors of the Company. In accordance with the 2002 Plan, the statedexercise price, (i) for an ISO, shall not be less than the fair marketvalue, (ii) for an NSO, shall not be less than eighty-five percent (85%)of the fair market value, as determined by the Board of Directors, of a shareof stock on the date of the granting of the option. The 2002 Plan allowsoptionees to purchase stock on exercise of options using cash, through a tenderof shares or through a same-day sale option exercise program. The 2002 Planprovides that the options shall be exercisable over a period not to exceed tenyears. Options generally vest 25% one year after date of grant and 1¤48th eachmonth thereafter for the next 36 months. The 2002 Plan provides that, in theevent 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 outstandingoptions, then these options would terminate upon the closing of thetransactions. In November 2004, the Company increased the number of sharesof common stock authorized for issuance under 2002 Plan by 6,500,000 to8,775,000. Options available for grant as of July 31, 2005 wereapproximately 1,936,000 shares. Refer to Note 16, Subsequent Events, regardingpotential amendment to the 2002 Plan.

 

TheCompany assumed certain options granted to former employees of acquiredcompanies, or the Acquired Options. All of the Acquired Options were adjustedto effectuate the conversion under the terms of the agreements between theCompany and the companies acquired. The Acquired Options generally becameexercisable over a four-year period and generally expire ten years from thedate of grant. No additional options will be granted under any of these plans.

 

*RestrictedStock Grant Agreement*

 

InJune 2002, the Company granted its new president and chief executiveofficer an option to purchase 1,500,000 restricted shares of common stock at$0.59 per share (the fair market value on July 14, 2002, the date

 

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ofthe grant). The options may be exercised prior to the options becoming vested,but such shares are subject to repurchase over the option vesting period. Ifthe officer’s employment is terminated for any reason, the Company has theright to repurchase any unvested shares. A total of 700,000 shares, conditionalupon continued employment, vest 25% one year after date of grant and 1¤48th eachmonth thereafter for the next 36 months. The remaining 800,000 shares vest infull on June 14, 2009, but the vesting may be accelerated upon achievementof certain performance objectives (212,500 shares have been accelerated as of July 31,2005). The grant provides for acceleration of vesting upon change of control.In June 2002, the officer exercised the option with respect to 525,000shares in exchange for a full recourse, interest-bearing promissory note. Thepromissory note was fully paid, together with 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 |   |

 

Alloptions were granted during fiscal 2005, 2004 and 2003 at the fair market valueof the Company’s common stock. Proceeds received by the Company from exercisesare credited to common stock and additional paid-in capital.

 

AtJuly 31, 2005, there were no shares subject to repurchase, and options topurchase 1,946,780 shares were available for future grants.

 

*DeferredStock Compensation.*

 

Inconjunction with the cancellation and regrant program implemented in January 2001,the new options granted to executive officers and directors were priced at thefair market value on the date of the new grant and accounted for as fixedawards. Accordingly, no stock compensation charge was recorded for these newoptions. The new options granted to employees were priced at a discount andaccounted for under the guidance in FIN No. 44. According to FIN No. 44,the associated compensation charge under variable accounting is based on anyexcess of the common stock closing price at the end of the reporting period ordate of exercise, forfeiture, cancellation without replacements, if earlier,over the exercise price. This cost is amortized on an accelerated basis overthe remaining vesting period consistent with the method described in FIN No. 28,“*Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*.” The Company recorded arecovery

 

F-44

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ofa previous charge of $25,000 in fiscal 2005 and a charge of approximately$79,000 and $400,000 in fiscal 2004 and 2003, respectively, for the underlyingdeferred compensation relating to the employees’ options.

 

Asa result of the cancellation and regrant program implemented in September 2001and in accordance with FIN No. 44, options to purchase 55,500 shares, netof the effect of recent terminations, that were granted between July and October 2001became subject to variable plan accounting. FIN No. 44 holds that if alower-priced option is granted within a six-month period before or after ahigher priced option held by the same person is cancelled, the combinedtransactions are considered a repricing and result in variable plan accounting.The Company recorded for these options a charge of $0 in fiscal 2005, arecovery of a $21,000 in fiscal 2004 and a charge of $33,000 in fiscal 2003.

 

The525,000 unvested shares that were exercised in fiscal 2002 by the president andchief executive officer of the Company under the Restricted Stock GrantAgreement were paid with a full recourse, fixed interest-bearing promissorynote (Refer to Note 6). The shares are accounted for by the Company under theprovisions of EITF No. 00-23, “*Issues Related to theAccounting for Stock Compensation under APB Opinion No. 25 and FIN No.44*.”EITF No. 00-23 holds that if unvested options were exercised with a fullrecourse note with a fixed interest rate, variable accounting would resultuntil such time that the underlying options have vested and the repurchaseprovision for the options has lapsed. According to EITF No. 00-23, theassociated compensation charge is based on any excess of the fair value of thestock at the end of the reporting period or date of vesting, if earlier, overthe fair value of the note at that date. The underlying note was paid duringfiscal 2004, therefore, the Company recorded a recovery of a portion of theprevious year’s charge of approximately $346,000 in fiscal 2004. For fiscal2003, the Company recorded a charge of $1,611,000 for the underlying options.

 

As a result of the employee terminations during fiscal2003, the Company recorded a reduction of unearned stock-based compensation of$69,000. For many of the terminated employees and executives, the Companyincurred significant deferred stock-based charges on the original option grantsover the previous years. The reversed amounts represent the additional paid incapital and stock-based compensation amounts associated with the unvestedoptions and stock awards.

 

TheCompany recorded an expense recovery of $25,000 in fiscal 2005 and a totalexpense of $745,000 and $1,742,000 in fiscal 2004 and 2003, respectively,relating to the above deferred compensation charges.

 

Uponthe Company’s adoption in the first quarter of fiscal 2006 of SFAS No. 123R, “Share-Based Payments,” (referto Note 2, Recently Issued Accounting Pronouncements) variable accounting forstock options, as those discussed above, will no longer be utilized. Instead,compensation expense will be determined based on the fair value of the stockoptions 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**               | ** ** | ** **              | ** ** | **Options Exercisable** | ** ** |
| ** **          | ** ** | ** **                   | ** ** | **Remaining**             | ** ** | **Weighted-**           | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| **Range of**   | ** ** | **Number**                   | ** ** | **Contractual Life** | ** ** | **Average**             | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Prices** | ** ** | **Outstanding**              | ** ** | **(In years)**       | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **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 |   |

 

*EmployeeStock Purchase Plan*

 

InDecember 1998, the Board of Directors adopted the Employee Stock PurchasePlan, or the ESPP. The purpose of the ESPP is to provide eligible employees ofthe Company with a means of acquiring common stock of the Company throughpayroll deductions. The ESPP consists of four six-month purchase periods ineach two-year offering period. Shares may be purchased under the ESPP at 85% ofthe lesser of the fair market value of the common stock on the beginning of theoffering period date or ending of the purchase period. During fiscal 2005, 2004and 2003, 355,910, 278,868 and 522,003 shares were sold through the ESPP at aweighted average price of $1.74, $1.21 and $0.32, respectively.

 

Amaximum of 500,000 shares of the Company’s common stock was initially madeavailable for issuance under the ESPP, which amount is cumulatively increasedon August 1 of each year by an amount equal to the lesser of (i) 500,000shares, or (ii) a lesser amount of shares determined by the Board ofDirectors. In fiscal 2005, the board of the Company authorized an increase inthe number of shares available for purchase under the ESPP pursuant to theevergreen provisions of the ESPP. As of July 31, 2005, the number ofshares available for purchase under the ESPP is approximately 350,000,exclusive of 500,000 shares approved by the Board of Directors to be added on August 1,2005.

 

F-46

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**Note 12****   Restructuringand 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*

 

TheCompany implemented a number of cost-reduction plans aimed at reducing coststhat were not integral to its overall strategy, better aligning its expenselevels with current revenue levels and ensuring conservative spending duringperiods of economic uncertainty. These initiatives included a reduction inworkforce and facilities consolidation.

 

*Fiscal 2004.**  *During fiscal 2004, the Companyimplemented reduction in workforce aimed at reducing excess capacity in itscontinued effort to streamline its operations, affecting 17 employees invarious business functions (nine in research and development and eight in salesand marketing). The program was completed by the end of April 2004, andthe associated severance costs incurred were approximately $253,000, none ofwhich remained unused as of July 31, 2004.

 

TheCompany continually evaluates the balance of the restructuring reserve itrecorded in prior years based on the remaining estimated amounts to be paid. Asa result of vacating the remaining office space inSanta Cruz, 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. Asa result, total facilities costsof$600,000, inclusive of the costs of $250,000 for vacating a floor of theCompany’s office facility in San Jose, California, wererecorded during fiscal 2004.

 

*Fiscal 2003.**  *During fiscal 2003, the Companyimplemented a reduction in workforce, affecting 19 employees inengineering and product management. As a result, the Company incurred severanceand other fringe benefit costs of $257,000.

 

Thecontinuing deterioration of the real estate market in Santa Cruz, Californiaresulted in the difficulties for the Company to sublet the sections of itsfacility in such location, which the Company vacated in previous years. As aresult, the Company determined that additional charges were needed foradjustments in expected future sublease rates and brokerage fees. Arestructuring charge adjustment of $159,000 was therefore recorded in fiscal2003.

 

F-47

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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 |   |

 

Theremaining unpaid amount as of July 31, 2005 of $86,000 related to the netlease expense due to the consolidation of excess facilities, will be paid overthe respective lease terms through June 2006 using cash from operationsand is reflected accordingly in “Accrued Liabilities” in the consolidatedbalance sheet as of July 31, 2005.

 

TheCompany believes that the above restructurings have contributed towards theimprovement in its gross and operating income during fiscal 2005 and 2004. The Companyhas further reduced the total costs of excess facilities by the estimatedproceeds from assumed future subleases. If the actual results differ from itsestimates and assumptions, the Company may be required to adjust further itsfacilities costs accrual related to expected losses on subleases, includingrecording additional losses. Differences, if any, between the estimated amountsaccrued and the actual amounts paid will be reflected in operating expenses infuture periods.

 

*Othercharges*

 

*Litigation settlementand related costs.*   During the fourth quarter offiscal 2005, the Company made a cash payment of $600,000 for litigationsettlement with NCR Corporation. This amount is amortized over the licenseperiod of certain NCR patents determined to be between January 2002 and December 2010based on the greater of straight line amortization or in proportion to volumeof the deployed licenses. As a result, approximately $239,000 was expensedduring the fourth quarter of fiscal 2005. The remaining $361,000 was recordedas “Other Assets” in the consolidated balance sheet as of July 31, 2005.In addition, an expense of $116,000 was recorded for the litigation relatedcosts incurred during the fourth quarter of fiscal 2005.

 

*Costs Relating ToPotential Acquisitions.**  *Duringfiscal 2005, 2004 and 2003, the Company incurred residual costs ofapproximately $150,000, $76,000 and $379,000 for operating expenses, mainlylegal and accounting, relating to potential acquisitions that the Companyceased pursuing.

 

F-48

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**Note 13****   Income Taxes**

 

Theincome 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 |   |

 

Netdeferred tax assets/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 assets associatedwith the Tourmaline and PDAapps, respectively. As the Company amortizes theintangible assets acquired in these transactions the deferred tax liabilityassociated with those assets will decrease resulting in a smaller net deferredtax 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 inAustralia and established a full valuation allowance against the remainder ofits deferred tax assets to the extent they are not likely to be recoverable.The change in valuation 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.

 

F-49

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Areconciliation of the income tax provision to the amount computed by applyingthe statutory federal income tax rate to income (loss) before income taxprovision is summarized as follows (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 |   |

 

AtJuly 31, 2005, the Company has federal and state net operating losscarryforwards of $150,886,000 and $25,724,000 respectively, and federal andstate credit carryforwards of $4,474,000 and $2,076,000, respectively,available to offset future taxable income. The Company’s carryforwards expirein 2006 through 2025 if 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.

 

TheCompany does not provide for taxes on unremitted earnings of its foreignsubsidiary as these earnings are intended to be reinvested permanently.

 

**Note14**   Net Loss PerCommon 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.

 

Potentialcommon shares attributable to stock options, convertible senior notes,warrants, shares held in escrow and shares subject to repurchase by the Companyof 27,756,240, 24,786,384 and 6,563,822 were outstanding at July 31, 2005,2004 and 2003, respectively. However, as a result of a net loss incurred by theCompany in the years ended July 31, 2005, 2004 and 2003, none of thein-the-money potential common shares were included in the weighted averageoutstanding shares (using the treasury stock method) used to calculate net lossper common share because the effect would have been antidilutive.

 

F-50

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**Note15**   BusinessSegments

 

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 about howto 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.

 

Revenueis attributed to regions based on the location of customers. Revenueinformation by geographic region 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 |   |

 

Revenueinformation by customer 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 |   |

 

Goodwillinformation by geographic region is as follows (in thousands):

 

|                    |       | **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 |   |

 

Otherlong-lived asset information 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 |   |

 

F-51

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**Note16**   SubsequentEvents

 

*Officers’Resignations*

 

OnAugust 29, 2005, the Company entered into a severance agreement and mutualrelease with its Chief 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 withits Chief 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.

 

*Appointmentof New Officers*

 

On October 3,2005, Blair Hankins was appointed as Senior Vice President of Technology,Client Development, 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.

 

*ComplaintFiled by Spontaneous Technology*

 

On October 5,2005, Plaintiff Spontaneous Technology, Inc. served the Company with acomplaint filed in the Third Judicial District Court, of Salt Lake County,State of Utah. In the Complaint, Plaintiff asserts a cause of action for breachof contract related to the calculation of an earnout payment in the AssetPurchase Agreement entered into between the parties on July 30, 2003.Plaintiff seeks compensatory damages in the amount of $673,750 and recovery ofits attorneys’ fees and costs. We believe the action has no merit and arevigorously defending against it. We cannot estimate any possible loss at thistime.

 

*Amendmentto the 2002 Stock Option Plan*

 

OnOctober 25, 2005, the Company’s Board of Directors has approved, subjectto stockholder approval at the upcoming annual meeting of stockholders, anamendment to the 2002 Stock Option Plan to allow for the granting ofrestrictive stock units in lieu of or in combination with available stockoption shares approved under such plan.

 

**Note 17****   SubsequentEvents (Unaudited)**

 

*MergerAgreement*

 

On November 15,2005, the Company entered into an Agreement and Plan of Merger (the “MergerAgreement”) with Nokia Inc., a Delaware corporation (“Parent”), and JupiterAcquisition Corporation, a Delaware corporation and wholly owned subsidiary ofNokia Inc. (“Merger Sub”).  Under the Merger Agreement, Merger Sub wouldbe merged with and into the Company (the “Merger”), the separate corporateexistence of Merger Sub shall cease and the Company shall continue as thesurviving corporation and as a wholly-owned subsidiary of Parent.

 

F-52

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Pursuant to the Merger Agreement, at the effectivetime of the Merger, each issued and outstanding share of common stock, par value$0.001 per share, of the Company issued and outstanding immediately prior tothe effective time, other than Common Stock held by the Company, Parent or anyof their wholly-owned subsidiaries, or any stockholders who are entitled to andproperly exercise appraisal rights under Delaware law, shall be automaticallyconverted into the right to receive $5.25 in cash per share, without interest.

 

The Merger is conditioned upon, among other things,the adoption of the Merger Agreement by the stockholders of the Companypursuant to applicable law, the termination or expiration of the waiting periodunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976, the terminationor expiration of the applicable waiting periods of antitrust laws of certainforeign jurisdictions and other conditions.

 

*Voting and Other Agreements*

 

Concurrently with the execution of the MergerAgreement, each director and officer of the Company entered into a votingagreement with Parent pursuant to which such director or officer agreed to votehis or her Common Stock in favor of approving and adopting the Merger Agreementand the Merger.  Also, simultaneously with the execution of the MergerAgreement, certain key employees of the Company entered into employment-relatedor consulting agreements with Parent (which contain non-competition andnon-solicitation provisions), which agreements will take effect as of theeffective time of the Merger.

 

*Amendment to Rights Agreement*

 

In connection with the Merger Agreement, the Companyand Computershare Investor Services LLC entered into Amendment No. 2 tothe Preferred Shares Rights Agreement, dated November 15, 2005 (the “RightsAmendment”), to the Preferred Shares Rights Agreement, dated as January 13,2003, as amended by Amendment No. 1 to Preferred Shares Rights Agreement,dated March 1, 2004 (together the “Rights Agreement”). The effect of theRights Amendment is to permit the Merger and the other transactionscontemplated by the Merger Agreement to occur without triggering anydistribution or adverse event under the Rights Agreement. In particular,neither Parent, Merger Sub nor any of their affiliates or associates shall bedeemed to be Acquiring Persons (as defined in the Rights Agreement) solely as aresult of the approval, execution, delivery or performance of the MergerAgreement or the consummation of the Merger or the other transactionscontemplated thereby.

 

*Resignation of Officer*

 

On November 21,2005,  Mr. Kitchen resigned hisposition as the Company’s Principal Accounting Officer, but will remain as theCompany’s Controller.  The Board ofDirectors appointed Mr. Eichler as the Company’s Principal AccountingOfficer effective the same day.

 

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