##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

FORM 10-K

(Mark One)



|  |                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------
|x | Annual Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the fiscal year ended:
    April 30, 2002

OR



|  |                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|o | Transition Report pursuant to Section 13 or 15(d) of the
    Securities Exchange Act of 1934 for the transition period
    from                         to

Commission File
Number  0-22703

MCK Communications, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                            
|------------------------------------------------------------------ |  | -------------------------------------------
|Delaware                                                           |  | 06-1555163                                 
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification Number)
|                                                                  
|117 Kendrick Street, Needham, MA                                   |  | 02494                                      
|(Address of principal executive
    offices)                       |  | (Zip code)                                 

Registrants telephone number, including
area code: (617) 454-6100

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to Section
12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15 (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 such reports),
and (2) has been subject to such filing requirements for
the past
90 days.          Yes x     No o

Indicate by check mark if disclosure of
delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.          o

The aggregate market value of voting stock held
by non-affiliates of the registrant as of June 28, 2002,
was approximately $12,693,960 based upon the last sales price
reported for such date on The Nasdaq National Market. For
purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of
Common Stock and shares held by officers and directors of the
registrant, have been excluded in that such persons may be
deemed to be affiliates. This determination is not necessarily
conclusive.

At June 28, 2002 the registrant had outstanding
20,426,632 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrants definitive
Proxy Statement to be filed pursuant to Regulation 14A for
the Registrants 2002 Annual Meeting of Stockholders are
incorporated by reference into Part III of this Annual
Report on Form 10-K



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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
|PART I                                          
|                                                 | Item 1. Business                                                                                       
|                                                 | Item 2. Properties                                                                                     
|                                                 | Item 3. Legal Proceedings                                                                              
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|                                                 | Item 6. Selected Historical Condensed Financial Information                                            
|                                                 | 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           
|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                                                
|PART IV                                         
|                                                 | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS      
|Ex-10.6 Incentive Bonus Plan of the Registrant  
|Ex-10.12 Promissory Note                        
|Ex-10.14 Offer letter dated 05/29/01 - Nolette  
|Ex-10.15 Offer Letter dated 05/10/01 - Doyle    
|Ex-10.16 Offer Letter dated 11/26/01 - McGovern 
|Ex-21.1 Subsidiaries of the Registrant          
|Ex-23.1 Consent of Ernst & Young LLP            



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TABLE OF CONTENTS

|                                                     |  |          |     |                                                                                                    |  |      |    | 
|---------------------------------------------------- |  | -------- | --- | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                     |  |          |     |                                                                                                    |  | Page
|                                                     |  |          |     |                                                                                                    |  |     
|INFORMATION REGARDING FORWARD-LOOKING
    STATEMENTS |  |          | 2   |                                                                                                   
|PART I                                               |  |          | 2   |                                                                                                   
|                                                     |  | ITEM 1.  |     | BUSINESS                                                                                           |  |      | 2  | 
|                                                     |  | ITEM 2.  |     | PROPERTIES                                                                                         |  |      | 21 | 
|                                                     |  | ITEM 3.  |     | LEGAL PROCEEDINGS                                                                                  |  |      | 21 | 
|                                                     |  | ITEM 4.  |     | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                            |  |      | 22 | 
|PART II                                              |  |          | 23  |                                                                                                   
|                                                     |  | ITEM 5.  |     | MARKET FOR THE REGISTRANTS COMMON EQUITY
    AND RELATED STOCKHOLDER MATTERS                      |  |      | 23 | 
|                                                     |  | ITEM 6.  |     | SELECTED HISTORICAL CONDENSED FINANCIAL
    INFORMATION                                            |  |      | 23 | 
|                                                     |  | ITEM 7.  |     | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  |      | 25 | 
|                                                     |  | ITEM 7A. |     | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                                     |  |      | 45 | 
|                                                     |  | ITEM 8.  |     | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                        |  |      | 45 | 
|                                                     |  | ITEM 9.  |     | CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE              |  |      | 46 | 
|PART III                                             |  |          | 46  |                                                                                                   
|                                                     |  | ITEM 10. |     | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                                 |  |      | 46 | 
|                                                     |  | ITEM 11. |     | EXECUTIVE COMPENSATION                                                                             |  |      | 46 | 
|                                                     |  | ITEM 12. |     | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  |      | 46 | 
|                                                     |  | ITEM 13. |     | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                     |  |      | 46 | 
|PART IV                                              |  |          | 47  |                                                                                                   
|                                                     |  | ITEM 14. |     | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
    REPORTS ON FORM 8-K                                |  |      | 47 | 
|INDEX TO CONSOLIDATED FINANCIAL
    STATEMENTS       |  |          | F-1 |                                                                                                   

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INFORMATION REGARDING FORWARD-LOOKING
STATEMENTS

This Annual Report on Form 10-K contains
certain forward-looking statements (within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended) that involve risks and uncertainties. Forward-looking
statements include, without limitation, statements containing
the words anticipates, believes,
expects, intends, future and
words of similar import which express managements belief,
expectations or intentions regarding the future performance of
MCK Communications, Inc. and its subsidiaries (hereafter,
collectively, we, us, our,
MCK or the Company). Actual results and
the timing of certain events could differ materially from those
projected in the forward-looking statements as a result of a
number of factors. For a discussion of important factors that
could affect the Companys results, please refer to the
Business section and to the financial statement line item and
Critical Accounting Policies discussions and Factors Affecting
Future Operating Results and Stock Price set forth in
Managements Discussion and Analysis of Financial Condition
and Results of Operations discussed elsewhere in this Annual
Report on Form 10-K.




PART I




Item 1.  Business

Overview

MCK Communications is a leading provider of
products that deliver distributed voice communications by
enabling businesses to extend the functionality and applications
of their business telephone systems from the main office to
outlying offices, remote call centers, teleworkers and mobile
employees over public and private networks. Business telephone
systems consist of private branch exchange (PBX)
systems and key systems (KTS). Whereas key systems
are used in medium and small businesses or smaller locations
within larger companies, PBXs are the most commonly used
telephone systems in corporations. PBXs deliver such features as
3- or 4-digit internal dialing, conferencing, call transfer and
call forwarding. PBXs also generally support a range of
telephony applications such as voicemail, automatic call
distribution, auto attendant, call accounting and interactive
voice response.

Our EXTender and ConneX products cost-effectively
deliver a unified enterprise-wide voice network by enabling the
voice switch to function as a company-wide voice server that
transmits call function and applications to distributed
locations over the companys existing voice and/or data
networks. This enables a company to provide the same telephony
functionality to all locations while reducing their total cost
of ownership. Savings are achieved by leveraging current
investments in voice and data equipment, flexibility of network
choice for lowered communications service cost, streamlined
network administration through the utilization of industry
standard network management techniques and lowered training
costs. These products also afford service providers the
flexibility of combining the power of their network services
such as data and/or mobile services with PBX/ KTS extension to
expand the range of offers provided to their customers.

Our embedded gateway recording products are used
within a variety of telephony-based applications (i.e., call
center, contact center, security and client services
applications) and enable our customers to convert digital PBX
signals into standard analog audio output so that calls can be
easily and cost-effectively recorded for future use. We also
provide a range of custom embedded gateway products for specific
Original Equipment Manufacturer (OEM) partners.

In addition, our bridge the gap products provide
enterprises or service providers flexible choices for managing
their path to the future by leveraging their current
infrastructure investments while taking advantage of next
generation nextgen telephony systems (i.e., CPE
and/or hosted IP switches), applications (i.e., unified
messaging) and devices (i.e., Internet Protocol (IP)
phones, wireless devices) to provide employees enriched
telephony experiences.

We market and distribute our products through an
international network of distributors, resellers, equipment
providers, system integrators, service providers and, to a
lesser extent, through direct sales. We are headquartered in
Needham, Massachusetts and have a development center in Calgary,
Canada. We also

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maintain a sales and marketing office in the
United Kingdom and a sales office in Montreal, Canada. We
outsource our manufacturing to two contract manufacturers. These
manufacturers provide full turnkey services including material
procurement, final assembly, test, shipment to our customers,
and warranty services.


Our customer support efforts complement our
distribution partners offerings thereby providing end
customers with world class servicing. Our sales force and
marketing efforts are primarily directed at supporting the sales
efforts of our indirect distribution partners and developing
brand awareness.

Industry Background

Most businesses today have deployed separate
networks to support voice and data communications. As they
evolve to unite their geographically distributed locations such
as branch or satellite locations and an increasingly virtual
workforce either working at home or on the road, new demands are
being placed on the traditionally localized voice communications
networks. While data networks have evolved to meet this
challenge by offering high-speed remote data access and a high
degree of interoperability among data systems and components,
telephony systems and voice networks have remained largely
centralized and switch-specific with limited multi-vendor
interoperability. Consequently, providing cost-effective,
company-wide telephony services and applications to all
locations and employees can be challenging.

Businesses depend on company-wide communication
to ensure critical internal collaboration, provide suitable
levels of customer service, and maintain operational efficiency
and productivity by sharing resources throughout the company.
The shift to a more distributed voice environment results from a
number of factors. These include extending business reach closer
to key customers, suppliers and partners, lowering the cost of
communications, complying with expanding environmental
regulations, the competition for qualified employees and
disaster preparedness and/or recovery.

In trying to address these needs, companies are
increasingly challenged by the need to integrate voice and data
networks across multiple locations. As the business environment
becomes more competitive, providing an appearance of one with
common features and applications seamlessly connecting employees
and callers into a virtual community is becoming increasingly
important.

Enterprise
Data Networks

Initially, data networks were built to
interconnect mainframe computers that served a single office
location. They were accessible by a limited number of users and
were often too costly for small organizations. Over the past 20
years, advances in open-systems, computer processing and
networking technology have altered this centralized model to
deliver cost-effective, high-speed distributed information
processing and communications by using a distributed
client-server architecture. This enables companies to deploy
equipment from multiple vendors that is interoperable across
local area network (LANs), or wide area networks
(WANs), using standard communication protocols,
internetworking technologies, and industry-standard system
management platforms. These same developments have also
facilitated widespread data access through the deployment of
remote access equipment capable of extending the reach of data
networks beyond corporate locations over public and private
networks.

Historically, branch offices and telecommuters
accessed corporate data networks over a variety of circuit-based
networks that were designed for voice service. These
circuit-based networks are dedicated point-to-point connections
that require companies to constantly maintain sufficient
bandwidth to meet their maximum communications requirements. New
packet-based networks, deployed over the past decade, divide all
types of data, including voice, into packets that can be
simultaneously transmitted and reassembled into their original
form at their final destination. These packet-based networks
enable sharing of network resources and are more efficient in
their use of available bandwidth than traditional circuit-based
networks, thus minimizing network capacity constraints and
management requirements.

As a result of the growing demand for
high-bandwidth applications, such as Internet and Intranet
access, service providers are migrating from existing
circuit-based networks to packet-based networks. In doing so,

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they are creating new service offerings over
private managed networks and public networks using new
technologies, such as Quality of Service and firewalls, to
ensure speed, quality and security.


Deployment of packet-based networks and
widespread access is enabling companies to realize tremendous
productivity gains due to increased collaboration, internal
communication and sharing of resources. Examples of specific
benefits include company-wide e-mail capabilities, company-wide
access to files and applications that run on a corporate server
and ease of access for remote workers.

Enterprise
Voice Networks

Enterprise telephony systems are generally based
on a circuit-based architecture and telephone equipment known as
private branch exchanges. Given the mission critical nature of
voice communications and related applications, enterprise voice
systems have been architected with numerous built-in fault
tolerant and redundancy features and are designed to deliver
99.999% up-time reliability. In addition to delivering reliable
voice service, PBXs have the capability to serve as the platform
for more than 500 critical voice features and applications,
including:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | voicemail                                                                                             
|
| |  | unified messaging that creates a single interface
    for accessing voicemail, e-mail and fax messages
|
| |  | automatic call distribution                                                                           
|
| |  | auto-attendant                                                                                        
|
| |  | directories                                                                                           
|
| |  | call accounting and/or billing                                                                        
|
| |  | least-cost routing                                                                                    
|
| |  | interactive voice response                                                                            

The PBX is also responsible for delivering
features and capabilities such as:



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | phone numbering plans                                      
|
| |  | 3 or 4 digit internal dialing                              
|
| |  | call transferring, conferencing, holding and
    forwarding
|
| |  | receptionist call screening                                

Despite the reliability and functionality of
centralized circuit-based voice networks, the features,
applications and inter-connectivity of traditional PBX systems
and their switch-specific architectures make it difficult to
integrate them with other systems and applications. Furthermore,
they are not typically cost-effectively networked or extended to
outlying and/or smaller offices and teleworkers. A number of
factors have created this deficiency. PBX-based telephone
systems are bandwidth constrained making them poor at
networking, not easily integrated with other traffic types, such
as data and video, and the quality of their voice transmission
degrades beyond a limited distance. In addition, the high cost
associated with deploying a PBX system and its supported voice
applications typically makes them prohibitively expensive for
smaller locations. Accordingly, companies seeking to extend
voice services to outlying locations and/or incorporate new
applications have traditionally had the following voice options,
all of which have significant limitations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Key Systems.KTS
    systems have functionality similar to PBXs but have been
    cost-effectively architected to service small office
    environments. They lack the full feature set and scalability of
    more expensive PBX-based telephone systems. KTS systems have
    limited interoperability with PBX systems, and consequently
    function as stand-alone voice systems with separate voice
    applications. This creates a less than professional image due to
    dissimilar functionalities, inefficiencies and network
    management complexities in a multi-office environment. More
    recently, KTS systems have been enhanced with multi-site
    networking to enable their residing within a network
    configuration either with

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | other like KTS systems or same vendor PBXs.
    However, typically the transparent access to the full range of
    applications is not facilitated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | IP PBXs.Recently
    introduced voice switches from voice and data networking
    vendors, such as LAN and Windows NT-server based PBXs, are based
    on data standards and tend to be more open than traditional PBX
    systems. Although providing new alternatives for medium to
    smaller locations, they lack the full feature set of the
    traditional PBXs, have limited ability to network with the
    proprietary, circuit-switched PBXs, limit business reach either
    to a LAN or nextgen network environment and provide less than
    the 99.999% service availability typically expected by the
    customer. In addition, IP based solutions require the use of IP
    phones. These are typically less reliable, less feature rich and
    more expensive than traditional phone sets. Although
    improvements are being made, most IP based solutions continue to
    fall short of business expectations.
|
| |  | Centrex.Centrex is
    a business telephone service that is offered by local telephone
    companies from their central offices. While Centrex offers some
    of the same features as PBXs, its effectiveness is constrained
    by phone companies capacity, its lack of interoperability
    with PBXs, its geographic limitations and its reliance upon the
    local phone company for service and support. Adding new services
    for a Centrex provider is time consuming, expensive, cumbersome
    and provisioning complexity can often prohibit customer
    acceptance.                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Off-Premises
    Extension.An Off-Premises Extension
    is a dedicated telephone line that originates from a PBX and
    extends a subset of PBX features and applications to remote
    users. These offerings cannot support digital telephone sets,
    and require an expensive dedicated leased line or private
    network connection.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

The inability of these solutions to fully
integrate with the PBX has caused businesses to deploy separate
voice networks for their outlying offices, limiting the
effectiveness of company communications and increasing the
burden on systems administrators. In addition, companies seeking
to provide business telephony for their teleworking employees
arent provided cost-effective, full-features solutions.

Enterprise
Voice Evolution

As business organizations decentralize,
distributed networks are becoming increasingly important. While
data networks have evolved to meet this critical business
requirement, there is a similar need for a suitable voice
solution that cost-effectively utilizes the companys voice
systems, its features and its applications to offer company-wide
voice applications to all employees. This includes employees at
smaller outlying offices, telecommuters and mobile workers.
Furthermore, in order to lower costs and simplify network
administration, companies are increasingly demanding that
distributed voice and data services be offered over the same
centrally-managed communications infrastructure. This
convergence of voice and data is made possible by technology
that can convert voice transmissions into packets of data and
advances in Quality of Service which enable the transmission of
voice over private managed data networks and public data
networks, such as managed IP networks.

As a result of their reliability, the wide
variety of applications supported and the size of their
installed base, proprietary, circuit-switched PBXs are pervasive
in the enterprise arena and are likely to remain entrenched as
the central system delivering enterprise voice on which new
applications are developed and deployed for many years to come.
However, businesses are looking to IP-enable their present
systems to support taking advantage of their data networks and
lower communications costs as well as to take advantage of
emerging access networks in support of an increasingly virtual
workforce. Most PBX and Key System manufacturers are IP enabling
their systems through IP trunk cards in order to provide
multi-site connectivity. Some vendors are developing converged
systems which support both TDM and IP backplanes.

However, this only addresses inter node
connectivity and doesnt address emerging access networks
and/or line side applications. To address these, a solution is
required that packetizes both the voice traffic and PBX
signaling information. Given that each PBX system has its own
signaling information alogorithims which must be used to deliver
features and applications to the user via the corresponding
handset, solutions for the

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sizeable installed base must support the breadth
of diverse signaling protocols. They must also offer a
centrally-managed interface to the main system and have the
capability of packetizing and transmitting voice and signaling
information over both traditional circuit-based voice and data
networks as well as emerging wired and wireless packet networks.


IP PBX vendors are experiencing introductory
success in targeting the smaller PBX and/or KTS environment and
smaller scale enterprise networks. However, vendors have found a
key barrier to acceptance is the inability to interoperate with
legacy environments. To address this need a solution must enable
an enterprise to leverage its existing applications and
interoperate with legacy switches and desksets while
incorporating new IP switches. This provides a company an
affordable migration path.

In taking a closer look at the enterprise
telephony application environment, applications traditionally
have sat behind the PBX and were historically switch-specific,
in that they did not operate with other PBX vendor protocols.
Over the last few years, applications have become open and sit
behind a LAN or managed Intranet. On a smaller degree, this
openness has allowed some applications to move out of the
enterprise and into a hosted model. Solutions which
support both Customer Premise Equipment (CPE) and
network based applications provide another example of enabling
an enterprise to have choices for their migration path.

Over the next five to ten years, co-existence, in
the form of hybrid or converged solutions, will likely prevail.
This will allow an enterprise to leverage their existing
infrastructures while having flexible choices for experiencing
new solutions. Resulting solutions will support new platforms
inter working with legacy switches and applications, support
legacy and IP voice terminals, support feature richness through
digital line interfaces to preserve the user experience, as well
as support CPE and service providers network environments.

MCK Enables the Distributed
Enterprise

MCK is a player in this enterprise voice
transformation because of our unique physical position in the
network. Our systems connect to the PBX, KTS and/or IP-based
system, speaking their protocols (the systems signaling
language), and also connect to the network, speaking traditional
or nextgen IP protocols. In doing so, MCK enriches a line side
voice network while laying a solid foundation for the future by
minimizing the impact of changing technology, bridging gaps and
allowing enterprises to evolve their voice capabilities via the
path of their choice.

MCK solutions address the access or line side of
the enterprise voice environment. MCKs solutions support
the majority of PBX and KTS systems in the industry. By
packetizing both the voice traffic and CPE signaling
information, MCKs products deliver full-featured business
telephony and applications to an end user via a range of devices
 each of which are enabled to function as digital sets.
MCKs products also offer a centrally-managed interface to
the main system and have the capability of packetizing and
transmitting voice and signaling information over both
traditional circuit-based voice and data networks as well as
emerging wired and wireless packet networks. This enables end
users to access their companys voice system from
anywhere  outlying offices, home offices, temporary
offices and while on the road  while preserving the
experience they have come to expect. This experience includes:
four digit dialing, calling party display, call
waiting/holding/forwarding/transfer/conferencing, telephony
applications, etc. over any network and thru any telephony
enabled device  whether wired, cordless or wireless.

Supporting the broadest range of protocols,
networks and devices, MCK solutions fulfill the market need for
widespread interoperability, creating a more open
enterprise by enabling business quality voice anytime, anywhere,
over any network. Our solutions support Alcatel, Avaya (Definity
and MAGIX), Ericsson (MD110 and BP250), Iwatsu (ADIX), NEC
(NEAX, Elite), Nitsuko (I-series), Nortel (Meridian and
Norstar), Panasonic (DBS) and Toshiba (Strata DK),
representing nearly 85% of the U.S. installed PBX and KTS base.
They also provide users choices in access networks (e.g.,
analog, IP, ISDN, T1, E1, Frame Relay, cellular, ATM or
broadband wireless) and devices (e.g., analog, digital,
cordless, mobile or IP phones). With the business appeal of an
appearance of one that is seamlessly connected in a
virtual community, an enterprise becomes a unified company for
its employees and callers.

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In addition, MCK products have the benefit of
reducing the total cost of ownership by enabling a company to:
leverage their existing investments in voice and data equipment;
eliminate voice network charges for traffic between offices by
utilizing data networks in a toll bypass situation; streamline
network administration through the utilization of industry
standard network management techniques; simplify training and
provide enterprises the flexibility of choosing their migration
path for when and how they evolve to nextgen services, systems,
features and applications.

When many companies talk about convergence, they
refer to voice and data and/or voice over IP. At MCK, were
committed to a more open enterprise by delivering convergence
along three dimensions. We:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Extend enterprise voice to distant locations
    through voice over a variety of networks, not just IP, creating
    an appearance of one company-wide system meeting the telephony
    needs of:



| |   |                          
| | - | -------------------------
| |  | Mobile workers           
|
| |  | Employees working at home
|
| |  | Branch office workers    
|
| |  | Remote call center agents



| |   |                                  
| | - | ---------------------------------
| |  | Bundle with service providers to:



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | Unite CPE and network services to deliver new
    value added PBX extension services                      
|
| |  | Blend PSTN and wireless networks for greater
    portability while eliminating infrastructure restrictions



| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bridge technology gaps between existing and
    nextgen applications, switches and services to enable company
    managed migration from legacy to nextgen systems.

Key to enabling this power of convergence is the
ability to preserve end user interfaces while providing access
to the widest array of new experiences. The following are the
key attributes of our solution:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Full-Featured Remote Voice
    Access.Our solutions provide the
    features and applications of enterprise telephone systems to
    employees at outlying offices, which may be local or
    geographically dispersed, home workers and mobile workers over
    wired or wireless, circuit or packet networks. Our solutions
    allow these distributed workers to utilize voice switch features
    such as 3 or 4 digit internal dialing, call hold, transfer and
    conference. They also give employees access to company chosen
    telephony applications such as voicemail, unified messaging,
    auto attendant, directories and automated call distribution.
    Extending these voice applications to outlying or mobile
    employees improves business reach by making them closer to
    customers, partners and suppliers, increases employee
    productivity, facilitates internal collaboration and delivers to
    external callers transparent access to all telephone extensions
    throughout an enterprise.
|
| | Digital Line Extension
    Technology.The features and
    applications of the voice switch reside on its digital line or
    user side. We have developed proprietary software and hardware
    interfaces that extract the voice and voice system signaling
    information from the user side of the switch. Our switch-side or
    gateway products then packetize and transmit this information to
    client-side or remote products over existing voice or data
    networks. Utilizing this captured information, our products
    mimic the digital line side of the PBX, thereby transparently
    connecting the users digital telephone set to the main
    voice system. Based on the protocol expertise and intellectual
    property we developed over the past decade, our products enable
    companies to deploy effective extended voice solutions without
    significant reconfigurations or upgrades to their existing
    enterprise voice systems.                                                           
|
| | Similarly, our products enable employees at
    satellite or branch offices, home workers and mobile employees
    to use their digital telephone sets and existing user interfaces
    to seamlessly connect with their companys voice system.
    Using our digital line extension technology, we are also working
    with a number of companies to enable digital telephone sets to
    interface with next generation corporate voice systems such as
    IP-PBXs and network-based voice systems and applications. This
    digital line extension                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | technology also enables us to terminate multiple
    types of telephone sets, including a variety of third-party
    digital telephone sets, analog telephone sets, cordless sets and
    IP-based telephone sets, off traditional and/or nextgen voice
    systems using MCK gateway products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Packet Voice
    Architecture.Our extensive experience
    in packetizing voice, voice signaling information and voice
    applications enables us to deliver a complete distributed voice
    solution over traditional circuit-based, packet-based and
    wireless networks. Over the last year, we began expanding our
    original proprietary Remote Voice Protocol (RVP)
    software platform to include a Common Terminal Protocol, Common
    Network Protocol and Common Switch Protocol. Using these, we
    packetize, compress, encode, transmit and decode voice,
    interfacing with a broad range of switches, to a diverse range
    of devices over a range of networks, providing enterprises and
    services providers broad business reach alternatives. Networks
    supported include asynchronous transfer mode, or
    (ATM), digital subscriber line, or DSL, fiber, frame
    relay, IP, integrated services digital network, or
    (ISDN), leased line, T-1, fractional T-1 and PSTN.
    Additionally, during the past year, we have evolved RVP to
    support cellular and broadband wireless enabling increased
    access portability and eliminating infrastructure restrictions.
    Our support of this broad range of signaling protocols creates a
    more open enterprise by providing enterprises migration
    alternatives.
|
| | We are evolving this technology to enable
    enterprises to incorporate new IP switches which interoperate
    with legacy switches, desksets and applications. This includes
    adding support for GR-303, H.323, SIP and MGCP which enable our
    products to interface with nextgen voice equipment located in
    either the enterprise or the network infrastructure or service
    providers. Our products packetize voice using industry standard
    compression algorithmns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | Lower Cost Solution.Our products provide a cost-effective solution, lowering costs
    in the following areas:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Transmission.Our
    products lower transmission costs by consolidating voice and
    data traffic over a single network, eliminating local loop
    service charges through toll bypass and enabling remote users to
    utilize volume-based, corporate long distance rates.                                                                                                                                                                                            
|
| |  | Management.Our
    products provide telecom managers the ability to centrally
    manage our remote devices using Telnet, hypertext mark-up
    language (HTML), and simple network management
    protocol (SNMP), with graphical user interfaces. Our
    customers can use these remote monitoring and diagnostic
    capabilities to solve problems on-line, thereby reducing the
    time and cost associated with dispatching a technician to a
    remote site.
|
| |  | Equipment.Our
    products enable companies to utilize their existing capital
    investment in enterprise voice systems, voice applications and
    data networks, thereby eliminating the need to expend
    significant additional capital on disparate, incompatible
    solutions such as KTS systems.                                                                                                                                                               
|
| |  | Facilities.Our
    products allow companies to reduce physical facility costs and
    infrastructure investments by enabling employees to work
    effectively outside of standard company locations.                                                                                                                                                                                                                                                                     



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Compatibility with Leading voice switch
    manufacturers.We have worked with
    Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko, Nortel,
    Panasonic and Toshiba to develop interfaces between our software
    platform and their primary voice communications systems. These
    manufacturers have tested and validated in their labs that our
    platform is interoperable with their primary switching products,
    including 4400/4200 (Alcatel), DEFINITY and MAGIX (Avaya),
    MD110/ BP250 (Ericsson), ADIX (Iwatsu), NEAX 1000/2000/2400
    (NEC), 1-Series (Nitsuko), Meridian and, Norstar (Nortel), DBS
    (Panasonic) and Strata DK (Toshiba) equipment.

Strategy

Overall, our strategy is to balance our need to
focus on todays revenue with the opportunity to be a
leader in nextgen enviornments. Our marketing, sales and service
delivery strategy is to partner with leading companies to
deliver solutions for enterprise customers. Our network of
partners include distributors, resellers,

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equipment providers, system integrators and
service providers. We will occasionally deal with an end-user on
a direct basis. During the fiscal year ended April 30, 2002, the
reduction in capital spending decreased the demand for our
products with these partners and subsequently our revenues.
Experiencing this reduction, we reevaluated our distribution
model and shifted to a territory sales model, enabling us to
deepen our relationships with our large channel partners while
transitioning our smaller partners to them for support. We
worked with these partners to closely map sell-in and
sell-through, enabling tighter channel inventory management.
During the year, we strengthened our channel contribution blend
thereby decreasing our dependency on any one segment as well as
capitalized on the value of our new products, and strengthened
the mix of products our channel partners offered to customers.
We continue to encourage distribution efforts on Fortune 5000
companies as we believe distributed voice networks are
particularly beneficial in this market. However, since many of
these companies significantly reduced their capital spending,
enterprise voice experienced greater growth in the arena
typically addressed by KTS placement. As such, during the last
year, we established relationships with KTS providers and have
refined our development, marketing and sales efforts to also
address the telephony requirements of medium and small
businesses.


Our product strategy is to create a more open
enterprise by being a leading provider of distributed voice
solutions that enable businesses to unleash the power of their
enterprise by connecting disparate voice systems and networks.
Historically, our business-quality remote voice solutions
allowed corporations to extend the features and applications of
switch-specific, circuit-based PBXs across distances to branch
offices, remote call centers, and teleworkers using circuit
networks. We have evolved this capability to work with the
majority of enterprise voice systems  PBX, KTS and IP
based systems, through our Common Switch Protocol; a diverse
range of devices  digital, analog, cordless and
cellular, through our Common Terminal Protocol; as well as
circuit, packet and wireless networks, through our Common
Network Protocol. Utilizing these we cost effectively develop
products which meet the needs of growing segments within
enterprise voice environments.

During the fiscal year ended April 30, 2002,
we introduced new members of the PBXgateway  family. In
addition to our traditional MCK EXTender PBXgateway,
we introduced: the MobileConneX PBXgateway to provide
portable business telephony for employees on the go:
the RemoteConneX PBXgateway with its associated
RemoteConneX Interactive Phone to enable portable business
telephony for teleworkers, and: the SetConneX
PBXgateway to foster a companys ease of evolving
their systems from traditional, circuit-based voice switches and
applications to nextgen switch, applications and devices.
Additionally, we entered customer trials on the MCK
EXTender 7000 for Branch Offices.

During the fiscal year ended April 30, 2002,
we also enhanced our embedded gateway product line by increasing
the number of protocols supported, enabling expanded
distribution possibilities in Europe and Asia. We strengthened
our commitment to the wireless arena by developing an embedded
gateway for a leading wireless communications CPE provider,
enabling full digital set functionality for their intra facility
wireless equipment.

We will continue to evolve our products. The
strategy for our single-user solutions is to continue emphasis
on simplicity, lower cost and expanding the range of devices
supported with emphasis on wireless. Our multi-user products
will continue to meet the needs of smaller offices, embracing
the broadest range of networks, including the emerging local and
wide area wireless networks, while incorporating expanded ranges
of local dialing and survivability. Our bridge the gap solutions
break down the closed system environments found in todays
enterprise voice infrastructures by hooking protocols together
thereby enabling disparate systems to interoperate. Examples
include enabling KTS systems to work within legacy PBX networks
and/or with IP switches, or enabling IP switches to work with
the installed based of digital sets and/or legacy voice
networks. These solutions will be developed when requested by
specific OEM partners.

As the voice infrastructure evolves over the next
five to ten years, we believe that legacy and nextgen systems
will co-exist. However, in time, we believe that the
switch-specific, circuit-switched PBX will begin to be replaced
with nextgen IP-based CPE or network-hosted voice solutions
located on the network outside of the companys premise.
Concurrently, we envision associated voice applications
migrating from a switch-specific, customer-owned model to a
standards-based model either managed by the customer or hosted
by service providers.

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As MCKs distributed voice solutions
continue to enable more openness and push control out to the
edge of the network, endusers will gain access to full business
functionality from any edge device by simply dialing into a
gateway and passing authentication. Over time, users will be
provided a range of applications and services from which to
choose their own defined experience. Ultimately we believe in
voice communications enabled via an infrastructure accessible as
easily as todays electric power yet tapped into on an
individuals own terms.

Technology

We have developed expertise in digital line
interface emulation and the packetization of voice for
transmission over data networks to address the technology
challenges of extending the features and applications of
enterprise voice systems to distributed locations as well as
enable a more open enterprise. Another key component
of our technological advantage is the flexible software and
hardware architecture upon which we build our solutions. We will
continue to prudently invest to maintain and extend our
technological advantage.

Digital
Line Extension Technology

The rich features and applications of enterprise
voice systems are accessed through the proprietary user or
digital line side of the voice switch. These line-side
interfaces enable the delivery of the features and applications
of enterprise voice systems to digital telephone sets. As a
result of our years of experience in working with major PBX
voice equipment, we have gained a significant understanding of
these line-side interfaces and have developed line-side software
interfaces to most of todays enterprise voice systems. In
addition to our software interfaces, we have developed a
hardware subsystem capable of duplicating the electrical
interfaces of Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko,
Nortel, Panasonic and Toshiba systems. These line-side software
and hardware interfaces extract the voice and the signaling
information required to interface with PBX and KTS systems and,
using our software platform, packetize this voice and signaling
information for transmission over voice and data networks as
well as wired and wireless to our access products. We have
developed messaging software that transmits this voice and
signaling information from our access products to the digital
telephone sets of the manufacturers that we support, thereby
transparently connecting these sets to the PBX or KTS.

Delivery
of Packet Voice

To deliver voice over data networks, solutions
must convert voice into packet form and then transmit these
voice packets alongside data packets. Despite the advantages of
simultaneous transmission of voice and data, there are also a
number of technological challenges to delivering voice over data
networks because audio quality can be distorted by jitter and
latency associated with congestion on the data network.

Our uniquely designed software platform,
packetizes, compresses and encodes circuit voice and signaling
information for transmission over data networks. We have
implemented both industry standard and proprietary voice
prioritization and voice fragmentation techniques that use
bandwidth efficiently while also ensuring that delay sensitive
voice packets are delivered with the quality expected from
voice. Much of this technology revolves around our core
expertise in developing software that runs on standard digital
signal processors, which are required for encoding voice for
transmission over bandwidth constrained networks. In particular,
we have designed and implemented the following software features
in our products to improve the quality of packet voice
transmission, minimize system delay and jitter, and utilize
bandwidth efficiently:



| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Voice Compression.We integrate a number of industry standard voice coding
    algorithms, including G.711, G.726, G.729A and G.723.1, that
    compress voice to reduce the total bandwidth required for
    transmission.
|
| |  | Echo Cancellation.We deliver echoless voice by integrating industry standard
    acoustic echo cancellation technology, known as G.165 and G.168,
    to which we have made proprietary enhancements.                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Silence Detection.Our proprietary silence detection technology eliminates
    unnecessary transmission of voice packets during the periods of
    silence that occur in normal conversation, freeing bandwidth for
    other uses.                                                                                                                                                                             
|
| |  | Comfort Noise.We
    incorporate technology that inserts comfort noise during periods
    of silence so that users do not inadvertently think that the
    phone call is no longer active.                                                                                                                                                                                                                     
|
| |  | Jitter Buffering
    Techniques.Our products adapt to the
    real-time irregularities in network transmission and ensure all
    traffic reaches its endpoint at the appropriate time by
    introducing delay that is unrecognizable to the user.                                                                                                                                                            
|
| |  | Dual Tone Multi-Frequency or
    (DTMF) Processing
    Technology.Dual tone multi-frequency
    tones are generated by depressing buttons on digital telephone
    sets, enabling the digital telephone set to recognize dialed
    numbers used for outbound calls and for applications such as
    voicemail. Our proprietary technology improves the transmission
    of these tones over packet networks.

We have significant experience in transmitting
packet voice over both low-speed, traditional telephone networks
and higher speed, broadband networks. We have developed network
interfaces for the delivery of distributed voice over
traditional telephone, ISDN, wireless and broadband connections
and have incorporated third-party network devices to support
T-1, fractional T-1, leased line, frame relay, IP, ATM, DSL,
fiber, cable and broadband wireless networks. In addition, to
deliver data alongside our packet voice transmission, we have
expertise in terminating dial-up networking connections and
bridging standard data traffic.

Our software platform has the ability to extract
and translate legacy, switch-specific signaling, as well as a
number of evolving industry standard protocols, such as GR-303,
H.323, SIP and MGCP. This enables our products to not only
interface with the large and diverse installed base of voice
systems but with next generation enterprise voice systems and
applications as well as terminate analog, ADSI, digital and
IP-based telephone sets. Supporting both legacy and nextgen
protocols enable our products to foster an open enterprise
interfacing with voice CPE as well as voice equipment and
applications located in the network infrastructure of
traditional, application and nextgen service providers.

Product
Architecture

We develop our products using a combination of
proprietary and commercial hardware and software subsystems. Our
product architecture enables these subsystems to be configured
and adapted in order to deliver a broad range of enterprise
voice product solutions, thereby minimizing product development
cycles and maximizing manufacturing efficiency. Our products are
fully compatible with the large installed base of telephone
systems from Alcatel, Avaya, Ericsson, Iwatsu, NEC, Nitsuko,
Nortel, Panasonic and Toshiba, and require no design
modifications or upgrades to these systems or their respective
digital telephone sets.

We have designed a standard hardware architecture
that serves as a common platform for our software modules. We
use industry standard digital signal processors and programmable
logic devices to build a standard hardware platform that can be
software modified to support different applications or telephone
systems without requiring a hardware change. We have also
architected our products with a variety of standard telephony
and data network interfaces to ensure that we can transmit
packet voice over the multiple network environments currently
available.

All of our products share a common software
library of functional modules that comprise our digital line
interface software subsystem and our software platform. Our
digital line interface software subsystem is responsible for the
interface to the proprietary software located on the digital
line of the legacy and IP-based voice switch. This software
subsystem has been designed to emulate a majority of the
business markets telephone systems without requiring a
change to our hardware architecture. This flexible software
architecture also enables us to easily add software support for
new enterprise voice systems. The software platform is
responsible for packetizing voice and signaling information, as
well as conditioning these voice packets for transmission over
data networks.

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All the software for our IP EXTender 4000,
EXTender 6000, EXTender 7000 for branch offices and PBXgateway
family runs on the VxWorks® real-time operating system from
Wind River Systems. This industry standard operating system
provides our engineers with a standard development environment
in which to design new proprietary software applications and
easily incorporate third-party software applications. A standard
development environment such as VxWorks allows for the rapid
prototyping and application development necessary for our
products that serve as platforms for future applications.

Products

We have worked with Alcatel, Avaya, Ericsson,
Iwatsu, NEC, Nitsuko, Nortel, Panasonic and Toshiba to develop
interfaces between the protocols of these leading enterprise
voice vendors and our standard software platform and hardware
architecture. We reverse engineer or enter into agreements with
leading vendors which provide us access to their protocols, if
needed to develop, manufacture and sell products which interface
with each vendors equipment. As a result, we have
developed substantial expertise in understanding and interfacing
with their systems. We have tested and validated or had vendors
certify in their own labs that our software platform is
interoperable with a variety of their equipment. Currently, our
products are compatible with the following PBX systems:
4400/4200 (Alcatel); DEFINITY and MAGIX (Avaya); MD110/ BP250
(Ericsson); ADIX (Iwatsu); NEAX and Elite (NEC); 1-Series
(Nitsuko); Meridian and Norstar (Nortel); DBS (Panasonic); and
Strata DK (Toshiba).

The MCK solution consists of the following
component parts:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gateways.Devices
    located near the voice switch, PBX or KTS, that extend the
    signaling along with the voice traffic and applications to our
    remotely located client devices; and
|
| |  | Clients.Single or
    multi-user remotely based, CPE devices that service
    outlying offices, teleworkers and mobile workers.                                                            

Our products enables companies to provide the
functionality of enterprise voice systems and all of their
supported applications to users who traditionally have not had
access to the companys telephone system and its voice
applications because of the limitations of traditional systems.
Our products enable the main telephone system to act as a server
that distributes features and applications any and all locations
over networks such as ATM, DSL, cable, fiber, frame relay, IP,
PSTN, ISDN, leased line, T-1, fractional T-1, cellular and
broadband wireless connections. Employees can utilize digital
telephone sets identical to the sets deployed at company
headquarters or cell phones, analog sets or ADSI sets provided
by third parties and access the central voice system for
applications such as voicemail, automated call distribution,
auto attendant, directories and interactive voice response, and
features such as 3 or 4 digit internal dialing,
conferencing and call forwarding. By enabling all employees,
regardless of location, to have access to a company-wide system,
our solutions create a unified voice network.

PBXgatewayTMProducts

Our family of PBXgateway products, located at the
companys PBX/ KTS site, interface with the line side of
the switch and create extensions of voice and telephony
applications to our clients or remotes.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | PBXgatewayTMII.The PBXgateway II supports up to 24 simultaneous users
    connected via both our multi-user and single-user EXTender
    client devices. The PBXgatewayTM II will
    transmit voice over a wide variety of data networks including
    ATM, DSL, fiber, frame relay, IP, ISDN, leased line, T-1 and
    fractional T-1 connections. It also has available internal
    network termination optionals.
|
| |  | PBXgatewayTM.
    The PBXgateway supports our multi-user and IP-based single user
    EXTender client devices and is available in both 8 and
    12 port versions. Like the PBXgateway II, the
    PBXgateway will transmit voice over a wide variety of data
    networks including ATM, DSL, fiber, frame relay, IP, ISDN,
    leased line, T-1 and fractional T-1 connections.                                     
|
| |  | MobileConneX
    PBXGatewayTM.
    The MobileConneX PBXgateway allows a cellular handset to act as
    a fully functioning digital handset. Using a cellular handset, a
    user can send and receive calls through                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | the PBX as well as access all of the
    companys voice applications  even when the user
    is on the road. This enables a user to handle a call just as if
    they were sitting at their desk in the office. This includes
    call hold, transfer, conferencing, 4-digit dialing, auto
    attendant, directories as well as receiving calls via the
    cellular handset. This ability to receive calls is more powerful
    than a find me capability since the PBX treats the
    cell phone as if it were a digital deskset. The MobileConnex
    PBXgateway bridges the call traffic directly to the cellular
    handset through the enterprise voice switch. For instance, if
    there is no answer, the voice mail system responds giving the
    user the convenience of one voice mailbox to check. This
    solution requires no modification to standard cell or service
    equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | RemoteConneXTMPBXGatewayTM.
    Targeted specifically to the needs of casual teleworkers and
    tapping the power of the traditional corporate communications
    system much like the MCK EXTender solutions, the RemoteConneX
    PBXgateway and its associated Interactive Phone uniquely
    utilizes standard POTS connections and feature-enhanced analog
    phones to provide PBX or KTS system functionality. In doing so,
    MCK is able to offer one of the lowest price points in the
    industry for true PBX functionality over analog. Using the
    product is easy. A first time user simply brings a RemoteConneX
    Phone home, plugs it into their existing analog connection, and
    after following simple first time use instructions to program
    the phone, they will have the same functionality as available in
    their office. Access to popular business telephony features are
    provided through the use of the screenphone menu 
    call hold, transfer and conference, four digit internal dialing,
    corporate directories, voice mail and more. Each of these are
    useable at the touch of a button. Incoming calls to the
    employees office phone number are simultaneously directed
    to their RemoteConneX Phone. An employees daily work
    location is transparent to callers, auto attendant support is
    maintained if available and unanswered calls continue to be
    routed to the corporate voicemail system. In addition, the
    employee has the added convenience of full accessibility when
    away from home by simply redirecting incoming calls to their
    cellular phone.
|
| |  | SetConneXTMPBXgatewayTM:Targeted for enterprises which desire manageable migration paths
    linking together heterogenous environments this gateway is
    initially targeted for enterprises looking to link their
    IP-based switches with legacy sets. This is the only gateway in
    the industry that bridges the gaps between legacy sets and next
    generation switches, applications and services. Other versions
    may be developed based upon the specific requirements of OEM
    partners.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

All of our Gateways can be centrally administered
over a Telnet connection, an in-band RVP connection, or with
SNMP and HTML interfaces.

PBX
Client Devices

Our multi-user or branch office products connect
outlying users to the companys telephone system over voice
and/or data networks.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MCK
    EXTenderTM6000 for branch offices. EXTender 6000 for branch offices
    is a multi-user product that is available in both 8 and
    12 port configurations and is designed for those offices
    within the same calling area as the companys voice switch.
    The EXTender 6000 for branch offices located at the remote
    office connects to our PBXgateway I and II products located
    at the companys PBX site. The product has dual external
    network interfaces that allow for multiple connection options
    over a wide variety of data networks including ATM, DSL, fiber,
    frame relay, IP, ISDN, leased line, T-1, fractional T-1 and
    broadband wireless connections. It also provides redundancy
    capability. An optional analog card is also available, which
    provides local dialing capabilities and emergency 911
    access. The EXTender 6000 for branch offices can be centrally
    administered over a Telnet connection, an in-band RVP
    connection, or with SNMP or HTML interfaces. The products
    ability to dynamically allocate bandwidth between multiple users
    allows for flexible configurations and bandwidth conservation.
    The product is designed using a standard 19-inch, rack-mountable
    form factor so multiple units can be deployed in parallel to
    service larger outlying offices.
|
| |  | MCK
    EXTenderTM7000 for branch offices.EXTender 7000
    for branch offices is a multi-user product that is designed for
    branch offices which are more geographically dispersed and/or
    larger. The                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | EXTender 7000 provides additional local calling
    ability, survivability, and optional built in WAN interfaces. It
    is available in a 24 port configuration and also connect to
    our PBXgateway II product located at a companys PBX
    site over a wide variety of networks. As with the EXTender 6000,
    the EXTender 7000 can be centrally administered over a Telnet
    connection, an in-band connection or with SNMP or HTML
    interfaces. It also uses a standard 19-inch, rack-mountable form
    factor so multiple units can be deployed in parallel for
    scalability.
|
| |  | Single-user
    products.Our EXTender single-user
    product line enables teleworkers and geographically distributed
    call center agents to connect to the companys main
    telephone system and data network via a PBXgateway over public
    and private networks.                                                                                                                                                                                                                                                                                                                        



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MCK
    EXTenderTM1000.The EXTender 1000 supports
    both voice and data over a single POTS telephone line. The
    product contains a built-in, industry-standard 56 kilobits
    per second, or Kbps, modem which enables the user to access the
    corporate data network and supports standard Windows-based,
    dial-up networking technology. The remote users personal
    computer and full-featured digital telephone set plug into the
    product, which terminates and multiplexes voice and data over a
    single telephone line. The EXTender 1000 unit is situated
    at the remote location and connects to either another
    EXTender 1000 unit located at the companys PBX site.
|
| |  | MCK
    EXTenderTM3000.The EXTender 3000 supports
    both voice and data over an ISDN connection. An integrated
    services digital network connection is composed of two
    64 Kbps channels that each can deliver a separate network
    connection. With its built-in network interface, the
    EXTender 3000 enables the remote user to connect a digital
    telephone set and a personal computer into the
    EXTender 3000. The EXTender 3000 unit situated at the
    remote location is connected to either another
    EXTender 3000 unit or a PBXgateway II located at the
    companys PBX site. There are two versions of the
    EXTender 3000:                                       
|
| |  | MCK
    EXTenderTM3000 S/T.The EXTender 3000S/T
    utilizes a serial data connection and offer simultaneous voice
    and data multiplexed over a single channel. The second channel
    is available for analog devices such as a fax, additional phone
    or a modem. It incorporates a standard Windows-based, dial-up
    networking technology to enable the user to set up a dial-up
    network connection to a remote access server.                                                                                                                                                                                                                                                            
|
| |  | MCK
    EXTenderTM3000 E.The EXTender 3000E
    offers dedicated voice over one channel and a 64 Kbps
    Ethernet data connection on the second channel. The
    EXTender 3000E uses an Ethernet port and bridging
    technology to enable simultaneous voice and data network access
    capabilities. In addition, standard hardware compression
    technology is utilized to significantly enhance data throughput.
    When not used for Ethernet data, the second channel is available
    as an analog port, supporting a fax, additional phone or modem.                                                                                                                                        
|
| |  | MCK
    EXTenderTM4000.The EXTender 4000 delivers
    voice extension over any IP network. The product sits
    behind an external network termination device and delivers
    IP-based voice over data networks. The IP EXTender 4000
    connects to a PBXgateway product located at the corporate site.                                                                                                                                                                                                                                                                                                                                                                                                

Other
Products



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Recording Interface.Our Recording Interface products convert digital voice from
    proprietary PBXs into a standard audio output so that voice
    calls can be recorded on any voice logger or recording device.
    They are used in a variety of applications such as call center,
    contact center, voice security and test verification
    applications. We offer 3 configurations that support from 2
    to 48 lines, and are modular in nature, allowing for easy
    expansion to accommodate more users. Our Recording Interface is
    compatible with the following voice systems: 4400/4200
    (Alcatel); DEFINITY (Avaya); ADIX (Iwatsu); Meridian (Nortel);
    Norstar (Nortel); DMS Centrex (Nortel); CallCenter (Aspect);
    NEAX (NEC); and HiCom (Siemens).

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Sales and Marketing

We primarily sell our products through an
indirect distribution system that includes the following
channels: OEMs, Teleco resellers, systems integrators,
distributors, telecom and datacom VARs, and service providers.
We support our sales channels with our own internal sales
professionals as well as marketing programs, lead generation,
educational programs, field technical support and telephone
technical support. Our multi-channel strategy enables us to
create end user demand for our products and services, and access
corporate opportunities identified by our channel partners,
while also allowing the enterprise customers to choose the
reseller that is most appropriate for delivering those products
and services to them. Our primary distribution channels include:

|                                     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|OEMs                                 |  | Alcatel, Ascom, Avaya, Verint (formerly
    Comverse), Dictaphone, Ericsson, Iwatsu, NEC, Nice, Nitsuko,
    Nortel, Panasonic, Toshiba                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|Teleco Resellers                     |  | Ameritech/ SBC and Southwestern Bell, Bell
    Canada, Bell Mobility, Bellsouth Cingular, GoBeam, Nextel,
    Sprint, Verizon/ GTE, Verizon Wireless, Telus                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Systems Integrators and Distributors |  | Anixter, Calayst, Dacon, GBH, Graybar Electronic,
    Optus, NextiraONE, Sprint North Supply, VodaOne                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Value Added Resellers                |  | 1Nation Technology, Affiliated Telephony, Aliant
    Systems, Alliance Telecom, All-Mode Communications, All-Tel
    Communications, Cartel Communications, Communications Resources,
    Computel Communications, Datapulse PLC, Digital Techniques Asia,
    Doe Technologies, Dynametric, Dyncorp Information Systems, IPC
    Information Systems, Newsouth Communications, Northwest
    Extension, PB Exchange, Ranger Telephone and Data Services,
    Ronco, Shared Technologies, Sound Communications, Staples
    Communications, Symon Communications, Tantacom Systems,
    TeleSwitch

During the fiscal year ended April 30, 2002,
we transitioned to a territory coverage model and concentrated
our sales and support efforts on our OEM partners as well as our
national and international stocking distributor partners. As the
same time, we encouraged our smaller volume distributors,
dealers and VADs to continue offering MCK products by ordering
through these larger partners. This approach has enabled MCK to
gain resource efficiencies while at the same time strengthening
relationships with our primary partners by increasing their
revenue stream and sell-through for MCK products.

Our channel sales managers work at a corporate
level with our channel partners to develop sales and marketing
plans that are implemented at the field level. Our channel
managers are regionally deployed and are located in Boston,
Chicago, Dallas, Nashville, Phoenix, Calgary, Montreal and
London.

Channel sales managers provide support to the
channels in their geographic territory. They work closely with
our channel partners, participating in end user briefings,
proposals, product training sessions, end user seminars, trade
shows and other demand generating activities. In addition, they
are involved in generating and qualifying end user leads that
are closed in partnership with our channel partners.

Our field-based systems engineers provide our
channels with technical training and perform pre- and post-sale
technical support for our distribution partners and end user
customers. These sales engineers have in-

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depth industry experience and product expertise.
They assist our channel partners with proposals, configurations,
requests for quotations and executive briefings, and perform
other consultative duties. Our territory managers and sales
engineers regularly visit our distribution partners
offices and to conduct product and technical training.


Our distribution channels are responsible for
identifying potential business customers, selling our products
as part of complete solutions, and installing and supporting the
equipment at end user sites. We generally establish
relationships with our most significant distribution channels
through written distribution agreements that provide pricing,
discounts, and terms and conditions under which they may
purchase our products for resale. These agreements are generally
non-exclusive, may be terminated at will and do not prevent our
resellers from carrying competing lines. Many of these
agreements are based on attaining specific sales levels.
However, a number of our distribution partners resell our
products without written agreements, with terms determined on a
purchase order basis.

Sales outside of the United States accounted for
15.3%, 18.4% and 20% of sales in the fiscal years ended
April 30, 2000, 2001, and 2002, respectively. We sell
primarily products which interface with Alcatel, Avaya,
Ericsson, Nortel and Toshiba systems, globally.

We focus our marketing efforts on brand
awareness, lead generation, sales tools, promotions and sales
support activities. Our marketing audience includes existing and
prospective customers, channel partners, trade and business
press, industry analysts and others who are influential in the
industry.

We selectively participate in trade shows, taking
advantage of joint marketing opportunities with our channel
partners whenever possible. Trade show efforts may include shows
in the telecommunications, teleworking, CTI, networking, call
center and service provider industries. We participate in many
seminars, dealer and user group events, and industry-related
conferences with our channel partners. We use direct marketing
programs, including electronic methods, to generate awareness
and qualified leads. Most campaigns are executed in conjunction
with our channel partners, customized with their messages and
contact information and then mailed to their prospect and
customer lists. Additionally, our marketing resources also
support public relations activities, including joint press
releases with our partners, editorial coverage and speaking
opportunities, as well as create by-lined articles, product
reviews, customer success stories, competitive assessments and
white papers.

To support our sales channels, we prepare
training materials, presentations, collateral,
cost-justification tools, competitive analysis, case studies,
product configurations, fact sheets, product introduction kits
and customer solution success guides. Our web site serves as an
information source for end users, prospects and channel
partners, as well as provides a lead generation, configuration
tool, and customer service resource.

Customer Support

A high level of customer support and service is
critical to developing long-term relationships with our major
distribution channels and end user customers. The majority of
our service and support activities are related to installation
support and initial network configuration issues. In North
America, we also offer a variety of comprehensive and flexible
maintenance and support programs including basic product
warranty, installation services, 24 hour a day, seven days
a week remote telephone support and onsite maintenance services.
Our products are architected with support in mind. For example,
our products are engineered with remote monitoring, management
and diagnostic capabilities so that problems can be diagnosed
on-line, thereby reducing the time and costs associated with
dispatching a technician to a remote site.

A number of our distribution partners provide
customer support offerings for our products. These distribution
partners provide installation, onsite maintenance and telephone
support services to our end users. To complement this service
infrastructure, we have engaged Vital Network Services, an
outsourced technical support and customer services organization,
to provide fee-based telephone support, installation and onsite
maintenance services. We sell these services indirectly and
sometimes directly, to end users. To date, our revenues
attributable to customer service and support services have been
immaterial. We provide high-level, back-up technical support and
engineering assistance for our distribution partners, and Vital
Network

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Services. We have established certification and
escalation guidelines with our channel partners, and Vital
Network Services to ensure that the appropriate technical
resources and management attention within our company are
focused on problems that are not solved in a timeframe
commensurate with the problems priority. At April 30,
2002, we employed eight people in customer support.


Customers

We sell substantially all of our products through
independent channel partners. The following is a representative
list of our indirect channel partners who have repeatedly
purchased products from us during the fiscal year ending
April 30, 2002:

|                                                                                                                                                   |  |                                                                                                            |  |                                                                                                                                                    
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Alcatel
    Anixter
    ASCOM
    Avaya
    Badger Communications
    Bell Canada
    BellSouth
    Catalyst
    Cingular
    Dacon
    Dictaphone |  | Ericsson
    Frantel
    GBH
    GoBeam
    Iwatsu
    NEC
    Nextel
    Nitsuko
    Nortel
    Panasonic |  | SBC/Ameritech
    Sprint North Supply
    Sylantro
    Teleswitch
    Telus
    Toshiba
    Verint
    Verizon/GTE
    Verizon Wireless
    VodaOne

Through these channel partners, we continue to
target medium to large enterprises. More than 300,000 ports of
our products have been shipped to corporations such as 3M,
Alberta Energy Company, American Express, Avis, BancOne, Bank of
America, Bear Stearns, Bloomberg, Caisse Populaire, Canadian
Auto Association, Carlson Wagonlit, Continental Airlines,
Circuit City, CNN, Compaq, Deloitte and Touche, Fairmont Hotels,
Federal Bureau of Investigation, Fidelity Investments, General
Electric, Merrill Lynch, Morgan Stanley, Oracle, Pan Canadian,
Petro Canada, Pepsico, Promus Hotels, Prudential Securities,
Raytheon, TD Waterhouse Group, Thrifty Car Rental, United
Airlines, US Postal Service, Whirlpool and Xerox, among others.
We will work with our existing and new partners to increase the
market opportunity for, and drive market acceptance of, our
products. For the fiscal year ended April 30, 2002, no single
customer represented 10% or more of our revenues.

Research and Development

To maintain our technology leadership position,
we focus our research and development efforts on improving the
functionality and performance of our existing products and
designing new products that address customer needs and changes
in the marketplace. We have assembled a team of experienced
software and hardware engineers with capabilities in both voice
and data networking. Our engineering expertise includes a
significant understanding of:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | the digital line or user side of proprietary
    enterprise voice systems               
|
| |  | digital audio technology, such as echo
    cancellation and voice compression algorithms
|
| |  | voice enabling signaling                                                                
|
| |  | voice over packet networks including IP telephony                                       
|
| |  | data network and telephony interfaces                                                   
|
| |  | network diagnostic and management frameworks                                            

At April 30, 2002, we employed 30 people in
our engineering organization, and intend to continue to expand
all functional areas of the engineering organization as revenues
increase or market competitiveness demands. We perform research
and product development activities at our principal offices in
Needham, Massachusetts, and Calgary, Alberta development
facilities.

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Our research and development process is driven by
market demand. Product development begins with a comprehensive
functional product specification based on input from all
functional groups and levels within our company. In addition, we
value feedback from our end user customers and distribution
channel partners, and have incorporated a significant amount of
customer-requested functionality in our products. We utilize
information from industry standards committees organizations in
our product development process. Finally, we have maintained an
ongoing dialogue and established technology relationships with a
number of PBX and KTS manufacturers, internetworking vendors,
broadband equipment suppliers and service providers. We will
continue to focus our efforts with these companies to develop
products that meet specific market requirements in growth
sectors.

We intend to continue enhancing the functionality
of our existing EXTender, ConneX and PBXgateway systems by
expanding the range of products and client devices supported,
including the emerging wireless devices, as well as expanding
the range of connectivity services by incorporating trunk side
interfaces, including IP network survivability through failover
support to public-switched network, and expanding support of
remote management and provisioning. This will further
differentiate our products from the competition while broadening
our addressable market. We will focus our new products
efforts on mobile environments and bridging the gap between
different switch environments such as, legacy and nextgen
switches, devices and applications. Specifically for the later,
we will enable IP switch and telephony application providers,
whether CPE or network based, to distribute their systems
functionality to the broadest installed base of endpoints. This
will not only give vendors a stronger solution equation, but
provide enterprises more flexibility in managing their path to
nextgen environments.

Product Validation Laboratory

Over the past few years, we have hired the
personnel and purchased the equipment necessary to build and
improve our product validation laboratory. Of the 30 people in
our engineering organization, seven are dedicated full time to
our product validation efforts. Their efforts are focused on
ensuring world class product quality. At our Calgary, Alberta
development facility, we have constructed a state of the art
laboratory with equipment from such vendors as ADC Kentrox,
Alcatel, Broadsoft, Cisco, Ericsson, IBM, Iwatsu, Avaya, NEC,
Netopia, Newbridge, Nitsuko, Nortel Networks, Packeteer,
Panasonic, Paradyne, Sonus, Sylantro and Toshiba.

Our Calgary, Alberta facility system tests the
product line and validates our products integration with
the major voice switches, applications and desksets that we
support. We conduct extensive product testing to ensure that our
equipment meets the high standards for voice quality and
reliability associated with mission critical systems such as
PBXs and KTS systems. We also conduct extensive tests on the
embedded systems within our product line as well as on all the
features and functions.

Our Calgary facility also tests system
interoperability. The ability to deliver traffic within multiple
network environments and to interoperate with equipment from
numerous vendors has become a key component to the success of
communications equipment companies. Because no communications
equipment product can be validated independently of the network
within which it operates or independently from the equipment
with which it interfaces, this lab conducts extensive tests of
our product line operating within multiple network environments
and interacting with equipment from numerous equipment vendors.
We conduct extensive tests that measure device performance,
quality of service and voice prioritization within multiple
network environments and across a range of network conditions.
Our facilities contain extensive telephony and data equipment
and network circuits to conduct these tests.

We have implemented a product validation
procedure that enables us to deliver high quality voice
equipment that works within multiple network environments, is
compatible with most widely deployed network equipment and is
capable of adapting to a wide range of network conditions.
Furthermore, the engineers in our product validation laboratory
work continually with validation engineers at other equipment
companies in order to compile feedback and recommendations to
improve our products.

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Manufacturing

We outsource our manufacturing to two contract
manufacturers. Mack Technologies, located in Westford,
Massachusetts, manufactures our Gateway products as well as our
EXTender 6000 and 7000 for branch offices and EXTender 4000
clients. They are ISO 9002 certified and provide full turnkey
services, including material procurement, final assembly,
testing, shipment to our customers and warranty repair. OEM
Worldwide, headquartered in Watertown, South Dakota, with a
manufacturing operation in Spearfish, South Dakata manufactures
our embedded gateway and single-user product lines. They are
also ISO 9002 certified and provide full turnkey services,
including material procurement, final assembly, testing,
shipment to our customers and warranty repair. During the fiscal
year ended April 30, 2002, we also used our manufacturing
facility in Allen, Texas. We closed those operations on
January 31, 2002 after transitioning their operations to
Mack Technologies and OEM worldwide.

We design and develop the key components,
including printed circuit boards and software, for all of our
products. In addition, we determine the components that are
incorporated in our products and select the appropriate
suppliers of these components. The contract manufacturers must
use the parts and suppliers we identify. Any variation from
these rules requires written MCK approval. We design the tests
and specify the testing equipment for the product testing
performed at Mack Technologies and OEM Worldwide and prior to
its closure, at our facility in Allen, Texas.

We use a rolling six-month forecast based upon
anticipated product orders to determine our material
requirements. Lead times for the materials and components that
we order vary significantly and depend on factors such as
specific supplier, contract terms and demand for a component at
a given time. We, along with our contract manufacturers, may
terminate our contracts without cause with a 120 day
notice. At that time, the terminating party must honor all open
purchases.

Competition

We compete in a new, rapidly evolving and highly
competitive and fragmented industry that is subject to
increasing product, market and technology changes brought about
by the introduction of new technologies, the deployment of
broadband networks and changes in the regulatory environment. We
believe that the main competitive factors in our market are the
following:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | technology partnerships, particularly among major
    PBX manufacturers and service providers
|
| |  | network enabled KTS systems                                                                  
|
| |  | end to end IP based solutions                                                                
|
| |  | system reliability and performance                                                           
|
| |  | sales and distribution capability                                                            
|
| |  | price/performance characteristics                                                            
|
| |  | access to third-party technology                                                             
|
| |  | conformance to industry standards                                                            
|
| |  | brand name recognition                                                                       
|
| |  | ease of deployment and use                                                                   
|
| |  | timeliness of product introductions                                                          
|
| |  | product features and breadth                                                                 
|
| |  | customer relationships                                                                       
|
| |  | technical support and service                                                                
|
| |  | pace of enterprise voice evolution                                                           

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We believe our success in competing with other
manufacturers of communications products depends primarily on:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to enter into and maintain key
    technology, business development and distribution relationships
    with third-party manufacturers, distributors, resellers, system
    integrators and service providers in our market segment
|
| |  | our engineering, marketing and sales skills                                                                                                                                                                                                   
|
| |  | the price, quality and reliability of our products                                                                                                                                                                                            
|
| |  | our delivery and service capabilities                                                                                                                                                                                                         

Our principal competitors include large
telecommunications manufacturers such as Nortel and Avaya.
Nortels 6150 product line competes against our Gateway and
EXTender 6000 products and their Home Office II product competes
against our EXTender 3000 product line. Avayas R300 Remote
Office Communicator product competes against our Gateway and
EXTender 6000 products. It is likely that a number of other
public and private companies are developing next generation
network access products that target the branch office and
telecommuting marketplaces. For example, Intel® offers its
iPOD product line to provide PBX extension capabilities to
branch offices. We expect competition to intensify in the future
and new competitors to emerge.

Many of our competitors are substantially larger
than we are and have significantly greater financial, sales and
marketing, technical, manufacturing and other resources, more
established distribution channels and stronger relationships
with service providers. These competitors may be able to respond
more rapidly to new or emerging technologies and changes in
customer requirements or devote greater resources to the
development, promotion and sale of their products than we can.
Furthermore, we believe some of our competitors may offer
aggressive sales terms, including financing alternatives, which
we may not be able to match. These competitors may enter our
existing or future markets with solutions that may be less
expensive, provide higher performance or additional features or
be introduced earlier than our solutions. Given the market
opportunity, we expect that other companies may enter our market
with better products and technologies. If any technology that is
competing with ours is more reliable, has better quality, is
less expensive or has other advantages over our technology, the
demand for our products could decrease.

We expect our competitors to continue to improve
the performance of their current products and introduce new
products or new technologies. Successful new product
introductions or enhancements by our competitors could reduce
the sales or market acceptance of our products, perpetuate
intense price competition or make our products obsolete. To be
competitive, we must continue to invest significant resources in
research and development, sales and marketing and customer
support. We cannot be sure that we will have sufficient
resources to make these investments or that we will be able to
make the technological advances necessary to remain competitive.

Increased competition is likely to result in
price reductions, reduced gross margins and loss of market
share. Our failure to compete successfully against current or
future competitors could seriously harm our business, financial
condition and results of operations.

Intellectual Property

Our success and ability to compete is dependent
in part upon our proprietary technology. We rely on a
combination of patent, copyright, trademark, trade secret and
other intellectual property law, nondisclosure agreements and
other protective measures to protect our proprietary rights. We
also utilize unpatented proprietary knowledge and trade secrets,
and employ various methods to protect our trade secrets and
knowledge. We presently have no issued patents. We have one U.S.
Utility patent application and one International (Patent
Cooperation Treaty  PCT) patent application pending.
Both of the applications are based on, and claim the benefit of,
a provisional patent application directed to a system for and
method of extending a PBX phone port to an external phone device.

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We believe our intellectual property rights are
significant and that the loss of all or a substantial portion of
such rights could have a material adverse effect on our
business, financial condition and results of operations. There
can be no assurance that our intellectual property protection
measures will be sufficient to prevent misappropriation of our
technology. Some of our contractual arrangements provide third
parties with access to our source code and other intellectual
property upon the occurrence of specified events. Such access
could enable these third parties to use our intellectual
property and source code to develop and manufacture competing
products, which would adversely affect our performance and
ability to compete. In addition, we cannot be certain that
others will not independently develop substantially equivalent
intellectual property, gain access to our trade secrets or
intellectual property, or disclose our intellectual property or
trade secrets. Furthermore, the laws of many foreign countries
do not protect our intellectual property to the same extent as
the laws of the United States. From time to time, we may desire
or be required to renew or to obtain licenses from others in
order to develop and market commercially viable products
effectively. There can be no assurances that any necessary
licenses will be available on reasonable terms, if at all.

The communications industry is characterized by
the existence of a large number of patents and frequent claims
and related litigation regarding patent and other intellectual
property rights. In particular, leading companies in the
communications markets have extensive patent portfolios. From
time to time, third parties may assert exclusive patent,
copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us. We
expect that we may increasingly be subject to infringement
claims as the number of products and competitors in the market
for our technology grows and the functionality of products
overlaps. Although we have not been a party to any litigation
asserting claims that allege infringement of intellectual
property rights, we may be a party to litigation in the future.
Any such claims, with or without merit, could be time-consuming,
result in costly litigation and diversion of technical and
management personnel or require us to develop non-infringing
technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be
available on acceptable terms, if at all. In addition, third
parties may assert claims or initiate litigation against us or
our manufacturers, suppliers, OEMs, technology partners or
customers alleging infringement of their proprietary rights with
respect to our existing or future products. We may in the future
initiate claims or litigation against third parties for
infringement of our proprietary rights to determine the scope
and validity of our proprietary rights.

Employees

At April 30, 2002, we had a total of 78
employees, of which 30 were in research and development, 23 were
in sales, marketing and business development, 14 were in
manufacturing and operations, and 11 were in finance and
administration. None of our employees is represented by a labor
union. We have not experienced any work stoppages and consider
relations with our employees to be good.




Item 2.     Properties

We currently lease approximately 48,000 square
feet of space at our headquarters in Needham, Massachusetts
under a lease that expires in March 2007. Through July 2002, we
subleased approximately 16,000 square feet of that space. In
July 2002, we entered into a sublease with a third party
for approximately 32,000 square feet at our headquarters through
the remaining lease term. We will occupy the balance of the
space or approximately 16,000 square feet that we had previously
subleased. We also lease approximately 12,500 square feet at our
development center in Calgary, Alberta under a lease that
expires in October 2005. We previously occupied
approximately 27,000 square feet for our DTI business unit in
Allen, Texas which we shut down in January 2002. One of the
properties, which is approximately 16,700 square feet is under a
sublease agreement through the remainder of the lease term of
August 2004. The second property, which is approximately 10,300
square feet has been turned back over to the landlord with no
further obligation to the Company.




Item 3.     Legal
Proceedings

On May 3, 2000, Joan Lockhart, the
Companys former Vice President of Marketing, filed a
complaint in Massachusetts State Court against the Company. In
the complaint, captioned Joan Lockhart v. MCK

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Communications, Inc., (Middlesex Superior Court),
Ms. Lockhart asserts a claim for breach of contract against
the Company based on her allegations that the Company failed to
comply with the terms of her employment agreement and a certain
restricted stock agreement executed by and between the Company
and Ms. Lockhart. Ms. Lockhart seeks approximately
$30,000 in severance pay as well as approximately $1,000,000 in
damages. On June 5, 2000, the Company filed its answer
denying the material allegations of Ms. Lockharts
complaint. On December 6, 2001, the Massachusetts Superior
Court, Middlesex County, entered judgment against the Company
and in favor of Ms. Lockhart in the amount of approximately
$1,160,000, including interest. The Company believes it has
meritorious grounds for appeal of this judgment and intends to
pursue vigorously an appeal of the same. Provision has been made
in the Companys financial statements for the judgment
entered in the event the appeal is not successful. The Company
has also expensed the legal fees incurred in this provision.


In December 2001, a complaint was filed in the
Southern District of New York seeking an unspecified amount of
damages on behalf of an alleged class of persons who purchased
shares of the Companys common stock between the date of
its initial public offering and December 6, 2000. The
complainants name as defendants the Company and certain of its
officers and other parties as underwriters of its initial public
offering. The plaintiffs allege, among other things, that the
Companys prospectus, contained in the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission, was materially false and misleading because
it failed to disclose that the investment banks which underwrote
the Companys initial public offering of securities and
others received undisclosed and excessive brokerage commissions,
and required investors to agree to buy shares of securities
after the initial public offering was completed at predetermined
prices as a precondition to obtaining initial public offering
allocations. The plaintiffs further allege that these actions
artificially inflated the price of the Companys common
stock after the initial public offering. This case is one of
many with substantially similar allegations known as the
Laddering Cases filed before the Southern District
of New York against a variety of unrelated issuers and
investment bankers and have been consolidated for pre-trial
purposes before one judge to assist with administration. The
Company believes that the claims against it are without merit
and that it intends to defend the actions. No provision has been
recorded for this matter.

MCK has been named a defendant in a lawsuit filed
in Norfolk County, Massachusetts by Entrata Communications, Inc.
(Entrata). Entrata Communications, Inc. v.
Superwire.com. Inc. and MCK Communications, Inc. arises out
of a dispute between Entrata and one of its largest
shareholders, Superwire.com, Inc. (Superwire).
Pursuant to a contract with Entrata, MCK was obligated to pay
Entrata $750,000 in early 2002. In order to take advantage of a
$100,000 discount offered for early payment, MCK paid Entrata
$650,000 in November 2001, in full satisfaction of its
contractual obligations. Entrata contends that it never received
the funds from MCK, and that the funds were diverted to
Superwire. Through the lawsuit, Entrata seeks to recover from
both MCK and Superwire the full $750,000 that MCK would have
owed in 2002. MCK has asserted counterclaims against Entrata for
and cross-claims against Superwire for fraud and breach of
contract. As discovery has not yet commenced, it is too soon to
assess MCKs likelihood of success in this litigation.
Management intends to defend the claims against MCK and
prosecute its counterclaims and cross-claims vigorously.




Item 4.     Submission
of Matters to a Vote of Security Holders

None.

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##### Table of Contents






PART II




Item 5.  Market for the
Registrants Common Equity and Related Stockholder
Matters

Market Price for Common
Stock.Our common stock is traded on
the NASDAQ National Market under the symbol MCKC.
The following table sets forth for the periods indicated the
high and low closing prices for the Common Stock, as reported by
NASDAQ:

Fiscal Year Ended April 30, 2002

|                     |  |      |      |     |  |   |      | 
|-------------------- |  | ---- | ---- | --- |  | - | ---- | 
|Fiscal Quarter Ended |  | High |      | Low
|                     |  |      |      |    
|July 31, 2001        |  | $    | 2.51 |     |  | $ | 1.63 | 
|October 31, 2001     |  |      | 1.62 |     |  |   | 1.01 | 
|January 31, 2002     |  |      | 1.89 |     |  |   | 1.13 | 
|April 30, 2002       |  |      | 1.67 |     |  |   | 1.26 | 

Fiscal Year Ended April 30, 2001

|                     |  |      |       |     |  |   |       | 
|-------------------- |  | ---- | ----- | --- |  | - | ----- | 
|Fiscal Quarter Ended |  | High |       | Low
|                     |  |      |       |    
|July 31, 2000        |  | $    | 36.63 |     |  | $ | 18.06 | 
|October 31, 2000     |  |      | 38.13 |     |  |   | 14.06 | 
|January 31, 2001     |  |      | 21.25 |     |  |   | 4.39  | 
|April 30, 2001       |  |      | 6.81  |     |  |   | 1.75  | 

Holders of Record.As of June 28, 2002, there were approximately 148 holders of
record of our common stock and 20,426,632 shares of common stock
outstanding.

Dividend Policy.To
date, we have not paid any cash dividends on our common stock.
We currently anticipate that we will retain any available funds
to finance the growth and operation of our business and do not
anticipate paying any cash dividends in the foreseeable future.




Item 6.  Selected Historical
Condensed Financial Information

The following selected financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and are qualified by reference to the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Report.
The statement of operations data set forth below for the years
ended April 30, 2000, 2001 and 2002, and the balance sheet
data at April 30, 2001 and 2002, are derived from, and are
qualified by reference to, the audited Consolidated Financial
Statements of MCK Communications, Inc. included elsewhere
herein. The statement of operations data set forth below for the
years ended April 30, 1998 and 1999 and the balance sheet
data at April 30, 1998, 1999 and 2000 are derived from
audited Consolidated Financial Statements of MCK Communications,
Inc. not included herein.

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|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |        |        | 
|-------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | --------- | ------- | ----- | ---- | --------- | ------- | ----- | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                                                                                         |                                                                                                                                                                               |                                      
|                                                                                                         |                                                                                                                                                                               | Years Ended April 30,                
|                                                                                                         |                                                                                                                                                                               |                                      
|                                                                                                         |                                                                                                                                                                               | 1998                                  |           | 1999    |       | 2000 |           | 2001    |       | 2002
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |     
|                                                                                                         |                                                                                                                                                                               |                                      
|                                                                                                         |                                                                                                                                                                               | (In thousands, except per share data)
|OPERATIONS DATA:                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Revenues                                                                                                 |                                                                                                                                                                               | $                                     | 7,876     |         |       | $    | 14,270    |         |       | $    | 25,082     |        |        | $ | 38,220     |        |        | $ | 16,487     |       
|Cost of goods sold                                                                                       |                                                                                                                                                                               |                                       | 2,800     |         |       |      | 5,390     |         |       |      | 9,455      |        |        |   | 15,287     |        |        |   | 9,096      |       
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Gross profit                                                                                             |                                                                                                                                                                               |                                       | 5,076     |         |       |      | 8,880     |         |       |      | 15,627     |        |        |   | 22,933     |        |        |   | 7,391      |       
|Operating expenses:                                                                                      |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         | Research and development (excluding amortization
    of stock based compensation of $0, $175, $1,558, $829 and $(52)
    in 1998, 1999, 2000, 2001 and 2002, respectively)    |                                       |           | 1,758   |       |      |           | 3,349   |       |      |            | 4,876  |        |   |            | 9,232  |        |   |            | 7,124  |       
|                                                                                                         | Sales and marketing (excluding amortization of
    stock based compensation of $0, $110, $1,853, $1,005 and $(453)
    in 1998, 1999, 2000, 2001 and 2002, respectively       |                                       |           | 2,191   |       |      |           | 3,888   |       |      |            | 7,817  |        |   |            | 13,820 |        |   |            | 9,397  |       
|                                                                                                         | General and administrative (excluding
    amortization of stock based compensation of $0, $120, $1,234,
    $1,068 and $202 in 1998, 1999, 2000, 2001 and 2002, respectively) |                                       |           | 1,485   |       |      |           | 1,617   |       |      |            | 2,475  |        |   |            | 4,646  |        |   |            | 4,478  |       
|                                                                                                         | Amortization of stock based compensation                                                                                                                                      |                                       |           |        |       |      |           | 406     |       |      |            | 4,645  |        |   |            | 2,902  |        |   |            | (303   | )     
|                                                                                                         | Amortization of goodwill and other intangibles(1)                                                                                                                             |                                       |           |        |       |      |           |        |       |      |            |       |        |   |            | 4,588  |        |   |            | 2,180  |       
|                                                                                                         | Write-off of in-process research and
    development(1)(2)                                                                                                                    |                                       |           |        |       |      |           |        |       |      |            |       |        |   |            | 3,694  |        |   |            |       |       
|                                                                                                         | Impairment of goodwill and other intangibles(1)                                                                                                                               |                                       |           |        |       |      |           |        |       |      |            |       |        |   |            |       |        |   |            | 14,063 |       
|                                                                                                         | Restructuring(3)                                                                                                                                                              |                                       |           |        |       |      |           |        |       |      |            |       |        |   |            | 597    |        |   |            | 4,310  |       
|                                                                                                         | Provision for legal settlement and fees(4)                                                                                                                                    |                                       |           |        |       |      |           |        |       |      |            |       |        |   |            |       |        |   |            | 1,387  |       
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         |                                                                                                                                                                               | Total operating expenses              |           |         | 5,434 |      |           |         | 9,260 |      |            |        | 19,813 |   |            |        | 39,479 |   |            |        | 42,636 | 
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Loss from operations                                                                                     |                                                                                                                                                                               |                                       | (358      | )       |       |      | (380      | )       |       |      | (4,186     | )      |        |   | (16,546    | )      |        |   | (35,245    | )     
|Other income (expense)                                                                                   |                                                                                                                                                                               |                                       | (595      | )       |       |      | (207      | )       |       |      | 758        |        |        |   | 3,617      |        |        |   | 1,287      |       
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Loss before income tax (provision) benefit and
    dividends on redeemable preferred stock of subsidiary |                                                                                                                                                                               |                                       | (953      | )       |       |      | (587      | )       |       |      | (3,428     | )      |        |   | (12,929    | )      |        |   | (33,958    | )     
|Income tax (provision) benefit                                                                           |                                                                                                                                                                               |                                       |          |         |       |      |          |         |       |      | (100       | )      |        |   | 1,130      |        |        |   | (60        | )     
|Dividends on redeemable preferred stock of
    subsidiary                                                |                                                                                                                                                                               |                                       | (160      | )       |       |      | (197      | )       |       |      | (97        | )      |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Net loss                                                                                                 |                                                                                                                                                                               |                                       | (1,113    | )       |       |      | (784      | )       |       |      | (3,625     | )      |        |   | (11,799    | )      |        |   | (34,018    | )     
|Dividends on redeemable preferred stock                                                                  |                                                                                                                                                                               |                                       | (1,220    | )       |       |      | (1,966    | )       |       |      | (1,285     | )      |        |   |           |        |        |   |           |       
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Net loss applicable to common shares                                                                     |                                                                                                                                                                               | $                                     | (2,333    | )       |       | $    | (2,750    | )       |       | $    | (4,910     | )      |        | $ | (11,799    | )      |        | $ | (34,018    | )     
|                                                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|Basic and diluted net loss per common share                                                              |                                                                                                                                                                               | $                                     | (0.67     | )       |       | $    | (0.71     | )       |       | $    | (0.44      | )      |        | $ | (0.61      | )      |        | $ | (1.69      | )     
|Shares used in computing basic and diluted net
    loss per common share                                 |                                                                                                                                                                               |                                       | 3,476,282 |         |       |      | 3,881,526 |         |       |      | 11,144,565 |        |        |   | 19,213,239 |        |        |   | 20,126,113 |       
|Pro forma basic and diluted loss per common share                                                        |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      | (0.31      | )      |        |   |            |        |        |   |            |       
|Shares used in computing pro forma basic and
    diluted loss per common share                           |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      | 15,268,368 |        |        |   |            |        |        |   |            |       
|                                                                                                        
|CONSOLIDATED BALANCE SHEET DATA:                                                                         |                                                                                                                                                                               |                                       |           |         |       |      |           |         |       |      |            |        |        |   |            |        |        |   |            |       
|                                                                                                         | Cash and equivalents and marketable securities                                                                                                                                |                                       |           | 1,867   |       |      |           | 3,285   |       |      |            | 75,724 |        |   |            | 54,802 |        |   |            | 44,367 |       
|                                                                                                         | Working capital                                                                                                                                                               |                                       |           | 3,545   |       |      |           | 5,578   |       |      |            | 78,288 |        |   |            | 58,444 |        |   |            | 43,344 |       
|                                                                                                         | Total assets                                                                                                                                                                  |                                       |           | 5,665   |       |      |           | 9,428   |       |      |            | 87,194 |        |   |            | 90,397 |        |   |            | 56,225 |       
|                                                                                                         | Long term debt                                                                                                                                                                |                                       |           | 5,000   |       |      |           | 2,500   |       |      |            |       |        |   |            |       |        |   |            |       |       
|                                                                                                         | Redeemable preferred stock                                                                                                                                                    |                                       |           | 19,449  |       |      |           | 28,205  |       |      |            |       |        |   |            |       |        |   |            |       |       
|                                                                                                         | Total stockholders (deficit) equity                                                                                                                                          |                                       |           | (20,050 | )     |      |           | (24,040 | )     |      |            | 80,946 |        |   |            | 82,861 |        |   |            | 48,956 |       



---

|    |                                                                  
|--- | -----------------------------------------------------------------
|(1) | See footnote 16 to notes to consolidated
    financial statements
|   
|(2) | See footnote 17 to notes to consolidated
    financial statements
|   
|(3) | See footnote 18 to notes to consolidated
    financial statements
|   
|(4) | See footnote 14 to notes to consolidated
    financial statements

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Item 7.  Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with our consolidated financial statements and the
related notes included elsewhere in this prospectus. Certain
statements in this report, including statements regarding our
business strategies, operations, financial conditions and
prospects, are forward-looking statements. Use of the words
believe, expect, anticipate,
will, contemplate, would and
similar expressions that contemplate future events may identify
forward-looking statements.

Numerous important factors, risks and
uncertainties affect our operations and could cause actual
results to differ materially from those expressed or implied by
these or any other forward-looking statements made by us or on
our behalf. Readers are urged to carefully review and consider
the various disclosures made in this report, including those
described under Factors Affecting Future Operating Results
and Stock Price, and in our other filings with the SEC,
that attempt to advise interested parties of certain risks and
factors that may affect our business. Readers are cautioned not
to place undue reliance on these forward-looking statements,
which are based on current expectations and reflect
managements opinions only as of the date thereof. We do
not assume any obligation to revise or update forward-looking
statements except as may be required by securities laws.
Finally, our historic results should not be viewed as indicative
of future performance.

Overview

MCK Communications is a leading provider of
products that enable businesses to unleash the power of their
voice communications systems by:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | extending the functionality and applications of
    their business telephone systems from the main office to
    outlying offices, remote call centers, teleworkers and mobile
    employees over public and private networks;                        
|
| |  | bundling with service providers to unite customer
    premise equipment (CPE) and network services to
    deliver new outsourced, value added PBXextension services; and                                                                            
|
| |  | bridging technology gaps between traditional and
    next generation (nextgen) applications
    (i.e., unified messaging), IP switches (CPE or hosted) and
    devices (i.e., IP telephones) to enable enterprises ease of
    technology migration.

This combination enables a more open enterprise.
We market and distribute our products through an international
network of distributors, resellers, equipment providers and
service providers. We are headquartered in Needham,
Massachusetts, have a development center in Calgary, Canada, and
maintain a sales and marketing office in the United Kingdom.

From our inception in 1989 through 1993, we were
a small company based in Calgary, Canada that designed and
marketed a number of niche, voice products targeted at the oil
industry. Commencing in 1993, we altered our business focus and
began developing remote voice access products for enterprise
telephone systems by using the technology derived from this
initial business. These efforts led to the development of our
EXTender product line. During the period from 1993 through 1995,
our operating activities related primarily to establishing a
research and development organization, developing and testing
prototype designs, and developing our initial OEM relationships.
We shipped our first remote voice access product, the
EXTender 1000, in 1995. From 1995 until 2000, we focused
our research and development efforts on developing additional
single user remote voice access products and their product
enhancements as well as our initial multi-user products for use
in branch offices. In addition, we established a product
validation laboratory, built international indirect sales
channels, developed additional technology relationships, and
established our sales, marketing and customer support
organizations. Over the last year, we have expanded our product
line to include application specific gateways that support
mobile and teleworking environments and a broader range of
devices, expanded the range of networks supported with an
emphasis on wireless networks, are adding a higher end branch
product, created technologies to enable a more open
enterprise and have expanded the range of protocols supported
across our products including our embedded gateway product line.

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Through the fiscal year ended April 30,
1999, our revenues consisted primarily of product sales of our
single-user remote voice access products and, to a lesser
degree, our recording interface gateways products. In
April 1999, we released our first multi-user remote voice
access products, the EXTender 6000 for branch offices and the
PBXgateway, and subsequently expanded the range of networks
support. For the foreseeable future, we anticipate that most of
our revenues will be attributable to sales of our access and
gateway products, with sales of recording interface gateways
continuing to represent a consistently lower percentage of our
revenues. Among our access and gateway products, we believe that
the multi-user products and next generation single-user gateways
and clients will represent a substantial and increasing
percentage of our revenues, while the sales of our traditional
single-user products may decline as a percentage of our
revenues. In fiscal year 2002, our traditional single-user
products comprised approximately 20% of revenues, our multi-user
products approximately 23% of revenues, our PBXgateways
contributed approximately 22% and our recording interfaces and
other miscellaneous products contributed the remainder. To date
we have generated minimal service and maintenance revenues. We
do not expect maintenance or service revenues to be a
significant portion of our revenues. Periodically, we have
received non-recurring engineering fees, although such fees have
not been material to date.

For the fiscal years ended April 30, 2000,
2001 and 2002, Avaya (formerly Lucent Technologies) accounted
for approximately 45.6%, 22.8%, and 2.9%, respectively of our
revenues. No customer accounted for greater than 10% of our
fiscal year 2002 revenues. For fiscal year 2002, our distributor
partners collectively contributed approximately 41% of revenues,
OEM partners contributed approximately 29%, VARs approximately
18%, and teleco partners approximately 12%.

We recognize product revenues upon shipment to
the customer. We routinely analyze and establish, as necessary,
reserves at the time of shipment for product returns and
allowances, which amounts, to date, have not been significant.
Service revenues are recognized as the services are performed.
Maintenance revenues are deferred and recognized over the period
of the contract.

Our cost of goods sold consists primarily of
purchased finished products from Mack Technologies and purchased
subassemblies from EMG and OEM Worldwide. We incur additional
costs to test and assemble these subassemblies for shipment to
our customers. Cost of goods sold also includes certain
manufacturing overhead costs, primarily facilities and related
depreciation. Additionally, our cost of goods sold includes
costs related to maintenance and support services provided to
our distribution channels and end users through Vital Network
Services, a third-party support provider.

Research and development expenses consist
primarily of salaries and related personnel costs and contract
engineering, purchased software and prototype expenses related
to the design, development, enhancement and testing of our
products. As of April 30, 2002, research and development
costs have been expensed as incurred. We will continue to
enhance existing products and fund new product development
initiatives targeted at growth segments of the enterprise voice
arena. We expect to hold research and development expenses
proportional to revenue growth in future periods. We expect to
do likewise for our expenditures on our product validation
laboratories that test the interoperability of our products with
enterprise voice systems and other products. This competency
continues to be critical to our business as we develop
additional products that function over circuit, packet and
wireless networks in conjunction with third-party voice and data
equipment.

Sales and marketing expenses consist primarily of
salaries, commissions and related personnel expenses for those
engaged in the sales, marketing and support of products as well
as related trade show, promotional and public relations
expenses. We primarily sell our products through an indirect
distribution system that includes: OEMs and private label
partners, teleco resellers including service providers, systems
integrators, distributors, and VARs. Our sales force and
marketing efforts are primarily directed at supporting our
indirect distribution channels through sales support, sales
tools, marketing promotions and developing brand awareness. Our
sales and marketing campaigns are designed to strengthen
relationships with existing partners and selectively expand to
new distribution channels by enabling them to stimulate sales of
our product. As revenues increase, we expect sales and marketing
headcount and associated expenses to increase accordingly.

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General and administrative expenses consist
primarily of salaries and related personnel expenses for
executive, accounting and administrative personnel, professional
fees and other general corporate expenses. We expect that
general and administrative expenses will remain relatively
constant during fiscal year 2003.

Stock based compensation expenses resulted from
the granting of restricted stock and stock options to employees
and directors with exercise prices per share determined to be
below the deemed fair values per share for financial reporting
purposes of our common stock at dates of grant. The deferred
compensation is being amortized to expense over the vesting
period of the individual award or options, generally four years.
At April 30, 2002, deferred compensation to be amortized in
future periods amounted to $0.2 million.

In June 2000, we acquired all of the
outstanding stock of Digital Techniques Incorporated Holding
(DTIH) and its subsidiary Digital Techniques, Inc.
(DTI) and certain other assets for $12.7 million in
cash and stock valued at $10.9 million. The acquisition provided
us with technologies to expand our product line, development
rights to additional protocols and an expanded customer base. In
conjunction with the acquisition, we recorded goodwill and
certain intangible assets resulting from the excess of purchase
price over the fair value of the tangible assets acquired.
Goodwill and intangibles, net of impairment charges, will be
amortized over a period of 5 years and will impact our
operating results through fiscal year 2005.

Other (income) expense, net consists of interest
expense related to our subordinated debt, credit financing fees,
interest income and foreign exchange gains or losses related to
the effects of the Canadian/ U.S. exchange rate on intercompany
transactions.

Critical Accounting Policies

The discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories, warranty
obligations, and income taxes. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe
the following critical accounting policies and the related
judgments and estimates materially affect the preparation of our
consolidated financial statements:

Revenue Recognition.Our policy is to recognize revenue upon shipment of our products
to our customers and the fulfillment of all contractual terms
and conditions, pursuant to the guidance provided by Staff
Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101), issued by the Securities
and Exchange Commission. Certain distribution partners have
rights to return a contractual percentage of sales. For sales to
these partners, we defer revenue subject to return until such
rights have expired. A significant number of our contractual
arrangements contain price protection provisions whereby we are
obligated to provide refunds or credits for any decrease in unit
prices of product in their inventory. Judgments are required in
evaluating the credit worthiness of our customers. Credit is not
extended to customers and revenue is not recognized until we
have determined that the risk of uncollectibility is minimal.

Allowance for Doubtful
Accounts.Our policy is to maintain
allowances for estimated losses resulting from the inability of
our customers to make required payments. Credit limits are
established through a process of reviewing the financial history
and stability of each customer. Where appropriate, we obtain
credit rating reports and financial statements of the customer
when determining or modifying their credit limits. We regularly
evaluate the collectibility of our trade receivable balances
based on a combination of factors. When a customers
account balance becomes past due, we initiate dialogue with the
customer to determine the cause. If it is determined that the
customer will be unable to meet its financial obligation to us,
such as in the case of

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a bankruptcy filing, deterioration in the
customers operating results or financial position or other
material events impacting their business, we record a specific
allowance to reduce the related receivable to the amount we
expect to recover given all information presently available.


We also record an allowance for all other
customers based on certain other factors including the length of
time the receivables are past due and historical collection
experience with individual customers. As of April 30, 2002,
our accounts receivable balance of $3.8 million is reported
net of allowances for doubtful accounts of $500,000. We believe
our reported allowances at April 30, 2002, are adequate. If
the financial conditions of those customers were to deteriorate,
however, resulting in their inability to make payments, we may
need to record additional allowances which would result in
additional selling, general and administrative expenses being
recorded for the period in which such determination was made.

Inventory Reserves.As a designer and manufacturer of high technology communication
equipment, we are exposed to a number of economic and industry
factors that could result in portions of our inventory becoming
either obsolete or in excess of anticipated usage. These factors
include, but are not limited to, technological changes in our
markets, our ability to meet changing customer requirements,
competitive pressures in products and prices, and the
availability of key components from our suppliers. Our policy is
to establish inventory reserves when conditions exist that
suggest that our inventory may be in excess of anticipated
demand or is obsolete based upon our assumptions about future
demand for our products and market conditions. We regularly
evaluate the ability to realize the value of our inventory based
on a combination of factors including the following: historical
usage rates, forecasted sales or usage, product end of life
projections, estimated current and future market values and new
product introductions. Purchasing requirements and alternative
usage avenues are explored within these processes to mitigate
inventory exposure. When recorded, our reserves are intended to
reduce the carrying value of our inventory to its net realizable
value. As of April 30, 2002, our inventory of
$1.9 million is stated net of inventory reserves of
$1.3 million. If actual demand for our products deteriorate
or market conditions are less favorable than those that we
project, additional inventory reserves may be required.

Product Warranties.Our products are sold with warranty provisions that require us
to remedy deficiencies in quality or performance of our products
over a specified period of time, generally twelve months, at no
cost to our customers. Our policy is to establish warranty
reserves at levels that represent our estimate of the costs that
will be incurred to fulfill those warranty requirements at the
time that revenue is recognized. We believe that our recorded
liability at April 30, 2002, is adequate to cover our
future cost of materials, labor and overhead for the servicing
of our products sold through that date. If actual product
failures, or material or service delivery costs differ from our
estimates, our warranty liability would need to be revised
accordingly.

Income Taxes.We
have recorded a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be
realized. The Company has assessed the valuation allowance based
upon our estimate of future taxable income covering a relatively
short time horizon given the volatility in the markets we serve
and our historic operating results. External market data is
considered in this evaluation. The availability of tax planning
strategies to utilize our recorded deferred tax assets is also
considered. As of April 30, 2002, the deferred tax assets
have been reduced by valuation allowances equal to the value of
the assets. If the Company is to realize the deferred tax assets
in an amount in excess of their reported net amounts, an
adjustment to the deferred tax assets would increase earnings in
the period such determination was made. Similarly, if we should
determine that we may be unable to realize our net deferred tax
assets to the extent reported, an adjustment to the deferred tax
assets would be charged to income in the period such
determination was made.

Contingencies.We
are subject to proceedings, lawsuits and other claims. We assess
the likelihood of any adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for
these contingencies are made after careful analysis of each
individual issue. The required reserves may change in the future
due to new developments in each matter or changes in approach
such as a change in settlement strategy in dealing with these
matters. We record charges for the costs we anticipate incurring
in connection with litigation and claims against us when we can
reasonably estimate these costs.

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Impaired Assets.We
review the carrying values of long-lived assets and amortizable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss for an asset to be held
and used is recognized when the fair value of the asset is less
than the carrying value of the asset, and for assets to be
disposed of, is recognized when the fair value of the asset,
less costs to dispose, is less than the carrying value of the
asset. The fair value of the assets is generally based on
discounted estimated cash flows using an annual discount rate of
18%. The estimates reflect our assumptions about selling prices,
production and sales volume levels, costs, and market conditions
over the estimated remaining operating period, which can range
from three months to over fifteen years. If our assumptions
related to assets to be held and used are inaccurate, additional
write-downs may be required in the future. If estimates of fair
value less costs to sell are revised, the carrying amount of the
related assets is adjusted, resulting in an increase or decrease
to earnings.

Restructuring.We
record restructuring charges incurred in connection with
consolidation or relocation of our operations, or shutdowns of
specific sites. These restructuring charges, which reflect our
commitment to a termination or exit plan that will begin within
twelve months, are based on estimates of the expected costs
associated with severance, site closure, legal matters, contract
terminations, or other costs directly related to the
restructuring. If the actual cost incurred exceeds the estimated
cost, an additional charge to earnings will result. If the
actual cost is less than the estimated cost, a credit to
earnings will be recognized.

Nonrecurring Items.It is our policy to identify as a nonrecurring item
a material charge or gain that is not associated with on-going
operations or that is caused by unique events not reflective of
our normal business activities in the period if such items
individually or in the aggregate have a material impact on a
specific line item in the consolidated statements of operations
or have a material impact on results overall. We believe that
separately reporting such charges or gains enhances transparency
and comparability of results by removing distortion that would
otherwise occur. Examples of such items that have been
separately identified in the past under this policy include
material charges or gains resulting from asset impairments and
restructuring of operations, including employee terminations;
litigation not related to on-going operations; and acquisition
charges including those related to acquired in-process research
and development. Nonrecurring items are appropriately identified
in the consolidated statements of operations.

Results of Operations

The following table sets forth certain financial
data for the periods indicated as a percentage of revenues.

|                            |                                                  |                          |       |      |      |      |       |      |       |  |        |      |       | 
|--------------------------- | ------------------------------------------------ | ------------------------ | ----- | ---- | ---- | ---- | ----- | ---- | ----- |  | ------ | ---- | ----- | 
|                            |                                                  |                         
|                            |                                                  | Years Ended April 30,   
|                            |                                                  |                         
|                            |                                                  | 2000                     |       | 2001 |      | 2002
|                            |                                                  |                          |       |      |      |     
|Revenues                    |                                                  |                          | 100.0 | %    |      |      | 100.0 | %    |       |  | 100.0  | %   
|Cost of goods sold          |                                                  |                          | 37.7  |      |      |      | 40.0  |      |       |  | 55.2   |     
|                            |                                                  |                          |       |      |      |      |       |      |       |  |        |     
|Gross profit                |                                                  |                          | 62.3  |      |      |      | 60.0  |      |       |  | 44.8   |     
|Operating expenses:         |                                                  |                          |       |      |      |      |       |      |       |  |        |     
|                            | Research and development                         |                          |       | 19.4 |      |      |       | 24.2 |       |  |        | 43.2 |      
|                            | Sales and marketing                              |                          |       | 31.2 |      |      |       | 36.1 |       |  |        | 57.0 |      
|                            | General and administrative                       |                          |       | 9.9  |      |      |       | 12.2 |       |  |        | 27.2 |      
|                            | Amortization of stock based compensation         |                          |       | 18.5 |      |      |       | 7.6  |       |  |        | (1.8 | )    
|                            | Amortization of goodwill and other intangibles   |                          |       |     |      |      |       | 12.0 |       |  |        | 13.2 |      
|                            | Write-off of in-process research and development |                          |       |     |      |      |       | 9.7  |       |  |        |     |      
|                            | Impairment of goodwill and other intangibles     |                          |       |     |      |      |       |     |       |  |        | 85.3 |      
|                            | Restructuring                                    |                          |       |     |      |      |       | 1.5  |       |  |        | 26.1 |      
|                            | Provision for legal settlement and fees          |                          |       |     |      |      |       |     |       |  |        | 8.4  |      
|                            |                                                  |                          |       |      |      |      |       |      |       |  |        |     
|                            |                                                  | Total operating expenses |       |      | 79.0 |      |       |      | 103.3 |  |        |      | 258.6 | 
|                            |                                                  |                          |       |      |      |      |       |      |       |  |        |     
|Loss from operations        |                                                  |                          | (16.7 | )    |      |      | (43.3 | )    |       |  | (213.8 | )   
|Other income (expense), net |                                                  |                          | 3.0   |      |      |      | 9.5   |      |       |  | 7.8    |     
|                            |                                                  |                          |       |      |      |      |       |      |       |  |        |     

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|                                                                                                         |  |                       |       |      |  |      |       |    |  |  |        |   
|-------------------------------------------------------------------------------------------------------- |  | --------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ------ | --
|                                                                                                         |  |                      
|                                                                                                         |  | Years Ended April 30,
|                                                                                                         |  |                      
|                                                                                                         |  | 2000                  |       | 2001 |  | 2002
|                                                                                                         |  |                       |       |      |  |     
|Loss before income tax (provision) benefit and
    dividends on redeemable preferred stock of subsidiary |  |                       | (13.7 | )    |  |      | (33.8 | )  |  |  | (206.0 | ) 
|Income tax (provision) benefit                                                                           |  |                       | (0.4  | )    |  |      | 2.9   |    |  |  | (0.3   | ) 
|                                                                                                         |  |                       |       |      |  |      |       |    |  |  |        |   
|Net loss before dividends on subsidiary
    redeemable preferred stock                                   |  |                       | (14.1 | )%   |  |      | (30.9 | )% |  |  | (206.3 | )%
|                                                                                                         |  |                       |       |      |  |      |       |    |  |  |        |   

Fiscal
years ended April 30, 2001 and 2002

Revenues.Revenues
decreased from $38.2 million for the fiscal year ended
April 30, 2001 to $16.5 million for the fiscal year
ended April 30, 2002, a decrease of $21.7 million or
56.8%. This decrease was, in part, due to a reduction in
revenues from Avaya (formerly Lucent Technologies) from
$9.2 million in 2001 to $500 thousand in 2002. We
believe the reduction in Avaya revenues is directly related to a
slow down in their overall business and their introduction of
competitive products. In addition, revenues from Anixter CA
decreased from $2.4 million in 2001 to $900 thousand in 2002. We
believe that reduction in revenues from Anixter CA, as well as
the reduction in revenues from our OEM and distributor partners
was due to a slowdown in the economy which caused a reduction in
capital expenditures and consequently a decrease in their demand
for our products. We will continue to work with our distribution
channels to increase revenues. However, our revenues and gross
profit could be further decreased if we need to reduce our
prices to remain competitive.

Cost of goods sold.Our cost of goods sold decreased from $15.3 million for the
fiscal year ended April 30, 2001 to $9.1 million for
the fiscal year ended April 30, 2002, a decrease of
$6.2 million or 40.5%. This decrease was primarily related
to the decrease in volume of units shipped. Gross profit
decreased from 60% for the fiscal year ended April 30, 2001
to 44.8% for the fiscal year ended April 30, 2002. The
decrease in gross profit was primarily attributable to the
smaller revenue base over which we spread our fixed
manufacturing costs and increases in inventory reserves due in
large to our decision to close our operation in Texas. With the
closing of our operation in Texas and our shift to a 100%
subcontracting model, we expect to reduce our cost of goods
sold. However, we expect our gross profit will continue to be
under pressure due to an overall weakness in the economy and
increased market pressures.

Research and
development.Research and development
expenses decreased from $9.2 million for the fiscal year ended
April 30, 2001 to $7.1 million for the fiscal year
ended April 30, 2002, a decrease of $2.1 million or
22.8%. This decrease was due primarily to decreases in staffing,
principally from the DTI development team in Texas along with
reductions to the staff in both our Needham and Calgary
facilities. For the years ended April 30, 2001 and 2002,
research and development expenses increased as a percentage of
revenues from 24.2% to 43.2% primarily as a result of the
reduction in revenues compared to the prior year.

Sales and marketing.Sales and marketing expenses decreased from $13.8 million
for the fiscal year ended April 30, 2001 to
$9.4 million for the fiscal year ended April 30, 2002,
a decrease of $4.4 million or 31.9%. This decrease was
primarily due to decreases in staffing of both sales and
marketing personnel to be more aligned with our decrease in
revenues. For the fiscal year ended April 30, 2002, sales
and marketing expenses increased as a percentage of revenues
from 36.1% to 57.0% primarily as a result of the reduction in
revenues compared to the prior year.

General and
administrative.General and
administrative expenses decreased from $4.6 million for the
fiscal year ended April 30, 2001 to $4.5 million for
the fiscal year ended April 30, 2002, a decrease of
$168,000 or 3.6%. For the years ended April 30, 2001 and
2002, general and administrative expenses increased as a
percentage of revenues from 12.2% to 27.2% primarily as a result
of the reduction in revenues compared to the prior year.

Amortization of stock based
compensation.In connection with the
grant of certain restricted stock awards and stock options to
employees in the fiscal year ended April 30, 2000, we
recorded deferred compensation expense of $8.5 million. The
amount recorded represents the difference between the deemed
fair value of the common stock for financial reporting purposes
and the exercise price of these options at the

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date of grant. Deferred compensation is presented
as a reduction of stockholders equity and is amortized
over the vesting period of the applicable options, generally
four years. We expensed $2.9 million of deferred
stock-based compensation in the year ended April 30, 2001.
In the fourth quarter of the year ended April 30, 2002, we
recorded an adjustment to reverse approximately
$1.5 million of stock-based compensation previously
recorded relating to terminated employees, which resulted in a
net benefit for the year of approximately $300 thousand.


Amortization of goodwill and other
intangibles.In conjunction with the
acquisition of DTIH, we recorded goodwill and certain intangible
assets resulting from the excess of purchase price over the fair
value of the tangible assets acquired. Goodwill and intangibles
were being amortized over a period of 5 years. During the
years ended April 30, 2001 and 2002, we recorded
$4.6 million and $2.2 million, respectively of
amortization expense related to goodwill and intangibles. The
decrease in amortization expense from the year ended
April 30, 2001 to the year ended April 30, 2002 was
due to the write-off of goodwill and certain identifiable
intangibles during the year ended April 30, 2002. As a
result of these charges, amortization expense has been reduced
from approximately $1.2 million per quarter to
approximately $318,000 per quarter through fiscal 2005.

Impairment of goodwill and other
intangibles.During the year ended
April 30, 2002, the Company evaluated the recoverability of
our long-lived assets, including intangibles related to the DTIH
acquisition. We determined that the estimated future
undiscounted cash flows were below their carrying value.
Accordingly, we recorded a special charge of $14.1 million.
These special charges relate to our $12.4 million write-off
of goodwill and a $1.7 million write-down of the carrying
value of certain identifiable intangibles to their estimated
fair value of $4.9 million at July 31, 2001.

Restructuring.In
July 2001, we consolidated our Texas operations and reduced
redundant headcount in other areas of the Company. We continued
to re-focus our business on our core competencies and matched
our staffing needs against our strategic initiatives. The
reorganization resulted in a reduction of 35 employees or
approximately 15% of the workforce then employed. In conjunction
with this action we recorded a charge of approximately $450,000
for the costs of severance, related benefits and outplacement
services. At April 30, 2002, approximately $380,000 had
been paid and approximately $70,000 was reversed. The
restructuring was completed in 2002 and we do not anticipate any
impact on future results.

In November, 2001, we undertook further
restructuring actions due to the continued downturn in the
economic environment and to accelerate our return to
profitability. These actions included the closure of the Texas
operations and personnel reductions of our Needham and Calgary
staffs, leading to an overall reduction of 75 employees or
approximately 45% of the workforce then employed in all
functional areas. In connection with this employee reduction, we
recorded a charge of approximately $1.0 million during the
three months ended January 31, 2002 for the costs of
severance, related benefits and outplacement services. At April
30, 2002, approximately $675,000 of the employee termination
costs had been paid, approximately $120,000 had been reversed
and the balance is expected to be paid out by December 2002. In
addition, we recorded a provision of approximately $350,000
related to the estimated remaining lease obligations for our
Texas operations which will be paid out by August 2004 and
recorded a charge of approximately $200,000 related to fixed
assets previously used at those facilities which were abandoned.
At April 30, 2002 approximately $54,000 had been paid and
$100,000 was reversed.

In April 2002, we undertook further restructuring
actions, again due principally to the continued economic
downturn and to accelerate our return to profitability. These
actions included a reduction of 17 employees or
approximately 15% of the workforce then employed. We recorded a
charge of approximately $275,000 for the costs of severance,
related benefits and outplacement services. The employee
termination costs will be paid out through October 2002. In
addition, we entered into a sublease agreement for approximately
32,000 square feet of our facility in Needham MA, through the
remainder of the lease term of March 2007. In connection with
this, we recorded a provision of approximately
$1.54 million related to the difference between the lease
payments and sublease income which will be paid out over the
remainder of the lease term of March 2007, and the write-off of
certain fixed assets of approximately $860,000.

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We estimate that these restructuring actions will
result in a savings of approximately $6.1 million in
salaries and wages and $1.2 million in facility related
expenses on an annual basis, although due to the current
economic environment, we anticipate that these savings may be
offset by a reduction in revenue.

Provision for legal settlement and
fees.We recorded a provision of
approximately $1.4 million related to a judgment against
the Company in favor of a former employee. The provision
includes the amount of the judgment, including interest, and
associated legal fees incurred by us.

Other income
(expense).Other income (expense),
consists primarily of interest income, and foreign exchange
gains or losses related to the effects of the Canadian/ U.S.
exchange rate on inter-company transactions. Other income
(expense) declined from income of $3.6 million for the
year ended April 30, 2001 to $1.3 million for the year
ended April 30, 2002, a decrease of $2.3 million. This
decrease was primarily due to a decrease in interest income
which decreased from $3.7 for the year ended April 30, 2001
to $1.4 million for the year ended April 30, 2002.
This decrease was related to a reduction in cash reserves
combined with reduced short term interest rates.

Income Tax
Provision.We recorded a provision of
$60,000 for the year ended April 30, 2002 compared to an
income tax benefit of $1.1 million for the year ended
April 30, 2001. The provision recorded for the year ended
April 30, 2002 represents a pro-rata portion of our minimum
tax obligations for fiscal 2002. The benefit recorded for the
year ended April 2001 resulted from a reduction of the deferred
tax valuation allowance which resulted from the deferred tax
liability recognized as part of the DTI acquisition.

Fiscal
years ended April 30, 2000 and 2001

Revenues.Revenues
increased from $25.1 million for the fiscal year ended
April 30, 2000 to $38.2 million for the fiscal year
ended April 30, 2001, an increase of $13.1 million or
52.4%. This increase was primarily due to the increased sales of
our remote voice access products, and our multi-user remote
voice products in particular. Revenues for fiscal 2001 increased
by approximately $7.4 million due to our acquisition of DTI
in June of 2000. Lucent Technologies, a significant customer
that has accounted for more than 40% of our revenues over the
past two years, divested its PBX unit into a standalone business
named Avaya. Revenue from Avaya declined from $7.1 million
during the first six months of fiscal 2001 to $2.1 million
during the last six months of fiscal 2001. This decrease in
revenue had an adverse affect on our operating results.

Cost of goods sold.Cost of goods sold increased from $9.5 million for the
fiscal year ended April 30, 2000 to $15.3 million for
the fiscal year ended April 30, 2001, an increase of
$5.8 million or 61.7%. This increase was primarily related
to the increase in volume of units shipped. Gross profit
decreased from 62.3% for the year ended April 30, 2000 to
60.0% for the year ended April 30, 2001. The decrease in
gross profit was primarily attributable to a $500,000 write down
of inventory related to the discontinuance of certain
non-strategic products as well as increased costs of certain
components such as flash memory, general pricing pressures in
the market and, to a lesser extent, start-up manufacturing costs
associated with our 24-port gateway and cost reduced EXTender
4000 products.

Research and
development.Research and development
expenses increased from $4.9 million for the fiscal year
ended April 30, 2000 to $9.2 million for the fiscal
year ended April 30, 2001, an increase of $4.3 million
or 89.3%. This increase was due primarily to increases in
staffing, the addition of DTIs development team, the
manufacturing of prototype units for our 24-port gateway and
cost reduced EXTender 4000 products, and, to a lesser extent,
related overhead costs. For the year ended April 30, 2000
and 2001, research and development expenses increased as a
percentage of revenues from 19.4% to 24.2% as a result of
increased spending and lower than expected revenues in the
second half of the year.

Sales and marketing.Sales and marketing expenses increased from $7.8 million
for the fiscal year April 30, 2000 to $13.8 million
for the fiscal year ended April 30, 2001, an increase of
$6.0 million or 76.8%. This increase was primarily due to
increases in staffing of both sales and marketing personnel, the
addition of DTIs sales force, the write-off of $500,000 of
accounts receivable due to the bankruptcy of a reseller, and, to
a lesser extent, increased marketing activities in support of
more diversified distribution. For the year ended

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April 30, 2000 and 2001, sales and marketing
expenses increased as a percentage of revenues from 31.2% to
36.1% as a result of increased spending and lower than expected
revenues in the second half of the year.


General and
administrative.General and
administrative expenses increased from $2.5 million for the
fiscal year ended April 30, 2000 to $4.6 million for
the fiscal year ended April 30, 2001, an increase of
$2.1 million or 87.7%. This increase was primarily due to
increases in staffing in our accounting and human resources
groups to support our growth and reporting requirements as a
public company, the addition of DTI staff, fees associated with
the recruiting and hiring of our new Chief Executive Officer,
and, to a lesser extent, professional service costs. For the
year ended April 30, 2000 and 2001, general and
administrative expenses increased as a percentage of revenues
from 9.9% to 12.2% as a result of increased spending and lower
than expected revenues in the second half of the year.

Amortization of stock-based
compensation.In connection with the
grant of certain stock options to employees prior to our initial
public offering on October 22, 1999, we recorded deferred
compensation expense of $9.7 million, net of cancellations
of certain options. The amount recorded represents the
difference between the deemed fair value of the common stock for
financial reporting purposes and the exercise price of these
options at the date of grant or cancellation. Deferred
compensation is presented as a reduction of stockholders
equity and is amortized over the vesting period of the
applicable options, generally four years. We recorded
$4.6 million and $2.9 million of stock-based
compensation expense in the fiscal years ended April 30,
2000 and 2001, respectively.

Amortization of goodwill and other
intangibles.In conjunction with the
acquisition of DTIH, we recorded goodwill and certain intangible
assets resulting from the excess of purchase price over the fair
value of the tangible assets acquired. During the year ended
April 30, 2001, we recorded $4.6 million of
amortization expense related to goodwill and intangibles.

Write-off of in-process research and
development.During fiscal 2001 we
allocated $694,000 of the $23.6 million purchase price for
the DTIH acquistion and 100% of the Entrata acquisition price to
in-process research and development. We did not incur any such
charges in fiscal 2000. In-process research and development
represents ongoing acquired research and development projects
which have yet to reach technological feasibility and would have
no probable alternative future use. We used independent
professional valuation consultants to assess and allocate values
for the DTIH acquisition. With regard to Entrata, it was
estimated that the non-exclusive license we purchased was less
than 50% complete and would require approximately
$2.0 million of additional funding to integrate with our
technology. No assurance can be given, however, that the
underlying assumptions used in the valuation of these projects
will be realized. Additionally, the development of our
technology has inherent risks in the design of its hardware and
software components, the manufacture of the product, and the
development of a marketplace to sell the product. If we
experience problems or delays in designing or manufacturing the
product or should the market not develop for our products it
could affect or prevent us from achieving commercial success.
After evaluation of technology and market opportunities, the
Company decided not to develop products relating to the Entrata
technology.

Restructuring.During March 2001 we reorganized various operating functions of
our business, re-focused our business on our core competencies
and matched staffing needs to our strategic initiatives. The
reorganization and refocusing resulted in a reduction of 25
employees or approximately 10% of the workforce then employed.
In conjunction with this action we recorded a charge of
approximately $597,000 for the costs of severance, related
benefits and outplacement services. The restructuring was
completed and excess reserves of $65,000 were reversed in 2002.

Other income
(expense).Other income
(expense) improved from income of $758,000 for the fiscal
year ended April 30, 2000 to $3.6 million for the
fiscal year ended April 30, 2001, an improvement of
$2.9 million. Interest expense, offset by interest income,
improved from income of $794,000 for the fiscal year ended
April 30, 2000 to income of $3.7 million for the
fiscal year ended April 30, 2001. This improvement was
primarily related to interest earned on invested cash and the
repayment of our subordinated debt. Foreign exchange losses for
the fiscal year ended April 30, 2000 were $20,000 compared
to a loss of $34,000 for the fiscal year ended April 30,
2001. Losses were primarily related to a weakening of the
Canadian Dollar against the U.S. Dollar.

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Income Tax Provision
(Benefit).The Company recorded a
income tax benefit of $1.1 million for the fiscal year
ended April 30, 2001 compared to a provision of $100,000
for the fiscal year ended April 30, 2000. The benefit
primarily resulted from a reduction of the deferred tax asset
valuation allowance, which resulted from the deferred tax
liabilities recognized as part of the DTIH acquisition.

Liquidity and Capital Resources

As of April 30, 2002, our principal sources
of liquidity consisted of cash and equivalents of
$4.6 million and short-term investments of
$39.8 million. This represents a decrease in cash and
equivalents and short-term investments of $10.4 million
compared to April 30, 2001. We regularly invest excess
funds in short-term money market funds, commercial paper, and
government and non-government debt securities. These investments
are designed to provide current income to the Company without
exposing the principal to significant risk.

Net cash used in operating activities was $10.2
million in the fiscal year ended April 30, 2002, compared with
net cash used in operating activities of $4.1 million in the
fiscal year ended April 30, 2001 and net cash provided by
operating activities of $1.3 million in the fiscal year ended
April 30, 2000. Cash used in operating activities in the fiscal
year ended April 30, 2002 was primarily attributable to the
decrease in revenues in the period.

Net cash provided by investing activities was
$10.3 million in the fiscal year ended April 30, 2002, compared
with net cash used in investing activities of $46.6 million in
the fiscal year ended April 30, 2001 and $21.9 million in the
fiscal year ended April 30, 2000. Net cash provided by investing
activities in the fiscal year ended April 30, 2002 was used
primarily to fund operating expenses.

Net cash provided by financing activities was
$333,000 in the fiscal year ended April 30, 2002, compared with
net cash used in financing activities of $792,000 in the fiscal
year ended April 30, 2001 and net cash provided by financing
activities of $73.3 million for the fiscal year ended April 30,
2000. Net cash provided by financing activities for the fiscal
year ended April 30, 2002 was primarily attributable to the sale
of common stock under our employee stock purchase plan and the
exercise of stock options.

We expect to devote our capital resources to
continue our research and development efforts to prudently
enhance our existing products and fund new product development
initiatives targeted at the growing telephony applications in
business markets, to hire and expand our sales, support,
marketing and product management organizations, to expand
marketing programs and for other general corporate activities.
In addition, we may utilize cash resources to fund acquisitions
or investments in complementary businesses, technologies or
products. We believe that our current cash and equivalents,
short-term investments and cash generated from operations will
be sufficient to meet our anticipated cash requirements for
working capital and capital expenditures for at least the next
12 months.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standard (SFAS) No. 141, Business
Combinations. SFAS No. 141 revises the standards of
business combinations by eliminating the use of the
pooling-of-interests (pooling) method and requiring
that all business combinations be accounted for using the
purchase method of accounting. SFAS No. 141 also changes
the criteria to recognize intangible assets apart from goodwill.
The provisions of SFAS No. 141 are effective for all
business combinations initiated after June 30, 2001. The
adoption of this statement had no impact on the Companys
financial position and results of operations.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 142 revises the standards of accounting for goodwill
and indefinite lived intangible assets by replacing the regular
amortization of these assets with the requirement that they are
reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have
finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS No. 142 are
effective for fiscal years

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beginning after December 15, 2001. The
adoption of this statement will have no material impact on the
Companys financial position and results of operations.


In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. SFAS No. 144 supercedes SFAS
No. 121 by requiring one accounting model to be used for
long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. The Company has
not yet determined what effect, if any, SFAS No. 144 may
have on its financial position, results of operations, or cash
flows.

Disclosures About Market Risk

Interest Rate Risk.The Companys cash equivalents and marketable securities
primarily consist of interest sensitive securities with weighted
average maturities of less than six months. A 100 basis point
decrease in interest rates would not result in a material change
in the fair value of these investments due mainly to the
short-term nature of these investments. However, a 100 basis
point decrease in interest rates would increase our net loss by
approximately $440,000.

Foreign Currency Exchange Rate
Risk.We primarily sell our products
in U.S. dollars and therefore we are not generally exposed to
foreign currency exchange risk. However, our Canadian subsidiary
sells products to Canadian customers that it invoices in
Canadian dollars. In the fiscal year ended April 30, 2002,
this revenue accounted for 12% of revenues. Transactions with
our Canadian subsidiary, whose functional currency is the
Canadian dollar, present us with foreign currency exchange risk.
The principal transactions are buying and selling of inventory.
The intercompany balance is denominated in U.S. dollars and
changes in the foreign currency exchange rate result in foreign
currency gains and losses. Using the intercompany balance at
April 30, 2002, a 10% strengthening of the U.S. dollar
against the Canadian dollar would result in a foreign currency
transaction loss of approximately $287,000. To date foreign
exchange gains and losses have not been significant.
Transactions with our United Kingdom office, whose functional
currency is the British Pound have not been significant and have
not had a material impact on our operations. All sales outside
of North America are denominated in U.S. dollars and are not
generally exposed to foreign currency exchange risk.

At April 30, 2002 we did not own any equity
investments. Therefore, we did not have any direct equity price
risk.

Factors Affecting Future Operating Results and
Stock Price

We are Exposed to General Economic and
Worldwide Political Conditions

As a result of unfavorable economic conditions,
the effects of war and acts of terrorism, reduced capital
spending by our enterprise end users, and the need of our
indirect channel partners to hold less inventory to satisfy
customer demand, our sales declined significantly in the second
half of our fiscal year ended April 30, 2001 and first half
of our fiscal year ended April 30, 2002. This economic
downtown has resulted in longer selling cycles for new equipment
purchases. We believe that our business and results of
operations will be seriously harmed if current economic
conditions do not improve. Specifically, as the rate at which
the Companys customers order its products decreases, the
more likely it is that current inventories will be exposed to
technological obsolescence, thus requiring the Company to reduce
the value of that inventory on the balance sheet. Additionally,
the slow down may impact our customers ability to pay for
products previously shipped which would require us to write-off
the associated receivables against earnings or take products
back in return.

We May be Materially and Adversely Affected
by Continued Reductions in Spending on Telecommunications
Infrastructure by Our Customers.

A continued slowdown in capital spending by
enterprises may affect our revenues more than we currently
expect. Moreover, the significant slowdown in IT capital
spending has created uncertainty as to market demand. As a
result, revenues and operating results for a particular period
can be difficult to predict. In

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addition, there can be no certainty as to the
severity or duration of the current industry adjustment. As a
result of the recent changes in industry and market conditions,
many end user customers have reduced their capital spending on
telecommunications infrastructure. Our revenues and operating
results have been and are expected to continue to be materially
and adversely affected by the continued reductions in capital
spending on telecommunications infrastructure by existing and
potential customers.


We Derive Almost All of Our Revenues from a
Small Number of Customers and Our Revenues May Decline
Significantly if Any Major Customer Cancels or Delays a Purchase
of Our Products

We have historically derived the majority of our
revenues from a small number of customers, most of whom resell
our products to end users. Our failure to generate as much
revenue as expected from these customers or the failure of these
customers to purchase our products would seriously harm our
business.

None of our customers is obligated to purchase
additional products or services. Accordingly, present and future
customers may terminate their purchasing arrangements with us or
significantly reduce or delay their orders. Any termination,
change, reduction or delay in orders could seriously harm our
business, financial condition and results of operations.
Accordingly, unless and until we diversify and expand our
customer base, our future success will significantly depend upon
the timing and size of future purchases by our customers and, in
particular:



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | market strategies of these customers                                              
|
| |  | the product requirements of these customers                                       
|
| |  | the financial and operational success of these
    customers                      
|
| |  | the success of the underlying products and
    services that our products support.

The loss of any one of our major customers or the
delay of significant orders from such customers, even if only
temporary, could reduce or delay our recognition of revenues,
harm our reputation in the industry and reduce our ability to
accurately predict cash flow, and, as a consequence, could
seriously harm our business, financial condition and results of
operations.

Our Inability to Develop and Maintain
Relationships with Key PBX and KTS System Vendors Would Harm Our
Ability to Sustain and Grow Our Business

Our success depends to a significant degree upon
our relationships with leading enterprise voice vendors like
Alcatel, Avaya, Ericsson, Iwatsu, Infrontia (formerly known as
Nitsuko), Nortel, NEC, Panasonic and Toshiba, among others and
their associated channel distribution partners. The systems sold
by these vendors account for approximately 85% confirm of the
U.S. market for voice equipment sales, and substantially all of
our revenues for the fiscal year ended April 30, 2002 were
attributable to products which interoperate with enterprise
voice systems offered by these vendors. Given that our products
interface with a broad range of switches, if we have difficulty
in implementing these interfaces on new products, it could delay
growing new revenues. Furthermore, we may not have access in the
future to the switch-specific protocols for the major telephone
systems marketed by those vendors, which access may be essential
to ensure the continued interoperability of our products.
Moreover, we may not be able to develop products that
interoperate with the voice systems offered by other vendors.
Additionally, the standards for telephony equipment and data
networks are evolving and our products may not be compatible
with any new technology standards that may emerge. If we are
unable to provide our customers with interoperable solutions,
they may make purchases from vendors who provide the requisite
product interoperability. This could seriously harm our
business, financial condition and results of operations.

In addition, we currently have varying
distribution, marketing and development arrangements with the
vendors noted above. There is no assurance that we will continue
to enjoy the support and cooperation that we have historically
experienced from these parties or their associated distribution
channels. Also, there is no certainty that these parties will
continue to offer MCKs products in their sales portfolio.
It is possible that these vendors may seek to offer broader
product lines and solutions that are competitive with our
products. In

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addition, they may change their distribution
models which could negatively impact our revenues. Furthermore,
the Company must correctly anticipate the price, performance and
functionality requirements of the PBX and KTS partners and the
Company must successfully develop products that meet OEM
requirements and make these products available on a timely basis
and in sufficient quantities in order to sustain and grow our
business.


If We Fail to Develop and Expand Our
Indirect Distribution Channels, Our Business Could
Suffer

Our product distribution strategy focuses
primarily on strengthening our relationships with our
distribution partners and developing and maintaining our
relationships with PBX and KTS system vendors, value added
resellers, distributors, and telecom resellers and nextgen
service providers. If we fail to develop and cultivate
relationships with significant indirect distribution channels,
or if these distribution channels are not successful in their
sales efforts, our product sales may decrease and our operating
results may suffer. Many of our indirect distribution channels
also sell products that compete with our products, and none of
our strategic or reseller arrangements are exclusive. In
addition, our operating results will likely fluctuate
significantly depending on the timing and amount of orders from
our distribution partners. Our indirect distribution channels
may not market our products effectively or may cease to devote
the resources necessary to provide us with effective sales,
marketing and technical support.

If there is consolidation in any of the
Companys target markets or if a small number of vendors
dominate any of these markets, then the Companys success
will depend on its ability to establish and maintain
relationships with the market leaders. If the Company does not
anticipate trends in any of its markets or fails to meet the
requirements of PBX and KTS vendors, or if the Company does not
successfully establish and maintain relationships with them,
then its business, financial condition and results of operations
could be seriously harmed.

Because We Sell Through Indirect
Distribution Channels, Our Visibility Into End User Demand Is
Limited

Our product distribution strategy is focused
primarily on selling to indirect distribution channels rather
than selling directly to end users. We do not typically have the
primary relationship with the end users who ultimately purchase
our products from our distribution partners. We interface with
our channel partners and rely on them for information. The
information we receive from our channel partners related to
future demand for our products is limited. While some provide us
with forecasts, pipelines and other key end user account
information, it is often not timely, can be incomplete and
cannot always be relied upon for its accuracy. As a result, it
is difficult for us to clearly understand our sales pipeline and
therefore our results may vary significantly from our internal
targets. Furthermore, if our partners change their purchasing
criteria, buying habits and/or inventory policies it will have a
significant impact on the Companys business results.

Unless We Are Able to Keep Pace with the
Rapidly Changing Product Requirements of Our Customers, We Will
Not Be Able to Sustain or Grow Our Business

The business communications market is
characterized by rapid technological advances, evolving industry
standards, changes in end-user requirements, frequent new
product introductions, intense competition and economic
uncertainty. We believe our future success will largely depend
on our ability to anticipate or adapt to such changes and to
offer, on a timely basis, products that meet customer demands in
growing segments. Our customers could purchase competitive
products from other suppliers if we fail to produce
technologically competitive products in a cost-effective manner
or on a timely basis. Our business is differentiated by
supporting a broad range of switch, device and network types. As
new ones emerge, our growth is dependent on supporting the new
and previously existing switch, device and network types. These
rapid technological advances make it difficult for our product
validation and test center to verify all possible environments
and this may have a negative impact on our customer support,
product enhancements and new product development. This may cause
us to be unable to sustain or grow our business.

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If Our Products Are Not Accepted by the
Market, Our Revenues Will Decrease

Market acceptance of our products is critical to
our future success. Factors that may affect the market
acceptance of our products include:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | continued market acceptance of traditional PBX
    and KTS technology               
|
| |  | delayed market acceptance of Nextgen switches and
    applications                  
|
| |  | the performance, price and total cost of
    ownership of our products              
|
| |  | the availability, functionality and price of
    competing products and technologies
|
| |  | the efforts and success of our indirect
    distribution channels.                  

Many of these factors are beyond our control. We
may experience failure or delays in market acceptance of our
products. Failure of our existing or future products to maintain
and achieve meaningful levels of market acceptance would reduce
the amount of revenue we receive from the sale of our products.

Because Substantially All of Our Revenues
are Derived from Sales of a Small Number of Products, Our Future
Operating Results will be Dependent on Sales of These
Products

We currently derive the majority of our revenues
from our product family of distributed voice equipment, and we
expect that this concentration will continue in the foreseeable
future. The market may not continue to demand our products, and
we may not be successful in marketing any new or enhanced
products. Any reduction in the demand for our products or our
failure to successfully develop or market new or enhanced
products could reduce the amount of revenue we receive from the
sale of our products and cause the price of our common stock to
decline. In addition, we expect our single-user products,
multi-user products, and our recently announced family of
gateway products will account for a substantial portion of our
revenues in the foreseeable future. Factors that could affect
sales of our products include:



| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | the demand for distributed voice solutions                                                                                            
|
| |  | the successful development, introduction and
    market acceptance of new and enhanced products that address
    customer requirements
|
| |  | product introductions or announcements by our
    competitors                                                                         
|
| |  | solution or price competition in our industry                                                                                         
|
| |  | technological change and customer acceptance                                                                                          
|
| |  | distribution changes, their business operation
    changes or they experience changes in their customer
    relationships.            

Intense Competition in the Market for
Enterprise Voice Solutions Could Prevent Us from Increasing or
Sustaining Revenue and Prevent Us from Achieving or Sustaining
Profitability

The market for enterprise voice solutions is
highly competitive. Our inability to compete effectively in this
market would materially adversely affect our revenues and future
profitability. Many of our current and potential competitors
have significantly greater sales and marketing, technical,
manufacturing, financial and other resources, more established
distribution channels and stronger relationships. For instance,
Nortel Networks, Avaya and more recently, Intel have released
products which compete directly with our products. KTS vendors
have announced network implementations. Non-traditional vendors
are offering IP or wireless based systems which are displacing
legacy environments. Moreover, our competitors may foresee the
course of market developments more accurately than we do and
could in the future develop new technologies that compete with
our products or even render our products obsolete. Realizing and
maintaining technological advantages over our competitors will
require a continued high level of investment in research and
development, sales and marketing and customer support and may
result in charges, write-offs, etc. as we transition our product
line and offer products to address the needs of hybrid,
converged and next generation equipment manufacturers. Due to
the opportunities in and the rapidly evolving nature of the
market in which we compete, additional competitors with
significant market presence and financial resources, including
large communications equipment manufacturers, may enter our
market, thereby further intensifying competition.

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We may not have sufficient resources to continue
to make the investments or achieve the technological advances
necessary to compete successfully with existing competitors or
new competitors.


Increased competition is likely to result in
price reductions, reduced gross margins, longer sales cycles and
loss of market share, any of which would seriously harm our
business and results of operations. We may not be able to
compete successfully against current or future competitors and
these competitive pressures may seriously harm our business.

The Companys Ability to Further
Reduce Costs is Limited by its Ongoing Need to Invest in
Research and Development

The Companys industry is characterized by
the need for continued investment in research and development.
If the Company failed to invest sufficiently in research and
development, the Companys products could become less
attractive to potential customers, and its business and
financial condition could be materially adversely affected. As a
result of the Companys need to maintain or increase its
spending levels in this area and the difficulty in reducing
costs associated with research and development, the
Companys operating results could be materially harmed if
its net sales fall below expectations. In addition, as a result
of the need for research and development and technological
innovation, the Companys operating costs may increase in
the future.

Future Consolidation in the Communications
Equipment Industry May Increase Competition that Could Harm Our
Business

The markets in which we compete are characterized
by increasing consolidation both within the communications
sector and by companies combining or acquiring communications
assets. This consolidation creates uncertainty as to the nature
of our future competition. For instance, a relatively small
competitor that is acquired by a large telecommunications
company would likely have access to greater resources than us
and would accordingly be a greater competitive threat. We may
not be able to compete successfully in an increasingly
consolidated industry. Increased competition and consolidation
in our industry could require that we reduce the prices of our
products and may result in our loss of market share, which would
materially adversely affect our business, financial condition
and results of operations. Additionally, because we are now, and
may in the future be, dependent on strategic relationships with
third parties in our industry, such as PBX and KTS vendors, and
large distributors, any consolidation involving these parties
could reduce the demand for our products and otherwise harm our
business prospects.

Our Dependence on Independent Manufacturers
and Suppliers Could Result in Product Delivery
Delays

We currently use two independent manufacturers,
Mack Technologies, and OEM Worldwide to manufacture all of our
products. Our reliance on independent manufacturers involves a
number of risks, including the absence of adequate capacity, the
unavailability of or interruptions in access to necessary
manufacturing processes and reduced control over delivery
schedules. If our manufacturers are unable or unwilling to
continue manufacturing our products and components in required
volumes, we will have to identify acceptable alternative
manufacturers, which could take in excess of six months.
Furthermore, the use of a new manufacturer may cause significant
interruptions in supply if the new manufacturer has difficulty
manufacturing products to our specifications. Further, the
introduction of a new manufacturer may increase the variance in
the quality of our products. In addition, we rely upon
third-party suppliers of specialty components and intellectual
property used in our products. It is possible that a component
needed to complete the manufacture of our products may not be
available to us at acceptable prices or on a timely basis, if at
all. For example, the demand for flash memory chips may be
strong and lead to shortages for these components of our
products. Inadequate supplies of components, or the loss of
intellectual property rights, could affect our ability to
deliver products to our customers. Any significant interruption
in the supply of our products would result in the reduction of
product sales to customers, which in turn could permanently harm
our reputation in the industry.

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If Anything Unexpected Were to Happen to
Damage the Equipment in Our Validation Laboratory Our Ability to
Develop and Test Our Products Would Be Restricted

We currently have a state of the art validation
laboratory and test center in our Calgary facility in which we
conduct product testing and system interoperability testing. If
the equipment in the validation laboratory were damaged due to a
natural disaster or other events it would take time to recreate
our unique laboratory environment and this would have a negative
impact on our customer support, product enhancements and new
product development.

Our Ability to Sustain or Grow Our Business
May Be Harmed If We Are Unable to Provide Adequate Customer
Support

Our ability to continue to grow and to retain
current and future customers depends in part upon the quality of
our customer support operations. We have entered into an
arrangement with a third-party customer support firm to provide
some of our customer support functions. Failure to offer
adequate customer support, either directly or through third
parties, or failure to properly integrate third-party services
into our customer support framework could materially and
adversely affect our reputation and cause demand for our
products to decline.

Fluctuations in Our Quarterly Results Could
Cause the Market Price of Our Common Stock to Fall

The Companys period-to-period revenue and
operating results have varied in the past and management expects
they will continue to vary in the future, and any such
fluctuations may cause the Companys stock price to
fluctuate. Accordingly, investors should not rely on the results
of any past quarterly or annual periods as an indication of
MCKs future performance. In future periods, the
Companys operating results may fail to meet or surpass the
expectations of public market analysts or investors, which could
cause the price of MCKs common stock to decline, perhaps
significantly. A number of factors could cause our quarterly
results to fluctuate, including, but not limited to:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and amount of, or cancellation or
    rescheduling of, orders for our products, particularly large
    orders from our key customers                      
|
| |  | our ability to develop, introduce, ship and
    support new products and product enhancements, and manage
    product transitions                                    
|
| |  | new product introductions and announcements, and
    rate of adoption                                                                                                
|
| |  | reductions in the prices of products offered by
    our competitors, competition from new technologies                                                               
|
| |  | our ability to sustain our technology
    relationships, particularly with the major PBX and KTS system
    manufacturers, distributor partners and telecom resellers
|
| |  | availability and changes in the prices of
    components provided by third parties                                                                                   
|
| |  | our ability to attain and maintain production
    volume levels for our products                                                                                     
|
| |  | excess or obsolete inventory and variations in
    inventory valuation                                                                                               
|
| |  | unpredictability of life cycles of MCKs
    customers                                                                                                               
|
| |  | our ability to sustain product and customer
    support quality                                                                                                      
|
| |  | changes in our distribution partners, their
    operating models, and/or customer relationships                                                                      
|
| |  | the mix of products sold and the mix of
    distribution channels through which they are sold                                                                        
|
| |  | fluctuations in demand for our products                                                                                                                              
|
| |  | costs relating to possible acquisitions and
    integration of technologies or businesses                                                                            
|
| |  | telecommunications market conditions and economic
    conditions generally                                                                                           
|
| |  | our ability to hire, train, integrate and retain
    new personnel                                                                                                   
|
| |  | changes in the level of our operating expenses.                                                                                                                      

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Given that any one or more of these or other
factors could have an adverse effect on our business, the
prediction of future quarterly results is difficult and
uncertain. In addition, some of our operating expenses are
relatively fixed in advance of any particular quarter. As a
result, we may not be able to reduce our operating costs in
response to unanticipated reductions in our revenues or the
demand for our products.

Our Stock Price Has Been, and May Continue
to be, Volatile and Investors May Not Be Able to Resell Shares
at or Above Their Purchase Price

The trading price of our common stock has been,
and may continue to be, subject to wide fluctuations in response
to factors such as:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | changes in general market conditions                                                                                                     
|
| |  | actual or anticipated variations in quarterly
    operating results                                                                      
|
| |  | announcements of technological innovations                                                                                               
|
| |  | general technology or economic trends                                                                                                    
|
| |  | revenues and operating results failing to meet or
    surpass the expectations of securities analysts or investors in
    any quarter    
|
| |  | changes in financial estimates by securities
    analysts                                                                                
|
| |  | announcements of significant acquisitions,
    strategic partnerships, joint ventures or capital commitments by
    us or our competitors
|
| |  | additions or departures of key personnel                                                                                                 
|
| |  | the demand for our common stock                                                                                                          
|
| |  | the number of market makers for our common stock                                                                                         
|
| |  | sales of a large number of shares of our common
    stock in the public market or the perception that such sales
    could occur         
|
| |  | other events or factors, many of which are beyond
    our control.                                                                       

In addition, the stock market in general, and the
Nasdaq National Market and technology companies in particular,
have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of such companies. These broad market and industry
factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. In
the past, following periods of volatility in the market price of
a companys securities, securities class-action litigation
has often been instituted against such companies. Such
litigation, if instituted, could result in substantial costs and
a diversion of managements attention and resources, which
would reduce the amount of resources and management time focused
on growing our business and improving operating results.

Sales to Customers Based Outside the United
States have Historically Accounted for a Significant Portion of
Our Revenues, Which Exposes Us to Risks Inherent in
International Operations

International sales represented 20% of our
revenues for the fiscal year ended April 30, 2002, and
18.4% of our revenues for the fiscal year ended April 30,
2001. While we expect sales to international markets to increase
as a percentage of revenues in the future, international sales
are subject to a number of risks, including:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | changes in foreign government regulations laws,
    and communications standards              
|
| |  | export license requirements                                                                   
|
| |  | currency fluctuations, tariffs and taxes                                                      
|
| |  | other trade barriers                                                                          
|
| |  | difficulty in collecting accounts receivable;
    longer accounts receivable collection cycles
|
| |  | difficulty in managing across disparate
    geographic areas                                  

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| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulties in hiring qualified local personnel                                                                                                                       
|
| |  | difficulties associated with enforcing agreements
    and collecting receivables through foreign legal systems                                                         
|
| |  | expenses associated with localizing products for
    foreign markets                                                                                                   
|
| |  | political and economic instability, including
    disruptions of cash flow and normal business operations that may
    result from terrorist attacks or armed conflict.

If the relative value of the U.S. dollar in
comparison to the currency of our foreign customers should
increase, the resulting effective price increase of our products
to these foreign customers could result in decreased sales. In
addition, to the extent that general economic downturns impact
our customers, the ability of these customers to purchase our
products could be adversely affected. Payment cycles for
international customers are typically longer than those for
customers in the United States. The foreign markets for our
products may develop more slowly than currently anticipated.
Also, the Companys ability to expand the sale of its
products internationally is limited by the necessity of
obtaining regulatory approval in new countries. We anticipate
that our non-Canadian, foreign sales will generally be invoiced
in U.S. dollars, and we do not currently plan to engage in
foreign currency hedging transactions. As we expand our
international operations, however, we may allow payment in
foreign currencies, and exposure to losses in foreign currency
transactions may increase. We may choose to limit any currency
exposure through the purchase of forward foreign exchange
contracts or other hedging strategies. Our future currency
hedging strategies may not be successful.

Our Limited Ability to Protect Our
Intellectual Property May Adversely Affect Our Ability to
Compete

Our success and ability to compete is dependent
in part upon our proprietary technology. Any infringement of our
proprietary rights could result in significant litigation costs,
and any failure to adequately protect our proprietary rights
could result in our competitors offering similar products,
potentially resulting in loss of a competitive advantage and
decreased revenues. We rely on a combination of patent,
copyright, trademark, trade secret and other intellectual
property laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary
rights. We presently have no issued patents. Despite our efforts
to protect our proprietary rights, existing copyright, trademark
and trade secret laws afford only limited protection. In
addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the
United States. The Company expects that the use of its
intellectual property will become more difficult to monitor if
MCK increases its international presence. Attempts may be made
to copy or reverse engineer aspects of our products or to obtain
and use information that we regard as proprietary. Accordingly,
we may not be able to protect our proprietary rights against
unauthorized third party copying or use. Furthermore, policing
the unauthorized use of our products is difficult. Some of our
contractual arrangements provide third parties with access to
our source code and other intellectual property upon the
occurrence of specified events. Such access could enable these
third parties to use our intellectual property and source code
to develop and manufacture competing products, which would
adversely affect our performance and ability to compete.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and
diversion of resources, could seriously harm our future
operating results, and may not prove successful.

Claims Alleging Infringement of a Third
Partys Intellectual Property Could Result in Significant
Expense to Us and Result in Our Loss of Significant
Rights

The telecommunications industry is characterized
by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. From
time to time, third parties may assert patent, copyright,
trademark, trade secret and other intellectual property rights
to technologies that are important to our business, and this
risk may increase as the number of entrants in our market
increases and the functionality of our products is enhanced and
overlaps with the products of other companies. Any claims
against us or any purchaser or user of our products asserting
that our products infringe or may infringe proprietary rights of
third parties, if determined adversely to us, could have a
material adverse effect on our

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business, financial condition or results of
operations. Any claims, with or without merit, could be time
consuming, result in costly litigation, divert the efforts of
our technical and management personnel, cause product shipment
delays, disrupt our relationships with our customers or require
us to enter into royalty or licensing agreements, any of which
could have a material adverse effect upon our operating results.
Such royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all. Legal action
claiming patent infringement may be commenced against us and we
may not prevail in such litigation given the complex technical
issues and inherent uncertainties in patent litigation. In the
event a claim against us is successful and we cannot obtain a
license to the relevant technology on acceptable terms, license
a substitute technology or redesign our products to avoid
infringement, our business, financial condition and results of
operations would be materially adversely affected.


In addition, because much of the ability of our
products to interoperate with the protocols of the various PBX
vendors is based upon our prior development work and/or
agreements with those vendors, it is possible that those vendors
may assert that our products infringe their trade secrets or
other intellectual property rights. Such claims may also be
precipitated by the declining product sales being experienced by
all of the major PBX vendors and the trend toward more open,
interoperable solutions that do not favor switch-specific
offerings. For example, the Company recently received
notification from Avaya that it believed the Company was
improperly utilizing certain of its intellectual property in our
products that interface with Avayas PBX systems and that
the Company may owe Avaya additional royalties with respect to
the sales of such products. The Company believes that these
allegations are without merit and intends to defend against them
vigorously. There can, however, be no assurance regarding the
outcome of this matter and it is possible that other PBX vendors
will make similar allegations against the Company in the future.

If Our Products Contain Defects, We May be
Subject to Significant Liability Claims from Our Customers and
the End Users of Our Products and Incur Significant Unexpected
Expenses and Lost Sales

Our products have in the past contained, and may
in the future contain, undetected or unresolved errors when
first introduced or as new versions are released. Despite
extensive testing, errors, defects or failures may be found in
our current or future products or enhancements after
commencement of commercial shipments. If this happens, we may
experience delay in or loss of market acceptance and sales,
certain product returns, diversion of development resources to
alleviate such problems, injury to our reputation or increased
service and warranty costs, any of which could seriously harm
our business, financial condition and results of operations.
Moreover, because our products are designed to be deployed
within business critical communications networks, we may receive
significant liability claims. Our agreements with customers
typically contain provisions intended to limit our exposure to
liability claims. These limitations may not, however, preclude
all potential claims resulting from a defect in one of our
products. Existing or future laws or unfavorable judicial
decisions could negate any limitation of liability provisions
that are included in the Companys license agreements

Although MCK maintains product liability
insurance covering damages arising from the implementation and
use of our products, the terms of our insurance limit the amount
and types of damages that are covered and the Company does not
guarantee that coverage under insurance policies will be
adequate to cover product liability claims. Liability claims
could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such
claims, whether or not successful, could seriously damage our
reputation and our business.

The Adverse Resolution of Litigation
Against Us Could Negatively Impact Our Business

We are currently a defendant in a class action
lawsuit initiated on behalf of holders of MCK Communications,
Inc. common shares, which seeks damages of material and
indeterminate amounts, and other lawsuits in the normal course
of business. We are and may in the future be subject to other
litigation arising in the normal course of our business.
Litigation may be time consuming, expensive, and distracting
from the conduct of our business, and the outcome of litigation
is difficult to predict. The adverse resolution of any specific
lawsuit could have a material adverse effect on our business,
results of operations, and financial condition. In addition,
product liability insurance could become more expensive and
difficult to maintain and

43



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may not be available in the future on
commercially reasonable terms or at all. The amount and scope of
any insurance coverage may be inadequate if a product liability
claim is successfully asserted against MCK.


We May Have Difficulty Identifying the
Source of the Problem When There is a Problem in a Network Which
May Adversely Affect the Market Acceptance of Our
Products

Our products must successfully integrate with
products from other vendors, such as circuit switched and IP
PBXs, application servers, telephony sets and private and public
networks. As a result, when problems occur in a network, it may
be difficult to identify the source of the problem. The
occurrence of hardware and software errors, whether caused by
our products or another vendors products, may result in
the delay or loss of market acceptance of our products and any
necessary revisions may force us to incur significant expenses.
The occurrence of some of these types of problems may seriously
harm our business, financial condition and results of operations.

Difficulties and Financial Burdens
Associated with Acquisitions Could Harm Our Business and
Financial Results

In the past we acquired all of the outstanding
stock of DTI Holdings, Inc. and its wholly owned subsidiary
Digital Techniques, Inc. In the future we may consider selective
opportunistic acquisitions of companies or businesses with
resources and products or service offerings capable of providing
us with additional strengths. Acquisitions involve significant
risks and uncertainties. These risks and uncertainties include
the risk that any future acquisition, may not produce the
revenue, earnings or business synergies that we anticipated, and
an acquired product, service or technology might not perform as
expected. Prior to completing an acquisition, however, it is
difficult to determine if such benefits can actually be
realized. The process of integrating acquired companies into our
business may also result in unforeseen difficulties. Unforeseen
operating difficulties may absorb significant management
attention, which we might otherwise devote to our existing
business. Also, the process may require significant financial
resources that we might otherwise allocate to other activities,
including the ongoing development or expansion of our existing
operations. In addition, an acquisition might adversely effect
the business relationships with the Companys existing
suppliers and customers and/or those of the acquired company.
Acquired company assets might become impaired as a result of
technical advancements or worse-than-expected performance by the
acquired company. The merged company may enter markets in which
MCK has no, or limited prior experience. If the recently
completed acquisition or any future acquisition fails to meet
our expectations or if we change the strategic focus of the
company, we may decide to sell, close, or otherwise
significantly reduce our investment in the acquired technologies
which could have an adverse effect on our operating results.

If we pursue a future acquisition, our management
could spend a significant amount of time and effort identifying
and completing the acquisition. To pay for a future acquisition,
we might use capital stock or cash. Alternatively, we might
borrow money from a bank or other lender or obtain financing on
unfavorable terms. We might incur amortization expenses related
to acquired intangible assets or incur large and immediate
write-offs. This might include write-offs related to office
closures, including costs relating to termination of employees
and facility and leasehold improvement charges relating to
vacating premises. If we use capital stock, our stockholders
would experience dilution of their ownership interests. If we
use cash or debt financing, our financial liquidity will be
reduced, as would the funds available to fund the Companys
operations or to use for other purposes.

If We Lose Key Personnel, We May Not Be
Able to Successfully Operate Our Business

Our success depends to a significant degree upon
the continued contributions of our senior sales, engineering and
management personnel, many of whom perform important management
functions and would be difficult to replace. Within the last
year we have experienced significant changes to the management
team including the appointment of a new chief financial officer
and new sales directors. The loss of the services of any key
personnel, particularly senior leadership, sales management and
key engineers, could seriously harm our business, financial
condition and results of operations, including our success in
selling our recently introduced products and planned new
products.

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If We Are Unable to Retain and Hire
Additional Qualified Personnel as Necessary, We May Not Be Able
to Successfully Achieve Our Objectives

We may not be able to attract and retain the
necessary personnel to accomplish our business objectives and we
may experience constraints that will adversely affect our
ability to satisfy customer demand in a timely fashion or to
support our customers and operations. We have at times
experienced, and continue to experience, difficulty in
recruiting qualified personnel. Recruiting qualified personnel
is an intensely competitive and time-consuming process. New
sales personnel and engineering personnel will require training
and take time to achieve full productivity. In addition, the
design and installation of telephony solutions can be complex.
Accordingly, we need highly trained customer service and support
personnel. We cannot be certain that we will successfully
attract and retain additional qualified personnel.

Control By Existing Stockholders May Limit
Your Ability to Influence the Outcome of Director Elections and
Other Matters Requiring Stockholder Approval

Our executive officers, directors and principal
stockholders and their affiliates own a significant percentage
of the outstanding shares of common stock. These stockholders,
if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the
election of directors and the approval of mergers or other
business combination transactions. This concentration of
ownership could have the effect of delaying or preventing a
change in our control or otherwise discouraging a potential
acquiror from attempting to obtain control of us, which in turn
could have a material adverse effect on the market price of the
common stock or prevent our stockholders from realizing a
premium over the market prices for their shares of common stock.

Provisions of Delaware Law and of Our
Charter and By-Laws May Make a Takeover More
Difficult

Provisions in our certificate of incorporation
and by-laws and in Delaware corporate law may make it difficult
and expensive for a third party to pursue a tender offer, change
in control or takeover attempt that is opposed by our
management. Public stockholders who might desire to participate
in such a transaction may not have an opportunity to do so, and
the ability of public stockholders to change our management
could be substantially impeded by these anti-takeover
provisions. For example, we have a staggered board of directors
and the right under our charter documents to issue preferred
stock without further stockholder approval, which provisions
could adversely affect the holders of our common stock.




Item 7A.     Quantitative
and Qualitative Disclosures about Market Risk

To date, the Company has not utilized derivative
financial instruments or derivative commodity instruments. The
Company invests cash in highly liquid investments, consisting of
highly rated U.S. and state government securities, commercial
paper and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no
debt. Therefore, the Company believes the market risks
associated with these financial instruments are immaterial. For
additional information regarding market risk, see
Disclosures About Market Risk on page 35.




Item 8.     Financial
Statements and Supplementary Data

The information required by this item is
incorporated by reference to the Consolidated Financial
Statements set forth on pages F-1 through F-20 hereof.

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Item
9.     Changes In and Disagreements
with Accountants on Accounting and Financial
Disclosure

None.




PART III




Item
10.     Directors and Executive
Officers of the Registrant

The information required by this Item 10
concerning our directors and officers is incorporated by
reference to the information under the heading, Election
of Directors  Information Regarding the Nominees and
Executive Officers in our 2002 Proxy Statement.




Item
11.     Executive
Compensation

The information required by this Item 11 is
incorporated by reference to the information under the heading,
Compensation of Directors and Executive Officers in
our 2002 Proxy Statement.




Item
12.     Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters

Except for the Equity Compensation Plan
Information set forth below, the information required by this
Item 12 is incorporated by reference to the information
under the heading, Security Ownership of Management and
Certain Beneficial Owners in our 2002 Proxy Statement.

Equity
Compensation Plan Information

The following table provides information as of
April 30, 2002 about our common stock that may be issued upon
the exercise of options, warrants and rights under all of our
existing equity compensation plans, including the 1996 Stock
Option Plan, the 1999 Stock Option and Grant Plan, the 2000
Director Stock Option Plan and the 2000 Employee Stock Option
Plan and a stock option grant to our chief executive officer.

|                                                              |       |                      |           |                   |  |                         |      |      |  |  |           |           | 
|------------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                              |       | (a)                  |           | (b)               |  | (c)                    
|                                                              |       |                      |           |                   |  |                        
|                                                              |       |                      |           |                   |  | Number of securities   
|                                                              |       |                      |           |                   |  | remaining available    
|                                                              |       | Number of securities |           | Weighted-average  |  | for issuance under     
|                                                              |       | to be issued upon    |           | exercise price of |  | equity compensation    
|                                                              |       | exercise of          |           | outstanding       |  | plans (excluding       
|                                                              |       | outstanding options  |           | options, warrants |  | securities reflected in
|Plan category                                                 |       | warrants and rights  |           | and rights        |  | column(a)(1))          
|                                                              |       |                      |           |                   |  |                        
|Equity Compensation plans approved by Shareholders            |       |                      | 2,334,348 |                   |  | $                       | 5.94 |      |  |  | 2,396,790 |          
|Equity Compensation plans not approved by
    Shareholders(2) |       |                      | 500,000   |                   |  | $                       | 2.53 |      |  |  |          |          
|                                                              | Total |                      |           | 2,834,348         |  |                         | $    | 5.34 |  |  |           | 2,396,790 | 



---



|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 68,254 shares which may be awarded under
    the terms of our 2000 Employee Stock Purchase Plan. Our 2000
    Employee Stock Purchase Plan permits all participants to elect
    to have deductions of up to 10% of their compensation to
    purchase shares of our common stock.
|   
|(2) | Excludes options to purchase 101,916 shares of
    our common stock with an exercise price of $.001 per share
    granted in connection with our acquisition of DTI Holdings Inc.
    and Digital Techniques Inc.                                                                          




Item
13.     Certain Relationships and
Related Transactions

The information required by this Item 13 is
incorporated by reference to the information under the heading,
Certain Relationships and Related Transactions in
our 2002 Proxy Statement.

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PART IV




Item
14.     Exhibits, Financial
Statement Schedules and Reports on Form 8-K

(a)(1) Financial Statements



| |    |                                                                                                                                                  
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Report of Ernst & Young LLP, independent
    auditors (see page F-2 hereof).                                                                     
|
| | 2. | Consolidated Balance Sheets as of April 30,
    2001 and 2002 (see page F-3 hereof).                                                             
|
| | 3. | Consolidated Statements of Operations for the
    years ended April 30, 2000, 2001 and 2002 (see
    page F-4 hereof).                           
|
| | 4. | Consolidated Statements of Common
    Stockholders (Deficit) Equity for the years ended
    April 30, 2000, 2001 and 2002 (see page F-5 hereof).
|
| | 5. | Consolidated Statements of Cash Flows for the
    years ended April 30, 2000, 2001 and 2002 (see
    page F-6 hereof).                           
|
| | 6. | Notes to Consolidated Financial Statements (see
    pages F-7 through F-18 hereof).                                                              

(a)(2) Financial Statement Schedules.

Schedules are not provided because of the absence
of conditions under which they are required or because the
required information is shown in the financial statements or
notes thereto.

(a)(3) Exhibits.

The following is a complete list of exhibits
filed as part of this Form 10-K. Documents identified by
footnotes are being filed herewith and, pursuant to
Rule 12b-32 of the General Rules and Regulations
promulgated by the Commission under the Securities Exchange Act
of 1934 reference is made to such documents as previously filed
as exhibits with the Commission.

|            |            |             |  |                                                                                                                                                                                                                                                         
|----------- | ---------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |            | Description
|            |            |            
|            | 2.1 (1)    |             |  | Agreement and Plan of Merger, dated June 14,
    2000, by and among the Registrant, Omni Acquisition Corporation,
    Troy Holdings International, Inc., DTI Holdings, Inc., Digital
    Techniques, Inc. and certain shareholders of DTI Holdings, Inc.
|            | 3.1 (2)    |             |  | Second Amended and Restated Certificate of
    Incorporation of the Registrant (Exhibit No. 3.3 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                                    
|            | 3.2 (2)    |             |  | First Amended and Restated By-laws of the
    Registrant (Exhibit No. 3.5 of Registration Statement
    on Form S-1 (File No. 333-85821)).                                                                                                              
|            | 4.1 (2)    |             |  | Specimen certificate for shares of common stock,
    $.001 par value, of the Registrant.                                                                                                                                                                
|            | 10.1 (2)   |             |  | Amended and Restated Registration Rights
    Agreement, dated July 16, 1998, among the Registrant and
    the stockholders named therein. (Exhibit No. 10.2 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                        
|            | 10.2 (2)   |             |  | Amended and Restated 1996 Stock Option Plan of
    the Registrant. (Exhibit No. 10.3 of Registration
    Statement on Form S-1 (File No. 333-85821)).                                                                                                   
|            | 10.3 (3)   |             |  | 1999 Stock Option and Grant Plan of the
    Registrant.                                                                                                                                                                                                 
|            | 10.4 (2)  |             |  | Master Support Agreement between the Registrant
    and Vital Networks, Inc. dated June 28, 1999
    (Exhibit No. 10.16 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                                                
|            | 10.5 (4)   |             |  | Lease Agreement by and between the Registrant and
    Wellsford/ Whitehall Holdings, L.L.C. dated January 10,
    2000.                                                                                                                                 
|            | 10.5.1 (5) |             |  | First Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 25, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                                                
|            | 10.5.2 (5) |             |  | Second Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 31, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                                               
|            | 10.6       |             |  | Incentive Bonus Plan of the Registrant                                                                                                                                                                                                                  
|            | 10.7 (6)   |             |  | 2000 Director Stock Option Plan of the Registrant.                                                                                                                                                                                                      

47



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|            |           |             |  |                                                                                                                                                                                      
|----------- | --------- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |           | Description
|            |           |            
|            | 10.8 (7)  |             |  | 2000 Employee Stock Purchase Plan of the
    Registrant.                                                                                                                             
|            | 10.9 (8)  |             |  | Offer letter dated January 11, 2001, between
    the Registrant and Glenda Davis (Exhibit No. 10.14 of Annual
    Report on Form 10-K (File No. 0-22703)).                           
|            | 10.10 (8) |             |  | Restricted Stock Purchase Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.15 of Annual Report on Form 10-K (File No.
    0-22703)). 
|            | 10.11 (8) |             |  | Non-qualified Stock Option Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.16 of Annual Report on Form 10-K (File No.
    0-22703)).
|            | 10.12     |             |  | Promissory Note dated March 13, 2001, issued
    by Glenda Davis to the Registrant.                                                                                                  
|            | 10.13 (2) |             |  | Form of Bonus Agreement (Exhibit No. 10.12
    of Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                      
|            | 10.14     |             |  | Offer letter dated May 29, 2001 between the
    Registrant and Thomas Nolette                                                                                                        
|            | 10.15     |             |  | Offer letter dated May 10, 2001 between the
    Registrant and Ann Doyle                                                                                                             
|            | 10.16     |             |  | Offer letter dated November 26, 2001 between the
    Registrant and Gerald J. McGovern                                                                                               
|            | 21.1      |             |  | Subsidiaries of the Registrant.                                                                                                                                                      
|            | 23.1      |             |  | Consent of Ernst & Young LLP.                                                                                                                                                        




|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment obtained as to portions of
    this exhibit. The confidential information has been filed
    separately with the Securities and Exchange Commission.



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants Report on Form 8-K dated
    June 28, 2000.                                                                                                                                                                               
|   
|(2) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed in response to
    Item 16(a), Exhibits, of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-85821), which was declared effective on
    October 21, 1999.
|   
|(3) | Incorporated by reference to Exhibit 10.4
    filed with the Registrants Registration Statement on
    Form S-8 dated February 4, 2000.                                                                                                                                                           
|   
|(4) | Incorporated by reference to
    Exhibit No. 10.18 of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-96235), which was declared effective on
    April 4, 2000.                                                                                             
|   
|(5) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2000, as filed with the SEC on
    July 31, 2000.                                                   
|   
|(6) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated November 14, 2000.                                                                                                                                                          
|   
|(7) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated December 4, 2000.                                                                                                                                                           
|   
|(8) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal year
    ended April 30, 2001, as filed with the SEC on July 2,
    2001.                                                    

(b) Reports on Form 8-K.

None

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1933, as amended, the
registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
town of Needham, State of Massachusetts on the 13th day of
August, 2002.



| |                                      
| | -------------------------------------
| | MCK COMMUNICATIONS, INC.             
|
| | By: /s/ GLENDA DAVIS                 
| |                                      
| | Glenda Davis                         
| | President and Chief Executive Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                         |  |                                                                                            |  |                
|---------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | ---------------
|Signature                                |  | Title                                                                                      |  | Date           
|                                         |  |                                                                                            |  |                
|/s/ GLENDA N. DAVISGlenda N. Davis       |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)          |  | August 13, 2002
|                                        
|/s/ GERALD J. MCGOVERNGerald J. McGovern |  | Chief Financial Officer (Principal Financial
    Officer and Principal Accounting Officer) |  | August 13, 2002
|                                        
|/s/ CALVIN K. MANZCalvin K. Manz         |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ JOHN B. LANDRYJohn B. Landry         |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ GREGORY M. AVISGregory M. Avis       |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ MICHAEL H. BALMUTHMichael H. Balmuth |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ PAUL SEVERINOPaul Severino           |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ ELIZABETH HOULIHANElizabeth Houlihan |  | Director                                                                                   |  | August 13, 2002
|                                        
|/s/ ALAN LEVINEAlan Levine               |  | Director                                                                                   |  | August 13, 2002

49



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MCK COMMUNICATIONS, INC.






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


|                                                                     |  |      |     | 
|-------------------------------------------------------------------- |  | ---- | --- | 
|                                                                     |  | Page
|                                                                     |  |     
|Report of Ernst & Young LLP, Independent
    Auditors                |  |      | F-2 | 
|Consolidated Balance Sheets                                          |  |      | F-3 | 
|Consolidated Statements of Operations                                |  |      | F-4 | 
|Consolidated Statements of Common
    Stockholders (Deficit) Equity |  |      | F-5 | 
|Consolidated Statements of Cash Flows                                |  |      | F-6 | 
|Notes to Consolidated Financial Statements                           |  |      | F-7 | 

F-1



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS

Board of Directors and Stockholders

MCK Communications,
Inc.


We have audited the accompanying consolidated
balance sheets of MCK Communications, Inc. (the Company) as of
April 30, 2001 and 2002, and the related consolidated
statements of operations, common stockholders (deficit)
equity, and cash flows for each of the three years in the period
ended April 30, 2002. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of the Company as
of April 30, 2001 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended April 30, 2002, in conformity with
accounting principles generally accepted in the United States.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Boston, Massachusetts

June 7, 2002

F-2



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##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands except for share related
data)


|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                                                                                                               |                                                                                                       |                          
|                                                                                                                                                                               |                                                                                                       | April 30,                
|                                                                                                                                                                               |                                                                                                       |                          
|                                                                                                                                                                               |                                                                                                       | 2001                      |         | 2002  
|                                                                                                                                                                               |                                                                                                       |                           |         |       
|ASSETS                                                                                                                                                                         |                                                                                                       |                           |         |        |        |   |         |       
|Current assets:                                                                                                                                                                |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                               | Cash and equivalents                                                                                  |                           | $       | 4,035  |        |   | $       | 4,554  |       
|                                                                                                                                                                               | Restricted securities                                                                                 |                           |         |       |        |   |         | 2,000  |       
|                                                                                                                                                                               | Marketable securities                                                                                 |                           |         | 50,766 |        |   |         | 37,813 |       
|                                                                                                                                                                               | Accounts receivable (net of allowances of $596
    and $500 at April 30, 2001 and 2002, respectively) |                           |         | 5,150  |        |   |         | 3,773  |       
|                                                                                                                                                                               | Inventory                                                                                             |                           |         | 4,337  |        |   |         | 1,878  |       
|                                                                                                                                                                               | Prepaids and other current assets                                                                     |                           |         | 1,692  |        |   |         | 595    |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                               |                                                                                                       | Total current assets      |         |        | 65,980 |   |         |        | 50,613 | 
|Fixed assets, net                                                                                                                                                              |                                                                                                       |                           | 4,094   |        |        |   | 1,529   |       
|Goodwill, intangibles and other long term assets                                                                                                                               |                                                                                                       |                           | 13,754  |        |        |   | 105     |       
|Completed technology                                                                                                                                                           |                                                                                                       |                           | 6,569   |        |        |   | 3,978   |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|Total assets                                                                                                                                                                   |                                                                                                       | $                         | 90,397  |        |        | $ | 56,225  |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|LIABILITIES AND COMMON STOCKHOLDERS
    EQUITY                                                                                                                                |                                                                                                       |                           |         |        |        |   |         |       
|Current liabilities:                                                                                                                                                           |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                               | Accounts payable                                                                                      |                           | $       | 3,484  |        |   | $       | 1,435  |       
|                                                                                                                                                                               | Accrued liabilities                                                                                   |                           |         | 2,864  |        |   |         | 4,740  |       
|                                                                                                                                                                               | Accrued compensation and benefits                                                                     |                           |         | 1,179  |        |   |         | 672    |       
|                                                                                                                                                                               | Deferred revenue                                                                                      |                           |         | 9      |        |   |         | 422    |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|                                                                                                                                                                               |                                                                                                       | Total current liabilities |         |        | 7,536  |   |         |        | 7,269  | 
|Common stockholders equity:                                                                                                                                                   |                                                                                                       |                           |         |        |        |   |         |       
|Common stock, $.001 par value; authorized
    shares  40,000,000, issued and outstanding 20,115,078
    shares at April 30, 2001 and 20,421,563 shares at
    April 30, 2002. |                                                                                                       |                           | 20      |        |        |   | 20      |       
|Additional paid-in capital                                                                                                                                                     |                                                                                                       |                           | 126,852 |        |        |   | 125,122 |       
|Accumulated deficit                                                                                                                                                            |                                                                                                       |                           | (41,013 | )      |        |   | (75,031 | )     
|Deferred compensation                                                                                                                                                          |                                                                                                       |                           | (1,615  | )      |        |   | (159    | )     
|Accumulated other comprehensive loss                                                                                                                                           |                                                                                                       |                           | (547    | )      |        |   | (464    | )     
|Notes receivable from officers                                                                                                                                                 |                                                                                                       |                           | (836    | )      |        |   | (532    | )     
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|Total common stockholders equity                                                                                                                                              |                                                                                                       |                           | 82,861  |        |        |   | 48,956  |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       
|Total liabilities and common stockholders
    equity                                                                                                                          |                                                                                                       | $                         | 90,397  |        |        | $ | 56,225  |       
|                                                                                                                                                                               |                                                                                                       |                           |         |        |        |   |         |       

See accompanying notes to consolidated financial
statements.

F-3



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands except for share related
data)


|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |        |        | 
|---------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | ---------- | ----- | ------ | ---- | ---------- | ------ | ------ | - | ---------- | ------ | ------ | 
|                                                                                                     |                                                                                                                                                         |                             
|                                                                                                     |                                                                                                                                                         | Years Ended April 30,       
|                                                                                                     |                                                                                                                                                         |                             
|                                                                                                     |                                                                                                                                                         | 2000                         |            | 2001  |        | 2002
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |     
|Revenues                                                                                             |                                                                                                                                                         | $                            | 25,082     |       |        | $    | 38,220     |        |        | $ | 16,487     |       
|Cost of goods sold                                                                                   |                                                                                                                                                         |                              | 9,455      |       |        |      | 15,287     |        |        |   | 9,096      |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Gross profit                                                                                         |                                                                                                                                                         |                              | 15,627     |       |        |      | 22,933     |        |        |   | 7,391      |       
|Operating expenses:                                                                                  |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|                                                                                                     | Research and development (excluding amortization
    of stock based compensation of $1,558, $829 and $(52) in 2000,
    2001 and 2002, respectively)    |                              |            | 4,876 |        |      |            | 9,232  |        |   |            | 7,124  |       
|                                                                                                     | Sales and marketing (excluding amortization of
    stock based compensation of $1,853, $1,005 and $(453) in 2000,
    2001 and 2002, respectively)      |                              |            | 7,817 |        |      |            | 13,820 |        |   |            | 9,397  |       
|                                                                                                     | General and administrative (excluding
    amortization of stock based compensation of $1,234, $1,068 and
    $202 in 2000, 2001 and 2002, respectively) |                              |            | 2,475 |        |      |            | 4,646  |        |   |            | 4,478  |       
|                                                                                                     | Amortization of stock based compensation                                                                                                                |                              |            | 4,645 |        |      |            | 2,902  |        |   |            | (303   | )     
|                                                                                                     | Amortization of goodwill and other intangibles                                                                                                          |                              |            |      |        |      |            | 4,588  |        |   |            | 2,180  |       
|                                                                                                     | Write-off of in-process research and development                                                                                                        |                              |            |      |        |      |            | 3,694  |        |   |            |       |       
|                                                                                                     | Impairment of goodwill and other intangibles                                                                                                            |                              |            |      |        |      |            |       |        |   |            | 14,063 |       
|                                                                                                     | Restructuring                                                                                                                                           |                              |            |      |        |      |            | 597    |        |   |            | 4,310  |       
|                                                                                                     | Provision for legal settlement and fees                                                                                                                 |                              |            |      |        |      |            |       |        |   |            | 1,387  |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|                                                                                                     |                                                                                                                                                         | Total operating expenses     |            |       | 19,813 |      |            |        | 39,479 |   |            |        | 42,636 | 
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Loss from operations                                                                                 |                                                                                                                                                         |                              | (4,186     | )     |        |      | (16,546    | )      |        |   | (35,245    | )     
|Other income (expense):                                                                              |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|                                                                                                     | Interest expense                                                                                                                                        |                              |            | (183  | )      |      |            | (36    | )      |   |            | (52    | )     
|                                                                                                     | Interest income                                                                                                                                         |                              |            | 977   |        |      |            | 3,696  |        |   |            | 1,399  |       
|                                                                                                     | Other expense, net                                                                                                                                      |                              |            | (36   | )      |      |            | (43    | )      |   |            | (60    | )     
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|                                                                                                     |                                                                                                                                                         | Total other income (expense) |            |       | 758    |      |            |        | 3,617  |   |            |        | 1,287  | 
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Loss before provision for income taxes and
    dividends on redeemable preferred stock of subsidiary |                                                                                                                                                         |                              | (3,428     | )     |        |      | (12,929    | )      |        |   | (33,958    | )     
|Income tax (provision) benefit                                                                       |                                                                                                                                                         |                              | (100       | )     |        |      | 1,130      |        |        |   | (60        | )     
|Dividends on redeemable preferred stock of
    subsidiary                                            |                                                                                                                                                         |                              | (97        | )     |        |      |           |        |        |   |           |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Net loss                                                                                             |                                                                                                                                                         |                              | (3,625     | )     |        |      | (11,799    | )      |        |   | (34,018    | )     
|Dividends on redeemable preferred stock                                                              |                                                                                                                                                         |                              | (1,285     | )     |        |      |           |        |        |   |           |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Loss applicable to common stock                                                                      |                                                                                                                                                         | $                            | (4,910     | )     |        | $    | (11,799    | )      |        | $ | (34,018    | )     
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Basic and diluted net loss per common share                                                          |                                                                                                                                                         | $                            | (0.44      | )     |        | $    | (0.61      | )      |        | $ | (1.69      | )     
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Shares used in computing basic and diluted net
    loss per common share                             |                                                                                                                                                         |                              | 11,144,565 |       |        |      | 19,213,239 |        |        |   | 20,126,113 |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Pro forma basic and diluted loss per common share                                                    |                                                                                                                                                         | $                            | (0.31      | )     |        |      |            |        |        |   |            |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       
|Shares used in computing pro forma basic and
    diluted loss per common share                       |                                                                                                                                                         |                              | 15,268,368 |       |        |      |            |        |        |   |            |       
|                                                                                                     |                                                                                                                                                         |                              |            |       |        |      |            |        |        |   |            |       

See accompanying notes to consolidated financial
statements.

F-4



---



##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMMON
STOCKHOLDERS (DEFICIT) EQUITY

(In thousands except for share related
data)


|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|-------------------------------------------- |  | ------------- | ------- | --------- |  | --------- | ---------- | ---------- |  | ----------- | -- | ------------ |  | ------------- | ------- | ---------- |  | ------------- | ------- | - |  | - | ------ | - |  | - | ---- | - |  | - | ---- | - |  | - | ------- | -
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  | Accumulated   |         |            |  | Total        
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  | Other         |         | Notes      |  | Common       
|                                             |  |               |         | Shares of |  | Common    |            | Additional |  |             |    |              |  | Comprehensive |         | Receivable |  | Stockholders
|                                             |  | Comprehensive |         | Common    |  | Stock at  |            | Paid-In    |  | Accumulated |    | Deferred     |  | Income        |         | From       |  | (Deficit)    
|                                             |  | Loss          |         | Stock     |  | Par Value |            | Capital    |  | Deficit     |    | Compensation |  | (Loss)        |         | Officers   |  | Equity       
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |              
|Balance at April 30, 1999.                   |  |               |         |           |  |           | 5,300,183  |            |  | $           | 5  |              |  | $             | 1,388   |            |  | $             | (24,303 | ) |  | $ | (806   | ) |  | $ | (166 | ) |  | $ | (159 | ) |  | $ | (24,041 | )
|Foreign currency translation adjustment      |  | $             | (151    | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (151 | ) |  |   |     |   |  |   | (151    | )
|Unrealized loss on marketable securities     |  |               | (28     | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (28  | ) |  |   |     |   |  |   | (28     | )
|Deferred compensation                        |  |               |         |           |  |           |           |            |  |             |   |              |  |               | 8,464   |            |  |               |        |   |  |   | (8,464 | ) |  |   |     |   |  |   |     |   |  |   |        |  
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   | 4,646  |   |  |   |     |   |  |   |     |   |  |   | 4,646   |  
|Sale of restricted stock                     |  |               |         |           |  |           | 397,800    |            |  |             |   |              |  |               | 687     |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | (687 | ) |  |   |        |  
|Dividends on preferred stock                 |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (1,286  | ) |  |   |        |   |  |   |      |   |  |   |     |   |  |   | (1,286  | )
|Sale of common stock                         |  |               |         |           |  |           | 4,935,600  |            |  |             | 5  |              |  |               | 100,409 |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 100,414 |  
|Stock options exercised                      |  |               |         |           |  |           | 133,435    |            |  |             |   |              |  |               | 38      |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 38      |  
|Conversion of Series B and D Preferred Stock |  |               |         |           |  |           | 8,677,210  |            |  |             | 9  |              |  |               | 4,908   |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 4,917   |  
|Cancellation of restricted stock             |  |               |         |           |  |           | (86,859    | )          |  |             |   |              |  |               | (91     | )          |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 91   |   |  |   |        |  
|Payment on notes receivable                  |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 62   |   |  |   | 62      |  
|Net loss                                     |  |               | (3,625  | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (3,625  | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (3,625  | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (3,804  | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2000                    |  |               |         |           |  |           | 19,357,369 |            |  |             | 19 |              |  |               | 115,803 |            |  |               | (29,214 | ) |  |   | (4,624 | ) |  |   | (345 | ) |  |   | (693 | ) |  |   | 80,946  |  
|Foreign currency translation adjustment      |  | $             | (241    | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (241 | ) |  |   |     |   |  |   | (241    | )
|Unrealized gain on marketable securities     |  |               | 39      |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | 39   |   |  |   |     |   |  |   | 39      |  
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   | 2,612  |   |  |   |     |   |  |   |     |   |  |   | 2,612   |  
|Stock options exercised net of cancellations |  |               |         |           |  |           | 357,801    |            |  |             |   |              |  |               | 69      |            |  |               |        |   |  |   | 74     |   |  |   |     |   |  |   |     |   |  |   | 143     |  
|Sale of restricted stock                     |  |               |         |           |  |           | 35,307     |            |  |             |   |              |  |               | 41      |            |  |               |        |   |  |   | 323    |   |  |   |     |   |  |   | (147 | ) |  |   | 217     |  
|Acquisition of DTI                           |  |               |         |           |  |           | 364,601    |            |  |             | 1  |              |  |               | 10,939  |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 10,940  |  
|Payment on notes receivable                  |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 4    |   |  |   | 4       |  
|Net loss                                     |  |               | (11,799 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (11,799 | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (11,799 | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (12,001 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2001                    |  |               |         |           |  |           | 20,115,078 |            |  |             | 20 |              |  |               | 126,852 |            |  |               | (41,013 | ) |  |   | (1,615 | ) |  |   | (547 | ) |  |   | (836 | ) |  |   | 82,861  |  
|Foreign currency translation adjustment      |  | $             | 94      |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | 94   |   |  |   |     |   |  |   | 94      |  
|Unrealized loss on marketable securities     |  |               | (11     | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   | (11  | ) |  |   |     |   |  |   | (11     | )
|Amortization of deferred compensation        |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   | 1,147  |   |  |   |     |   |  |   |     |   |  |   | 1,147   |  
|Stock options exercised net of cancellations |  |               |         |           |  |           | 250,239    |            |  |             |   |              |  |               | (1,791  | )          |  |               |        |   |  |   | 309    |   |  |   |     |   |  |   |     |   |  |   | (1,482  | )
|Cancellation of restricted stock             |  |               |         |           |  |           | (95,347    | )          |  |             |   |              |  |               | (178    | )          |  |               |        |   |  |   |       |   |  |   |     |   |  |   | 178  |   |  |   |        |  
|Sale of common stock                         |  |               |         |           |  |           | 151,593    |            |  |             |   |              |  |               | 239     |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   | 239     |  
|Payment on note receivable                   |  |               |         |           |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |      |   |  |   | 126  |   |  |   | 126     |  
|Net loss                                     |  |               | (34,018 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               | (34,018 | ) |  |   |       |   |  |   |     |   |  |   |     |   |  |   | (34,018 | )
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Total comprehensive income (loss)            |  | $             | (33,935 | )         |  |           |           |            |  |             |   |              |  |               |        |            |  |               |        |   |  |   |       |   |  |   |     |   |  |   |     |   |  |   |        |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  
|Balance at April 30, 2002                    |  |               |         |           |  |           | 20,421,563 |            |  | $           | 20 |              |  | $             | 125,122 |            |  | $             | (75,031 | ) |  | $ | (159   | ) |  | $ | (464 | ) |  | $ | (532 | ) |  | $ | 48,956  |  
|                                             |  |               |         |           |  |           |            |            |  |             |    |              |  |               |         |            |  |               |         |   |  |   |        |   |  |   |      |   |  |   |      |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

F-5



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##### Table of Contents



MCK COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |         |        |         |  
|------------------------------------------- | --------------------------------------------------------------------------- | --------------------------------- | ---------------------------------------------------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ----- | ------- | ------ | ------- | -
|                                            |                                                                             |                                  
|                                            |                                                                             | Years Ended April 30,            
|                                            |                                                                             |                                  
|                                            |                                                                             | 2000                              |                                                      | 2001    |        | 2002   
|                                            |                                                                             |                                   |                                                      |         |        |        
|Cash flow from operating activities:        |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            | Net loss                                                                    |                                   | $                                                    | (3,625  | )      |         | $       | (11,799 | )      |         | $     | (34,018 | )     
|                                            | Depreciation                                                                |                                   |                                                      | 823     |        |         |         | 1,664   |        |         |       | 2,121   |       
|                                            | Amortization of goodwill and other intangibles                              |                                   |                                                      | 15      |        |         |         | 4,589   |        |         |       | 2,180   |       
|                                            | Impairment of goodwill and other intangibles                                |                                   |                                                      |        |        |         |         |        |        |         |       | 14,063  |       
|                                            | Write down of fixed assets to net realizable value                          |                                   |                                                      |        |        |         |         |        |        |         |       | 1,064   |       
|                                            | Stock based compensation                                                    |                                   |                                                      | 4,645   |        |         |         | 2,902   |        |         |       | (303    | )     
|                                            | In-process research and development                                         |                                   |                                                      |        |        |         |         | 694     |        |         |       |        |       
|                                            | Deferred income taxes                                                       |                                   |                                                      | 33      |        |         |         | (1,502  | )      |         |       |        |       
|                                            | Dividends accrued on redeemable preferred stock
    of subsidiary           |                                   |                                                      | 97      |        |         |         |        |        |         |       |        |       
|                                            | Change in operating assets and liabilities:                                 |                                   |                                                      |         |        |         |         |         |        |         |       |         |       
|                                            |                                                                             | Accounts receivable               |                                                      |         | (1,668 | )       |         |         | 969    |         |       |         | 1,377  |        
|                                            |                                                                             | Inventory                         |                                                      |         | (1,004 | )       |         |         | (1,240 | )       |       |         | 2,459  |        
|                                            |                                                                             | Prepaids and other current assets |                                                      |         | (1,084 | )       |         |         | 665    |         |       |         | 1,129  |        
|                                            |                                                                             | Accounts payable                  |                                                      |         | 3,116  |         |         |         | (1,718 | )       |       |         | (2,049 | )      
|                                            |                                                                             | Accrued liabilities               |                                                      |         | 128    |         |         |         | 1,573  |         |       |         | 1,876  |        
|                                            |                                                                             | Accrued compensation and benefits |                                                      |         | 136    |         |         |         | (1,052 | )       |       |         | (507   | )      
|                                            |                                                                             | Deferred revenue                  |                                                      |         | 71     |         |         |         | (62    | )       |       |         | 413    |        
|                                            |                                                                             | Other long-term assets            |                                                      |         | (335   | )       |         |         | 227    |         |       |         | (35    | )      
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            |                                                                             |                                   | Net cash provided (used) by operating activities     |         |        | 1,348   |         |         |        | (4,090  | )     |         |        | (10,230 | )
|Cash flows from investing activities:       |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            | Purchase of fixed assets                                                    |                                   |                                                      | (1,965  | )      |         |         | (3,100  | )      |         |       | (645    | )     
|                                            | Purchase of marketable securities                                           |                                   |                                                      | (19,907 | )      |         |         | (30,887 | )      |         |       |         |       
|                                            | Sales of marketable securities                                              |                                   |                                                      |         |        |         |         |         |        |         |       | 10,954  |       
|                                            | Acquisition of business, net of cash acquired                               |                                   |                                                      |        |        |         |         | (12,650 | )      |         |       |        |       
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            |                                                                             |                                   | Net cash (used) provided by investing
    activities |         |        | (21,872 | )       |         |        | (46,637 | )     |         |        | 10,309  |  
|Cash flows from financing activities:       |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            | Repayment of subordinated debt                                              |                                   |                                                      | (2,500  | )      |         |         |        |        |         |       |        |       
|                                            | Redemption of preferred stock                                               |                                   |                                                      | (24,804 | )      |         |         |        |        |         |       |        |       
|                                            | Decrease in short-term borrowings                                           |                                   |                                                      |        |        |         |         | (866    | )      |         |       |        |       
|                                            | Issuance of common stock, net                                               |                                   |                                                      | 100,610 |        |         |         | 4       |        |         |       | 302     |       
|                                            | Proceeds from exercise of stock options                                     |                                   |                                                      | 37      |        |         |         | 70      |        |         |       | 31      |       
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            |                                                                             |                                   | Net cash provided (used) by financing activities     |         |        | 73,343  |         |         |        | (792    | )     |         |        | 333     |  
|Effect of exchange rate changes on cash     |                                                                             |                                   | (260                                                 | )       |        |         | (290    | )       |        |         | 107   |        
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|Net increase (decrease) in cash             |                                                                             |                                   | 52,559                                               |         |        |         | (51,809 | )       |        |         | 519   |        
|Cash and equivalents at beginning of period |                                                                             |                                   | 3,285                                                |         |        |         | 55,844  |         |        |         | 4,035 |        
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|Cash and equivalents at end of period       |                                                                             | $                                 | 55,844                                               |         |        | $       | 4,035   |         |        | $       | 4,554 |        
|                                            |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|Non-cash transactions:                      |                                                                             |                                   |                                                      |         |        |         |         |         |        |         |       |        
|                                            | Dividends on non-subsidiary preferred stock                                 |                                   | $                                                    | 1,285   |        |         |         |        |        |         |       |        |       
|                                            | Sale of restricted stock, net of cancellations                              |                                   |                                                      | 597     |        |         | $       | 147     |        |         |       |        |       
|                                            | Dividends to Manz Development, Inc.                                         |                                   |                                                      | 193     |        |         |         |        |        |         |       |        |       
|                                            | Conversion of Series B and D redeemable
    preferred stock to common stock |                                   |                                                      | 4,917   |        |         |         |        |        |         |       |        |       
|                                            | Issuance of common stock in acquisition                                     |                                   |                                                      |        |        |         |         | 10,939  |        |         |       |        |       

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



MCK COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Fiscal Years Ended April 30, 2000, 2001 and
2002


1. Nature of Operations

MCK Communications, Inc. (MCK or the Company)
develops and markets products that enable businesses to unleash
the power of their voice communications by



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | extending the functionality and applications of
    their business telephone systems from the main office to
    outlying offices, remote call centers, teleworkers and mobile
    employees over public and private networks;
|
| |  | bundling with service providers to unite CPE and
    network services to deliver new outsourced, value added services                                                                                                         
|
| |  | bridging technology gaps between existing and
    nextgen applications, switches and devices to enable enterprises
    ease of technology migration.                                                                          

This combination strengthens our commitment to
enabling a more open enterprise. Sales are made to original
equipment manufacturers (OEMs) and private label partners,
independent local exchange carriers (ILECs), systems integrators
and distributors, telecom and datacom value added resellers
(VARs), and broadband service providers. The Company operates in
one business segment. In the fiscal years ended 2000 and 2001,
sales to one customer represented approximately 46% and 23%,
respectively, of consolidated revenues. In fiscal year 2002, no
customer accounted for 10% or more of revenues.

2. Significant Accounting
Policies

(a) Principles
of Consolidation

The consolidated financial statements include the
accounts of MCK Communications, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions are eliminated.

(b) Cash
Equivalents

Cash equivalents are defined as short-term,
highly-liquid investments having an original maturity of three
months or less.

(c) Inventory

Inventory is valued at the lower of cost
(first-in, first-out) or market.

(d) Fixed
Assets

Fixed assets are stated at cost and depreciated
on a straight-line basis over the following estimated useful
lives:

|                       |  |                                           
|---------------------- |  | ------------------------------------------
|Equipment              |  | 3 years                                   
|Furniture and fixtures |  | 3 years                                   
|Purchased software     |  | 2 years                                   
|Leasehold improvements |  | The lesser of seven years or term of lease

(e) Fair
Value of Financial Instruments

The Companys cash, cash equivalents,
accounts receivable and accounts payable are carried at cost,
which approximates fair value due to their relative short term
to maturity.

F-7



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(f) Revenue
Recognition

Revenues from product sales are recognized upon
shipment of our products to our customers and the fulfillment of
all contractual terms and conditions, pursuant to guidance
provided by Staff Accounting Bulletin, No. 101, Revenue
Recognition in Financial Statements (SAB 101), issued by the
Securities and Exchange Commission. Certain distribution
partners have rights to return a contractual percentage of
sales. For sales to these partners, we defer revenue subject to
return until such rights have expired. A significant number of
our contractual arrangements contain price protection provisions
whereby we are obligated to provide refunds or credits for any
decrease in unit prices of product in their inventory. We
routinely analyze and establish, as necessary, reserves at the
time of shipment for product returns and allowances and warranty
costs. To date these amounts have not been significant.

The Company recognizes service revenues including
revenues under non-recurring engineering agreements as the
service is provided. Maintenance revenues are deferred and
recognized ratably over the contract period. Service and
maintenance revenues have not been material.

(g) Earnings
per Share and Pro Forma Earnings per Share

Statement of Financial Accounting Standard
(SFAS) NO. 128 requires entities to present both
basic earnings per share (EPS) and diluted EPS.
Basic EPS excludes dilution and is computed by dividing income
(loss) available to common stockholders by the
weighted-average number of common shares outstanding during the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock.

Pro forma earnings per share is computed using
the weighted average number of common shares outstanding and
assumes the conversion of the redeemable convertible preferred
stock at the later of May 1, 1998 or at the date of
issuance.

(h) Use
of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Significant estimates include the collectibility of accounts
receivable, the carrying value of inventory and the
recoverability of long-lived assets. Actual results could differ
from those estimates.

(i) Translation
of Foreign Currencies

All assets and liabilities of the Companys
foreign subsidiaries are translated into U.S. dollars using the
rate of exchange in effect at the balance sheet date. Revenue
and expense accounts are translated into U.S. dollars using the
weighted-average exchange rate during the period. The gains or
losses resulting from such translation are reported in a
separate component of stockholders equity. Gains or losses
resulting from foreign currency transactions, which are included
in results of operations, were losses of $51,000, $34,000, and
$138,000 in 2000, 2001, and 2002, respectively.

(j) Income
Taxes

The Company provides deferred taxes to recognize
temporary differences between the financial and tax bases of
assets and liabilities. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts
expected to be realized.

F-8



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(k) Comprehensive
Income

Comprehensive income includes all changes in
equity during a period except those resulting from investments
by and distributions to owners. Other comprehensive income is
comprised of net income, currency translation adjustments and
available-for-sale securities valuation adjustments. At
April 30, 2002, the Companys accumulated currency
translation loss and accumulated unrealized loss on marketable
securities was $464,000 and $400, respectively.

(l) Concentration
of Credit Risk

Financial instruments that potentially subject
the Company to concentration of credit risk consist primarily of
cash equivalents, marketable securities and trade accounts
receivable. The Company invests its cash equivalents in deposits
with two financial institutions with strong credit ratings and
or in marketable securities. The Company sells its products to
customers in the telecommunications industry, primarily in the
United States and Canada. The Company performs periodic credit
evaluations of its customers financial condition and collateral
is generally not required. The Company maintains reserves for
potential credit losses and such losses have been within
managements expectations.

(m) Marketable
Securities

The Companys investments consist primarily
of commercial paper and money market instruments with maturities
of less than one year and are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the
unrealized gains and losses reported in other comprehensive
income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities
classified as available-for-sale are included in interest
income. Realized gains and losses and declines in value judged
to be other-than temporary on available-for-sale securities are
included in interest income.

(n) Stock-Based
Compensation

The Company has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options.
Under APB 25, no compensation expense is recorded when the
exercise price of the options granted equals the market price of
the underlying stock on the date of grant. The Company has
adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. In those
instances where stock options were granted with exercise prices
less than the fair value of the common stock at the date of
grant, expense is being recognized over the vesting period.
Because the stock options vest on a pro-rata basis the Company
follows the guidance included in Financial Accounting Standards
Board Interpretation No. 28 to determine compensation
expense for the period.

(o) Accounting
for Impairment of Long-Lived Assets

The Company reviews its long-lived assets and
goodwill for impairment losses when impairment indicators are
present. In the event that undiscounted cash flows are not
sufficient to recover the associated asset, the Company adjusts
the carrying amount to fair value determined by using a
discounted cash flow methodology. Also, on an on-going basis,
the Company reviews the periods of depreciation and amortization
for continued appropriateness.

(p) Research
and Development Costs

Research and development costs are charged to
expense as incurred.

F-9



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(q) Recent
Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business
Combinations. SFAS No. 141 revises the standards of
business combinations by eliminating the use of the
pooling-of-interests (pooling) method and requiring
that all business combinations be accounted for using the
purchase method of accounting. SFAS No. 141 also changes
the criteria to recognize intangible assets apart from goodwill.
The provisions of SFAS No. 141 are effective for all
business combinations initiated after June 30, 2001. The
adoption of this statement had no impact on the Companys
financial position and results of operations.

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS
No. 142 revises the standards of accounting for goodwill
and indefinite lived intangible assets by replacing the regular
amortization of these assets with the requirement that they are
reviewed annually, or more frequently if impairment indicators
arise, for impairment. Separable intangible assets that have
finite lives will continue to be amortized over their useful
lives. The accounting standards of SFAS No. 142 are
effective for fiscal years beginning after December 15,
2001. The adoption of this statement will have no impact on the
Companys financial position and results of operations.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-lived Assets. SFAS No. 144 supercedes SFAS
No. 121 by requiring one accounting model to be used for
long-lived assets to be disposed of by sale, whether previously
held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 will be effective for fiscal
years beginning after December 15, 2001. The Company has
not yet determined what effect, if any, SFAS No. 144 may
have on its financial position or results of operations, or cash
flows.

3. Inventory

Inventory consisted of (in thousands):

|                |  |           |       |      |  |   |       | 
|--------------- |  | --------- | ----- | ---- |  | - | ----- | 
|                |  |          
|                |  | April 30,
|                |  |          
|                |  | 2001      |       | 2002
|                |  |           |       |     
|Raw materials   |  | $         | 2,268 |      |  | $ | 1,594 | 
|Work-in-process |  |           | 419   |      |  |   |      | 
|Finished goods  |  |           | 1,650 |      |  |   | 284   | 
|                |  |           |       |      |  |   |       | 
|                |  | $         | 4,337 |      |  | $ | 1,878 | 
|                |  |           |       |      |  |   |       | 

4. Fixed Assets

Fixed assets consisted of (in thousands):

|                         |  |           |        |      |  |   |        |  
|------------------------ |  | --------- | ------ | ---- |  | - | ------ | -
|                         |  |          
|                         |  | April 30,
|                         |  |          
|                         |  | 2001      |        | 2002
|                         |  |           |        |     
|Equipment                |  | $         | 4,410  |      |  | $ | 2,650  |  
|Purchased software       |  |           | 1,979  |      |  |   | 1,452  |  
|Leasehold improvements   |  |           | 762    |      |  |   | 140    |  
|Furniture and fixtures   |  |           | 742    |      |  |   | 199    |  
|                         |  |           |        |      |  |   |        |  
|                         |  |           | 7,893  |      |  |   | 4,441  |  
|Accumulated depreciation |  |           | (3,799 | )    |  |   | (2,912 | )
|                         |  |           |        |      |  |   |        |  
|                         |  | $         | 4,094  |      |  | $ | 1,529  |  
|                         |  |           |        |      |  |   |        |  

F-10



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5. Credit Agreements

During the fiscal years ended April 30, 2001
and 2002, the Company maintained a revolving credit agreement
that provided for borrowings up to the lesser of $5 million
or 80% of qualifying receivables. No amounts were outstanding
under this agreement during the fiscal years ended
April 30, 2001 and 2002. The agreement bears interest at
the banks base rate and the debt was collateralized by
substantially all assets of the Company. The Company terminated
the agreement in April 2002.

The Company paid interest and fees of
approximately $197,000, $36,000 and $53,000 for the years ended
April 30, 2000, 2001 and 2002, respectively.

At April 30, 2002, restricted securities
include approximately $2 million pledged to secure a letter
of credit, which expires in January 2003, in favor of the
landlord of the Companys headquarters in Needham, MA.

6. Income Taxes

Pre-tax income (loss) is summarized by
country as follows (in thousands):

|              |  |           |        |      |  |      |         |   |  |   |         |  
|------------- |  | --------- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|              |  |          
|              |  | April 30,
|              |  |          
|              |  | 2000      |        | 2001 |  | 2002
|              |  |           |        |      |  |     
|Canada        |  | $         | 1,190  |      |  | $    | 24      |   |  | $ | (614    | )
|United States |  |           | (4,618 | )    |  |      | (12,953 | ) |  |   | (33,344 | )
|              |  |           |        |      |  |      |         |   |  |   |         |  
|Total         |  | $         | (3,428 | )    |  | $    | (12,929 | ) |  | $ | (33,958 | )
|              |  |           |        |      |  |      |         |   |  |   |         |  

The provision (benefit) for income taxes
consisted of (in thousands):

|          |               |           |    |      |     |      |        |        |        |   |    |    |    | 
|--------- | ------------- | --------- | -- | ---- | --- | ---- | ------ | ------ | ------ | - | -- | -- | -- | 
|          |               |          
|          |               | April 30,
|          |               |          
|          |               | 2000      |    | 2001 |     | 2002
|          |               |           |    |      |     |     
|Current:  |               |           |    |      |     |      |        |        |        |   |    |   
|          | Canada        |           | $  |     |     |      | $      | 254    |        |   | $  |   |   
|          | United States |           |    | 67   |     |      |        | 118    |        |   |    | 60 |   
|          |               |           |    |      |     |      |        |        |        |   |    |   
|          |               |           | 67 |      |     |      | 372    |        |        |   | 60 |   
|Deferred: |               |           |    |      |     |      |        |        |        |   |    |   
|          | Canada        |           |    | 33   |     |      |        | (33    | )      |   |    |   |   
|          | United States |           |    |     |     |      |        | (1,469 | )      |   |    |   |   
|          |               |           |    |      |     |      |        |        |        |   |    |   
|          |               |           | 33 |      |     |      | (1,502 | )      |        |   |   |   
|          |               |           |    |      |     |      |        |        |        |   |    |   
|          |               | Total     |    | $    | 100 |      |        | $      | (1,130 | ) |    | $  | 60 | 
|          |               |           |    |      |     |      |        |        |        |   |    |   

F-11



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision (benefit) for income taxes differed
from the amount computed by applying the U.S. federal statutory
rate as follows (in thousands):

|                                                 |       |           |        |      |  |      |        |        |   |   |         |    | 
|------------------------------------------------ | ----- | --------- | ------ | ---- |  | ---- | ------ | ------ | - | - | ------- | -- | 
|                                                 |       |          
|                                                 |       | April 30,
|                                                 |       |          
|                                                 |       | 2000      |        | 2001 |  | 2002
|                                                 |       |           |        |      |  |     
|Income tax provision (benefit) at statutory rate |       | $         | (1,205 | )    |  | $    | (4,525 | )      |   | $ | (11,885 | ) 
|Tax loss with no current benefit                 |       |           | 68     |      |  |      | 1,524  |        |   |   | 9,269   |   
|Utilization of foreign net operating losses      |       |           | (136   | )    |  |      |       |        |   |   |        |   
|Foreign tax differential                         |       |           | 114    |      |  |      | 2      |        |   |   | (59     | ) 
|Non-deductible expenses                          |       |           | 1,550  |      |  |      | 1,878  |        |   |   | 4,024   |   
|Tax credits                                      |       |           | (331   | )    |  |      |       |        |   |   | (512    | ) 
|State taxes, net of federal benefit              |       |           | 15     |      |  |      | (332   | )      |   |   | (1,079  | ) 
|Other, net                                       |       |           | 25     |      |  |      | 323    |        |   |   | 302     |   
|                                                 |       |           |        |      |  |      |        |        |   |   |         |   
|                                                 | Total |           | $      | 100  |  |      | $      | (1,130 | ) |   | $       | 60 | 
|                                                 |       |           |        |      |  |      |        |        |   |   |         |   

The components of the Companys deferred tax
assets and liabilities are as follows (in thousands):

|                          |                                  |                                |   |        |        |   |   |         |        |  
|------------------------- | -------------------------------- | ------------------------------ | - | ------ | ------ | - | - | ------- | ------ | -
|                          |                                  |                               
|                          |                                  | April 30,                     
|                          |                                  |                               
|                          |                                  | 2001                           |   | 2002  
|                          |                                  |                                |   |       
|Deferred tax assets:      |                                  |                                |   |        |        |   |   |        
|                          | Reserves and accruals            |                                | $ | 1,334  |        |   | $ | 2,460   |       
|                          | Fixed assets                     |                                |   | 1,079  |        |   |   | 1,096   |       
|                          | Tax credits                      |                                |   | 155    |        |   |   | 667     |       
|                          | Net operating loss carryforwards |                                |   | 1,311  |        |   |   | 8,161   |       
|                          |                                  |                                |   |        |        |   |   |        
|                          |                                  | Total deferred tax assets      |   |        | 3,879  |   |   |         | 12,384 |  
|Deferred tax liabilities: |                                  |                                |   |        |        |   |   |        
|                          | Intangible assets                |                                |   | (2,355 | )      |   |   | (1,591  | )     
|                          |                                  |                                |   |        |        |   |   |        
|                          |                                  | Total deferred tax liabilities |   |        | (2,355 | ) |   |         | (1,591 | )
|                          | Valuation allowance              |                                |   | (1,524 | )      |   |   | (10,793 | )     
|                          |                                  |                                |   |        |        |   |   |        
|                          | Net deferred taxes               |                                | $ |       |        |   | $ |        |       
|                          |                                  |                                |   |        |        |   |   |        

The Company has incurred cumulative losses for
the three year period ended April 30, 2002. Consequently,
the Company does not have an objective and verifiable basis for
concluding that it is more likely than not the Company will
generate taxable income in the foreseeable future. Accordingly,
the Company has provided a valuation allowance covering its net
deferred tax assets. The valuation allowance for the period
ended April 30, 2002 increased by approximately $9,269,000
primarily due to an increase in net operating loss
carryforwards. At April 30, 2002, the Company had
approximately $481,000 of Canadian investment tax credits earned
as a result of government incentive programs which begin to
expire in 2009. At April 30, 2002 the Company has
approximately $136,000 of United States research credits which
begin to expire in 2013 and net operating loss carryforwards of
approximately $20,574,000 which begin to expire in 2019. The
Company paid income taxes of approximately $1,000, $207,000, and
$161,000 in 2000, 2001, and 2002 respectively.

7. Stock Plans

In June 1996, the Company adopted the 1996 Stock
Option Plan (the 1996 Plan), which provides for the
issuance of up to 1,959,081 shares of common stock of the
Company as either incentive stock options or non-qualified stock
options. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors. Both incentive stock
options and non-qualified stock options are generally granted at
the fair market

F-12



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value, although as disclosed herein, certain
options were granted below fair market value. Options granted
under the 1996 Plan generally vest as to 25% of the underlying
shares on the first anniversary of the date of grant and ratably
over the remaining thirty-six months and expire five and ten
years from date of grant for incentive stock options and
non-qualified stock options, respectively. At April 30,
2002, 352,239 shares were available for future grant. At
April 30, 2000, 2001 and 2002, there were 374,991, 334,493,
and 317,525 options exercisable under the 1996 Plan, at a
weighted average exercise price of $0.152, $0.42, and $0.40 per
share, respectively.

In August 1999, the Company adopted the 1999
Stock Option and Grant Plan (the 1999 Plan). The
1999 Plan provides for the issuance of up to 3,060,000 shares of
common stock of the Company as either incentive stock options or
non-qualified stock options. The 1999 Plan is administered by
the Compensation Committee of the Board of Directors. Options
granted under the 1999 Plan generally vest as to 25% of the
underlying shares on the first anniversary of the date of grant
and ratably over the remaining twelve quarters and expire ten
years from the date of grant. At April 30, 2002, 1,590,042
shares were available for future grant. At April 30, 2000,
2001 and 2002 there were 28,450, 445,507 and 552,948 options
exercisable under the 1999 Plan at a weighted average exercise
price of $6.81, $13.44 and $10.42 per share, respectively.

On August 15, 2000 the Board of Directors of
the Company adopted the 2000 Director Stock Option Plan (The
Director Plan). The Director Plan provides for the
issuance of up to 500,000 shares of common stock of the Company
as non-qualified stock options. The Director Plan is
administrated by a committee of the Board of Directors. Initial
options granted under the Director Plan generally vest ratably
over twelve quarters. Annual options granted are fully vested
and are immediately exercisable at the date of grant. All
options granted under the Director Plan expire upon the
termination date of the participant. At April 30, 2002,
386,255 shares were available for future grant. At
April 30, 2001 and 2002, there were 15,624 and 59,060
options exercisable at a weighted average exercise price of
$16.50 and $11.25 per share, respectively.

The following table summarizes option activity
over the life of the 1996 Plan, the 1999 Plan and the Director
Plan:

|                              |           |             |           |                  |   |   |      |       | 
|----------------------------- | --------- | ----------- | --------- | ---------------- | - | - | ---- | ----- | 
|                              |           | Options     |           | Weighted Average
|                              |           | Outstanding |           | Exercise Price  
|                              |           |             |           |                 
|Outstanding at April 30, 1999 |           |             | 971,642   |                  |   | $ | 0.11 |      
|                              | Granted   |             |           | 1,406,882        |   |   |      | 13.42 | 
|                              | Exercised |             |           | (133,435         | ) |   |      | 0.28  | 
|                              | Canceled  |             |           | (120,922         | ) |   |      | 7.62  | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2000 |           |             | 2,124,167 |                  |   | $ | 8.57 |      
|                              | Granted   |             |           | 3,127,779        |   |   |      | 10.21 | 
|                              | Exercised |             |           | (357,801         | ) |   |      | 0.19  | 
|                              | Canceled  |             |           | (895,798         | ) |   |      | 16.76 | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2001 |           |             | 3,998,347 |                  |   | $ | 9.02 |      
|                              | Granted   |             |           | 937,679          |   |   |      | 1.55  | 
|                              | Exercised |             |           | (250,239         | ) |   |      | 0.11  | 
|                              | Canceled  |             |           | (2,351,439       | ) |   |      | 9.64  | 
|                              |           |             |           |                  |   |   |      |      
|Outstanding at April 30, 2002 |           |             | 2,334,348 |                  |   | $ | 5.94 |      
|                              |           |             |           |                  |   |   |      |      

F-13



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table presents certain information
about options outstanding as of April 30, 2002:

|                  |  |           |  |                       |      |             |  |                |         |  |  |   |       | 
|----------------- |  | --------- |  | --------------------- | ---- | ----------- |  | -------------- | ------- |  |  | - | ----- | 
|                  |  |           |  |                       |      |             |  | Weighted      
|                  |  |           |  |                       |      |             |  | Average       
|                  |  |           |  | Weighted Average      |      | Number of   |  | Exercise Price
|                  |  | Number of |  | Remaining Contractual |      | Options     |  | of Options    
|Exercise Price    |  | Options   |  | Life (Yrs.)           |      | Exercisable |  | Exercisable   
|                  |  |           |  |                       |      |             |  |               
|$0.001  $.098039 |  | 244,104   |  |                       | 1.31 |             |  |                | 238,252 |  |  | $ | 0.09  | 
|$0.19068  $1.34  |  | 320,117   |  |                       | 8.78 |             |  |                | 41,319  |  |  |   | 0.59  | 
|$1.36  $1.9375   |  | 302,143   |  |                       | 7.49 |             |  |                | 88,377  |  |  |   | 1.65  | 
|$2.03  $2.53125  |  | 676,000   |  |                       | 8.91 |             |  |                | 163,063 |  |  |   | 2.51  | 
|$3.125  $5.8125  |  | 308,863   |  |                       | 8.63 |             |  |                | 135,594 |  |  |   | 5.20  | 
|$8.17  $18.062   |  | 185,130   |  |                       | 8.01 |             |  |                | 103,225 |  |  |   | 13.59 | 
|$20.13  $33.975  |  | 297,991   |  |                       | 8.01 |             |  |                | 159,703 |  |  |   | 24.01 | 
|                  |  |           |  |                       |      |             |  |                |         |  |  |   |       | 
|                  |  | 2,334,348 |  |                       |      |             |  |                | 929,533 |  |  | $ | 7.048 | 
|                  |  |           |  |                       |      |             |  |                |         |  |  |   |       | 

The weighted-average exercise price of stock
options granted are as follows:

|                                                        |  |      |       |      |  |      |       |  |  |   |      | 
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ---- | 
|                                                        |  | 2000 |       | 2001 |  | 2002
|                                                        |  |      |       |      |  |     
|Exercise price less than fair value of common
    stock |  | $    | 6.43  |      |  | $    |      |  |  | $ |     | 
|Exercise price equals fair value of common stock        |  | $    | 23.25 |      |  | $    | 10.22 |  |  | $ | 1.55 | 

The Company recorded deferred compensation
charges of approximately $8,464,000 related to stock options and
restricted stock granted below market exercise prices during the
fiscal year ended April 30, 2000. The deferred compensation
is being amortized to expense over the vesting period of the
individual options, generally four years. In the fourth quarter
of the fiscal year ended April 30, 2002, the Company recorded an
adjustment to reverse approximately $1.5 million of stock-based
compensation expense previously recorded relating to terminated
employees. SFAS No. 123 requires the Company to disclose,
on a pro forma basis, the effect on net income (loss) as if the
Company had recorded compensation expense for its stock-based
compensation plans based on the fair value of the awards. On a
pro forma basis, loss applicable to common stock for 2000, 2001
and 2002 would have been approximately $5,619,000 and
$15,063,000, and $37,639,000, respectively. Loss per common
share would have been approximately $0.50, $0.78 and $1.87, for
the years ended April 30, 2000, 2001 and 2002, respectively.

The fair value for these options was estimated at
the date of grant using the minimum value method prior to our
initial public offering on October 22, 1999 and the
Black-Scholes model thereafter using the following
weighted-average assumptions for options granted in 2000, 2001
and 2002: risk-free interest rate of 6.5%, 5.6% and 4.5%; a
weighted-average expected life of the option of between five and
six years; expected volatility of 1.2 in 2000 (Black-Scholes
only), 1.5 in 2001 and 1.4 in 2002; and no dividends.

The weighted-average fair value of stock options
granted are as follows:

|                                                                                          |  |      |       |      |  |      |      |  |  |   |      | 
|----------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                                                          |  | 2000 |       | 2001 |  | 2002
|                                                                                          |  |      |       |      |  |     
|Fair value of stock options where exercise price
    less than fair value of common stock |  | $    | 9.64  |      |  | $    |     |  |  | $ |     | 
|Fair value of stock options where exercise price
    equals fair value of common stock    |  |      | 19.91 |      |  |      | 9.98 |  |  |   | 1.56 | 

The weighted average remaining contractual life
for all stock options outstanding at April 30, 2002 was
8.14 years.

The Company issued 100,000 shares of restricted
common stock having a fair value of $2.5312 per share in March
2001, 22,950 shares of restricted common stock at $3.27 per
share which was less than the fair value in September 1999,
374,850 shares of restricted common stock at $1.63 per share
which was less than fair

F-14



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

value in July 1999, 114,750 shares of restricted
common stock having a fair value of $0.098 per share in June
1998 and 1,538,178 shares of restricted common stock having a
fair value of $0.098 per share in January 1998 to certain
executives and a member of the Board of Directors in exchange
for promissory notes totaling $1,102,672. The promissory notes
are non-interest bearing to employees insofar as the Company is
required to reimburse the employees for any interest on the
promissory notes that is payable to the Company. The face values
of the promissory notes approximate their fair market value.
Upon termination for any reason other than for cause or in the
event of the merger, consolidation or sale of substantially all
of the Companys assets or voting securities, the Company
must repurchase all the non-vested restricted stock of the
executives at the original issue price. If an executive is
terminated for cause, the Company must repurchase such
executives vested and non-vested restricted stock

The Company has a right of first refusal prior to
any transfer of restricted stock. The restricted stock generally
vests over four years and the promissory notes have a five-year
maturity. The outstanding balance of the promissory notes at
April 30, 2001 and 2002 is $836,360 and $532,145,
respectively. The promissory note underlying the 100,000 shares
issued in March 2001 does not require repayment. Accordingly,
the Company has recorded a compensation charge to amortize the
balance of the note over the vesting period of the stock of four
years.

At April 30, 2002, the Company had reserved
4,662,884 shares of common stock for issuance under the 1996 and
1999 Stock Option plans and the Director Plan.

8. Employee Stock Purchase Plan

The Company has an employee stock purchase plan
(the Stock Purchase Plan) under which eligible
employees may purchase common stock at a price per share equal
to 85% of the lower of the fair market value of the common stock
at the beginning or end of each offering period. Participation
in the offering is limited to 10% of an employees
compensation (not to exceed amounts allowed under section 423 of
the Internal Revenue Code), may be terminated at any time by the
employee and automatically ends on termination of employment
with the Company. A total of 250,000 shares of common stock have
been reserved under the Stock Purchase Plan.

In addition, on each May 1, the aggregate number
of shares of common stock reserved for issuance under the Stock
Purchase Plan will be increased automatically by a number of
shares equal to 0.5% of the total number of outstanding shares
on the immediately preceding April 30, subject to the ability of
the Compensation Committee to reduce the amount of the increase
in any particular year; provided that the aggregate number of
shares that may be issued over the term of the Stock Purchase
Plan shall not exceed 500,000 shares.

9. Employee Savings Plans

The Company maintains a retirement savings plan
under section 401(k) of the Internal Revenue Code. The plan
covers substantially all U.S. employees and allows participants
to defer a portion of their annual compensation on a pre-tax
basis. The Company also maintains a Registered Retirement
Savings Plan for its Canadian employees, which allows
participants to defer a portion of their annual compensation on
a pre-tax basis. The Company made no contributions to either
plan during 2000, 2001 or 2002.

10. Commitments and
Contingencies

The Company leases office space in the United
States, Canada, and the United Kingdom under non-cancelable
operating leases. The Companys former Canadian facility
was leased from Manz Developments, Inc., a related party. Rent
expense under this arrangement was approximately $105,000, and
$66,207 in 2000 and 2001, respectively. In January 2001 the
Company moved its Canadian offices and no longer leases space

F-15



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

from Manz Developments, Inc. Total rent expense
under all operating leases for 2000, 2001 and 2002 was
approximately $478,000, $1,331,000, and $1,318,000,
respectively. At April 30, 2002, future minimum lease
commitments were approximately $1,645,000 in 2003, $1,597,000 in
2004, $1,514,000 in 2005, $1,425,000 in 2006 and $1,238,000 in
2007. Future minimum lease payments have not been reduced by
future minimum sublease rentals of $619,000, $686,000, $686,000,
$686,000 and $686,000 in 2003, 2004, 2005, 2006 and 2007,
respectively.

11. Earnings Per Share and Pro Forma
Earnings Per Share

The calculations of earnings per share are as
follows (in thousands, except for share related amounts):

|                                 |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |            |     
|-------------------------------- | ------------------------------------------------------------------------------------------------ | --------------------- | ----- | ----------- | - | ---- | ----- | ---------- | - | - | ----- | ---------- | - | - | ----- | ---------- | ----
|                                 |                                                                                                  |                       |       |             |   |      |       | Pro Forma 
|                                 |                                                                                                  |                       |       |             |   |      |       | Year Ended
|                                 |                                                                                                  |                       |       | April 30,  
|                                 |                                                                                                  | Years Ended April 30, |       | (Unaudited)
|                                 |                                                                                                  |                       |       |            
|                                 |                                                                                                  | 2000                  |       | 2001        |   | 2002 |       | 2000      
|                                 |                                                                                                  |                       |       |             |   |      |       |           
|Numerator:                       |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           
|                                 | Net loss                                                                                         |                       | $     | (3,625      | ) |      | $     | (11,799    | ) |   | $     | (34,018    | ) |   | $     | (3,625     | )   
|                                 | Dividends on preferred stock                                                                     |                       |       | (1,285      | ) |      |       |           |   |   |       |           |   |   |       | (1,102     | )(1)
|                                 |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           
|                                 | Numerator for basic and diluted earnings per
    share  income available to common stockholders |                       | $     | (4,910      | ) |      | $     | (11,799    | ) |   | $     | (34,018    | ) |   | $     | (4,727     | )   
|                                 |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           
|Denominator:                     |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           
|                                 | Denominator for basic and diluted earnings per
    share  weighted-average shares               |                       |       | 11,144,565  |   |      |       | 19,213,239 |   |   |       | 20,126,113 |   |   |       | 15,268,368 | (2) 
|                                 |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           
|Basic and diluted loss per share |                                                                                                  | $                     | (0.44 | )           |   | $    | (0.61 | )          |   | $ | (1.69 | )          |   | $ | (0.31 | )         
|                                 |                                                                                                  |                       |       |             |   |      |       |            |   |   |       |            |   |   |       |           



---



|    |                                                                                             
|--- | --------------------------------------------------------------------------------------------
|(1) | Excludes dividends on redeemable convertible
    preferred stock.                           
|   
|(2) | Includes common shares issued upon conversion of
    redeemable convertible preferred stock.

The following potential common shares have been
excluded from the computation of diluted net loss per share for
all periods presented because the effect would have been
anti-dilutive (in thousands):

|                                     |  |                      |       |      |  |      |       |  |  |  |       | 
|------------------------------------ |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                     |  |                     
|                                     |  | Year Ended April 30,
|                                     |  |                     
|                                     |  | 2000                 |       | 2001 |  | 2002
|                                     |  |                      |       |      |  |     
|Shares issuable under stock options  |  |                      | 2,124 |      |  |      | 3,998 |  |  |  | 2,334 | 
|                                     |  |                      |       |      |  |      |       |  |  |  |       | 
|Shares of nonvested restricted stock |  |                      | 873   |      |  |      | 381   |  |  |  | 88    | 
|                                     |  |                      |       |      |  |      |       |  |  |  |       | 

12. Valuation and Qualifying
Accounts

Accounts Receivable Reserves and Allowances (in
thousands):

|                          |  |              |     |             |  |            |     |              |  |            |      |   |  |   |      |   |  |   |     | 
|------------------------- |  | ------------ | --- | ----------- |  | ---------- | --- | ------------ |  | ---------- | ---- | - |  | - | ---- | - |  | - | --- | 
|                          |  |              |     |             |  | Additions  |     |              |  |           
|                          |  | Balance at   |     | Balance     |  | Charged to |     | Deductions   |  | Balance at
|                          |  | Beginning of |     | Acquired in |  | Income     |     | (Principally |  | End of    
|Period                    |  | Year         |     | Acquisition |  | Statement  |     | Write-Offs)  |  | Year      
|                          |  |              |     |             |  |            |     |              |  |           
|Year ended April 30, 2000 |  | $            | 179 |             |  |            |    |              |  | $          | 81   |   |  | $ | (106 | ) |  | $ | 154 | 
|Year ended April 30, 2001 |  | $            | 154 |             |  | $          | 151 |              |  | $          | 808  |   |  | $ | (517 | ) |  | $ | 596 | 
|Year ended April 30, 2002 |  | $            | 596 |             |  |            |    |              |  | $          | (289 | ) |  | $ | 193  |   |  | $ | 500 | 

F-16



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13. Initial Public Offering and Follow on
Offering

The Company completed its Initial Public Offering
of 3,400,000 shares of common stock in October 1999 raising
approximately $49.5 million, net of offering and
distribution costs. MCK Communications, Inc. is listed on the
NASDAQ National Market under the symbol MCKC.

Upon completion of the Initial Public Offering,
the Company redeemed 14,985,733, 28,505, and 20,000 shares of
Series A, Series C and Series E Redeemable
Preferred Stock, respectively. The aggregate redemption price
for the Series A, Series C and Series E preferred
stock was $19,070,164, $3,147,487 and $2,586,793, respectively.
In addition, 3,968,384 shares of Series B Redeemable
Preferred Stock were converted into 6,102,195 shares of the
Companys common stock and 1,672,354 shares of
Series D Redeemable Preferred Stock were converted into
2,575,015 shares of the Companys common stock.

On November 22, 1999, the underwriters of
the Initial Public Offering exercised their over-allotment
option and purchased an additional 255,000 shares of the
Companys common stock at the offering price of $16.00. The
Company received an additional $3,794,400, net of underwriting
discounts and commissions, in this transaction. Additionally,
certain stockholders sold 255,000 shares of their stock in the
Company. The Company did not receive any proceeds on such sales
by its stockholders.

On April 7, 2000, the Company completed a
follow-on Public Offering of 2,750,000 shares of common stock,
1,250,000 of which were sold by the Company and 1,500,000 of
which were sold by certain stockholders. The Company received
approximately $47.1 million, net of offering and
distribution costs. The Company did not receive any proceeds on
the sale of shares by its stockholders.

14. Legal Proceedings

On May 3, 2000, Joan Lockhart, a former
employee, filed a complaint in Massachusetts State Court against
the Company. In the complaint, the former employee asserted a
claim for breach of contract against the Company based on
allegations that the Company failed to comply with the terms of
her employment agreement and a certain restricted stock
agreement executed by and between the Company and the former
employee. The former employee seeks approximately $30,000 in
severance pay as well as approximately $1,000,000 in damages. On
June 5, 2000, the Company filed its answer denying the
material allegations of the former employees complaint. On
December 6, 2001, the Massachusetts Superior Court,
Middlesex County, entered judgment against the Company and in
favor of the former employee in the amount of approximately
$1,160,000, including interest. The Company believes it has
meritorious grounds for appeal of this judgment and intends to
pursue vigorously an appeal of the same. Provision has been made
in the Companys 2002 financial statements for the judgment
entered in the event the appeal is not successful. The Company
has also expensed the legal fees incurred in this provision.

In December 2001, a complaint was filed in the
Southern District of New York seeking an unspecified amount of
damages on behalf of an alleged class of persons who purchased
shares of the Companys common stock between the date of
its initial public offering and December 6, 2000. The
complainants name as defendants the Company and certain of its
officers and other parties as underwriters of its initial public
offering. The plaintiffs allege, among other things, that the
Companys prospectus, contained in the Registration
Statement on Form S-1 filed with the Securities and
Exchange Commission, was materially false and misleading because
it failed to disclose that the investment banks which underwrote
the Companys initial public offering of securities and
others received undisclosed and excessive brokerage commissions,
and required investors to agree to buy shares of securities
after the initial public offering was completed at predetermined
prices as a precondition to obtaining initial public offering
allocations. The plaintiffs further allege that these actions
artificially inflated the price of the Companys common
stock after the initial public offering. This case is one of
many with substantially similar allegations known as the
Laddering Cases filed before the Southern District
of New York against a variety of unrelated issuers and
investment bankers and

F-17



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

have been consolidated for pre-trial purposes
before one judge to assist with administration. The Company
believes that the claims against it are without merit and that
it intends to defend the actions. No provision has been recorded
for this matter.

The Company has been named a defendant in a
lawsuit filed in Norfolk County, Massachusetts by Entrata
Communications, Inc. (Entrata). Entrata
Communications, Inc. v. Superwire.com. Inc. and MCK
Communications, Inc.arises out of a dispute between Entrata
and one of its largest shareholders, Superwire.com, Inc.
(Superwire). Pursuant to a contract with Entrata,
the Company was obligated to pay Entrata $750,000 in early 2002.
In order to take advantage of a $100,000 discount offered for
early payment, the Company paid Entrata $650,000 in November
2001, in full satisfaction of its contractual obligations.
Entrata contends that it never received the funds from MCK, and
that the funds were diverted to Superwire. Through the lawsuit,
Entrata seeks to recover from both the Company and Superwire the
full $750,000 that the Company would have owed in 2002. The
Company has asserted counterclaims against Entrata and
cross-claims against Superwire for fraud and breach of contract.
As discovery has not yet commenced, it is too soon to assess the
Companys likelihood of success in this litigation.
Management intends to defend the claims against the Company and
prosecute its counterclaims and cross-claims vigorously.

15. Segments

Information about the Companys revenue and
long-lived assets by geographic area is as follows (in
thousands):

|                                  |       |           |        |        |  |      |        |        |  |   |        |        | 
|--------------------------------- | ----- | --------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                  |       |          
|                                  |       | April 30,
|                                  |       |          
|                                  |       | 2000      |        | 2001   |  | 2002
|                                  |       |           |        |        |  |     
|Revenues from external customers: |       |           |        |        |  |      |        |        |  |   |        |       
|United States                     |       | $         | 21,257 |        |  | $    | 31,200 |        |  | $ | 13,179 |       
|Canada                            |       |           | 2,892  |        |  |      | 4,027  |        |  |   | 1,931  |       
|Rest of world                     |       |           | 933    |        |  |      | 2,993  |        |  |   | 1,377  |       
|                                  |       |           |        |        |  |      |        |        |  |   |        |       
|                                  | Total |           | $      | 25,082 |  |      | $      | 38,220 |  |   | $      | 16,487 | 
|                                  |       |           |        |        |  |      |        |        |  |   |        |       

|                   |       |           |        |        |  |   |       |       | 
|------------------ | ----- | --------- | ------ | ------ |  | - | ----- | ----- | 
|                   |       |          
|                   |       | April 30,
|                   |       |          
|                   |       | 2001      |        | 2002  
|                   |       |           |        |       
|Long-lived assets: |       |           |        |        |  |   |       |      
|United States      |       | $         | 23,742 |        |  | $ | 5,144 |      
|Canada             |       |           | 671    |        |  |   | 461   |      
|Rest of world      |       |           | 4      |        |  |   | 7     |      
|                   |       |           |        |        |  |   |       |      
|                   | Total |           | $      | 24,417 |  |   | $     | 5,612 | 
|                   |       |           |        |        |  |   |       |      

16. Acquisition of DTI

In June, 2000, the Company acquired all of the
outstanding stock of DTI Holdings, Inc. (DTIH), its
wholly owned subsidiary Digital Techniques, Inc (together
DTI) for $12.7 million in cash, including
transaction costs, and 364,601 shares of common stock and
101,916 stock options with a fair market value of
$10.9 million. The Company engaged an independent firm to
determine the value of certain tangible and intangible assets
owned by DTIH for the purpose of allocating the total purchase
price. The Company allocated approximately $1.6 million of
the purchase price to tangible liabilities, $16.8 million
to goodwill and other intangibles, $8.0 million to
completed technology, and $694,000 to in-process development.
Although the Company continues to use the acquired technology,
the rapidly changing and competitive environment in which the
Company operates has negatively impacted operating results. Two
of the Companys protocol partners have recently introduced
their own competitive products, and one has reduced their
purchases of the

F-18



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys products. In addition, the Company
has determined the market value of the DTI acquisition has
declined significantly from the value at the date DTI was
acquired. Moreover, during the year ended April 30, 2002,
the Company terminated substantially all the DTI staff, which
was not contemplated at the date of acquisition. As a result,
the Company determined that impairment indicators were evident.
In accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, the Company evaluated the recoverability of
its long-lived assets, including intangibles related to the DTI
acquisition and determined that the estimated future
undiscounted cash flows were below their carrying value at
July 31, 2001. Undiscounted cash flows were determined at
an enterprise level as the operations and technology of DTI had
been integrated with those of the Company. Accordingly, the
Company wrote off all remaining unamortized goodwill of
$12.4 million and reduced the carrying value of certain
identifiable intangibles by $1.7 million to their estimated
fair value of $4.9 million. The estimated fair value was
based on anticipated future cash flows discounted at a rate of
18%, which is commensurate with the risk involved. The useful
lives of the remaining identifiable intangibles were reevaluated
and deemed to be appropriate. The remaining estimated fair value
is being amortized over its estimated useful life through fiscal
2005. During the period ended July 31, 2000, the Company
recorded a $694,000 in-process research and development charge
to fully write off the value associated with projects that were
yet to be completed or released from beta testing.

The consolidated results of operations for the
year ended April 30, 2001 include DTIs results from
June 14, 2000. Assuming the acquisition of DTI occurred on
May 1, 2000, on a pro-forma basis, the Company would have
reported revenues of $39.6 million, a net loss of
$14.2 million and basic net loss per common share of $0.74
for the year ended April 30, 2001. The unaudited pro-forma
financial information is presented for illustrative purposes and
is not necessarily indicative of the combined results of
operations in future periods or the results that actually would
have been realized had MCK and DTIH been a combined company
during the specified periods.

17. Entrata License Agreement

During the year ended April 30, 2001, the
Company entered into an agreement with Entrata providing MCK
with a royalty free, non-exclusive, perpetual, worldwide license
to use, install, and modify Entratas LoopBuilder 50 and
100 series integrated access device technology. This technology
was to have been integrated into certain MCK products and
solutions and resold or sublicensed under MCKs name and
trademarks. In consideration for the license and related
training, MCK agreed to pay $3.0 million, of which
$2,250,000 was advanced to Entrata under the terms of the
agreement. In order to take advantage of a $100,000 discount
offered for early payment, the Company paid Entrata $650,000 in
November 2001, in full satisfaction of its contractual
obligations. The Company received the source code and all
deliverables in February 2001. Training was completed during the
Companys fourth quarter of fiscal 2001. The entire
$3.0 million was expensed during the fourth quarter of
fiscal 2001 as in-process research and development.

18. Restructuring

During the year ended April 30, 2001, the
Company reorganized various operating functions of its business,
re-focusing the business on core competencies and matching
staffing needs to strategic initiatives. The reorganization and
refocusing resulted in a reduction of the Companys
workforce by approximately 10% or 25 employees. In conjunction
with this action the Company recorded a charge of approximately
$597,000 for the costs of severance, related benefits and
outplacement services.

During the year ended April 30, 2002, due to
the continued downturn in the economic environment and to
accelerate the Companys return to profitability, the
Company instituted a number of actions to streamline operations.
These actions included closing the Companys Texas
operations and personnel reductions at the Companys
Needham and Calgary locations. In connection with these actions,
the Company recorded

F-19



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##### Table of Contents



MCK COMMUNICATIONS, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

aggregate charges of approximately
$1.5 million related to the costs of severance, related
benefits and outplacement services. The consolidation and
reorganization resulted in aggregate reductions of our workforce
by approximately 126 employees, or 66% of our workforce. The
employee termination costs will be paid out through December
2002. In addition, the Company recorded a provision of
approximately $250,000 related to remaining lease obligations
for its Texas operations and recorded a charge of approximately
$200,000 related to fixed assets previously used at those
facilities and abandoned. The Texas facility lease obligations
expire in August 2004. The Company recorded a charge of
approximately $1.5 million in connection with a sublease of
part of its space at the Needham location through the remaining
lease term. In addition, the Company recorded a charge of
approximately $800,000 related to fixed assets and leasehold
improvements at that facility. The Needham facility lease
obligation expires in February 2007.

The following table summarizes the restructuring
activity for the year ended April 30, 2002:

|                        |  |                   |        |            |  |               |       |   |  |   |        |  
|----------------------- |  | ----------------- | ------ | ---------- |  | ------------- | ----- | - |  | - | ------ | -
|                        |  | Employee          |        | Facility   |  | Write-down of
|                        |  | Termination Costs |        | Exit Costs |  | Fixed Assets 
|                        |  |                   |        |            |  |              
|Balance April 30, 2001  |  | $                 | 380    |            |  | $             |      |   |  | $ |       |  
|Restructuring provision |  |                   | 1,465  |            |  |               | 1,781 |   |  |   | 1,064  |  
|Non-cash charges        |  |                   |       |            |  |               |      |   |  |   | (1,044 | )
|Paid to date            |  |                   | (1,370 | )          |  |               | (44   | ) |  |   |       |  
|                        |  |                   |        |            |  |               |       |   |  |   |        |  
|Balance April 30, 2002  |  | $                 | 475    |            |  | $             | 1,737 |   |  | $ | 20     |  
|                        |  |                   |        |            |  |               |       |   |  |   |        |  

19. Quarterly Results of Operations
(Unaudited)

|                      |  |                                      |        |        |  |       |        |        |  |   |        |  |  |   |       | 
|--------------------- |  | ------------------------------------ | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ |  |  | - | ----- | 
|                      |  |                                     
|                      |  | Quarter                             
|                      |  |                                     
|2001                  |  | First                                |        | Second |  | Third |        | Fourth
|                      |  |                                      |        |        |  |       |        |       
|                      |  |                                     
|                      |  | (in thousands except per share data)
|Revenues              |  | $                                    | 10,042 |        |  | $     | 11,185 |        |  | $ | 10,411 |  |  | $ | 6,582 | 
|Gross profit          |  |                                      | 6,230  |        |  |       | 6,929  |        |  |   | 5,910  |  |  |   | 3,864 | 
|Net loss              |  |                                      | 1,286  |        |  |       | 1,319  |        |  |   | 2,888  |  |  |   | 6,306 | 
|Loss per common share |  | $                                    | .07    |        |  | $     | 0.07   |        |  | $ | 0.15   |  |  | $ | 0.33  | 

|                      |  |                                      |        |        |  |       |       |        |  |   |       |  |  |   |       | 
|--------------------- |  | ------------------------------------ | ------ | ------ |  | ----- | ----- | ------ |  | - | ----- |  |  | - | ----- | 
|                      |  |                                     
|                      |  | Quarter                             
|                      |  |                                     
|2002                  |  | First                                |        | Second |  | Third |       | Fourth
|                      |  |                                      |        |        |  |       |       |       
|                      |  |                                     
|                      |  | (in thousands except per share data)
|Revenues              |  | $                                    | 3,403  |        |  | $     | 4,433 |        |  | $ | 4,051 |  |  | $ | 4,600 | 
|Gross profit          |  |                                      | 1,378  |        |  |       | 2,015 |        |  |   | 1,897 |  |  |   | 2,100 | 
|Net loss              |  |                                      | 21,028 |        |  |       | 5,000 |        |  |   | 5,170 |  |  |   | 2,820 | 
|Loss per common share |  | $                                    | 1.06   |        |  | $     | 0.25  |        |  | $ | 0.26  |  |  | $ | 0.14  | 

F-20



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##### Table of Contents



EXHIBIT INDEX

|            |            |             |  |                                                                                                                                                                                                                                                         
|----------- | ---------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |            | Description
|            |            |            
|            | 2.1 (1)    |             |  | Agreement and Plan of Merger, dated June 14,
    2000, by and among the Registrant, Omni Acquisition Corporation,
    Troy Holdings International, Inc., DTI Holdings, Inc., Digital
    Techniques, Inc. and certain shareholders of DTI Holdings, Inc.
|            | 3.1 (2)    |             |  | Second Amended and Restated Certificate of
    Incorporation of the Registrant (Exhibit No. 3.3 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                                    
|            | 3.2 (2)    |             |  | First Amended and Restated By-laws of the
    Registrant (Exhibit No. 3.5 of Registration Statement
    on Form S-1 (File No. 333-85821)).                                                                                                              
|            | 4.1 (2)    |             |  | Specimen certificate for shares of common stock,
    $.001 par value, of the Registrant.                                                                                                                                                                
|            | 10.1 (2)   |             |  | Amended and Restated Registration Rights
    Agreement, dated July 16, 1998, among the Registrant and
    the stockholders named therein. (Exhibit No. 10.2 of
    Registration Statement on Form S-1 (File
    No. 333-85821)).                        
|            | 10.2 (2)   |             |  | Amended and Restated 1996 Stock Option Plan of
    the Registrant. (Exhibit No. 10.3 of Registration
    Statement on Form S-1 (File No. 333-85821)).                                                                                                   
|            | 10.3 (3)   |             |  | 1999 Stock Option and Grant Plan of the
    Registrant.                                                                                                                                                                                                 
|            | 10.4 (2)  |             |  | Master Support Agreement between the Registrant
    and Vital Networks, Inc. dated June 28, 1999
    (Exhibit No. 10.16 of Registration Statement on
    Form S-1 (File No. 333-85821)).                                                                
|            | 10.5 (4)   |             |  | Lease Agreement by and between the Registrant and
    Wellsford/ Whitehall Holdings, L.L.C. dated January 10,
    2000.                                                                                                                                 
|            | 10.5.1 (5) |             |  | First Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 25, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                                                
|            | 10.5.2 (5) |             |  | Second Amendment to Lease Agreement between the
    registrant and Wellsford/ Whitehall Holdings, LLC dated
    May 31, 2000. (Exhibit No. 10.13.1 of Annual
    Report on Form 10-K (File No. 0-22703)).                                               
|            | 10.6       |             |  | Incentive Bonus Plan of the Registrant.                                                                                                                                                                                                                 
|            | 10.7 (6)   |             |  | 2000 Director Stock Option Plan of the Registrant.                                                                                                                                                                                                      
|            | 10.8 (7)   |             |  | 2000 Employee Stock Purchase Plan of the
    Registrant.                                                                                                                                                                                                
|            | 10.9 (8)   |             |  | Offer letter dated January 11, 2001, between
    the Registrant and Glenda Davis (Exhibit No. 10.14 of Annual
    Report on Form 10-K (File No. 0-22703)).                                                                                              
|            | 10.10 (8)  |             |  | Restricted Stock Purchase Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.15 of Annual Report on Form 10-K (File No.
    0-22703)).                                                                    
|            | 10.11 (8)  |             |  | Non-qualified Stock Option Agreement, dated
    March 13, 2001, between the Registrant and Glenda Davis
    (Exhibit No. 10.16 of Annual Report on Form 10-K (File No.
    0-22703)).                                                                   
|            | 10.12      |             |  | Promissory Note dated March 13, 2001, issued
    by Glenda Davis to the Registrant.                                                                                                                                                                     
|            | 10.13 (2)  |             |  | Form of Bonus Agreement (Exhibit No. 10.12
    of Registration Statement on Form S-1 (File
    No. 333-85821)).                                                                                                                                         
|            | 10.14      |             |  | Offer letter dated May 29, 2001 between the
    Registrant and Thomas Nolette                                                                                                                                                                           
|            | 10.15      |             |  | Offer letter dated May 10, 2001 between the
    Registrant and Ann Doyle                                                                                                                                                                                
|            | 10.16      |             |  | Offer letter dated November 26, 2001 between the
    Registrant and Gerald J. McGovern                                                                                                                                                                  
|            | 21.1       |             |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                         
|            | 23.1       |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                           




|  |                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Confidential treatment obtained as to portions of
    this exhibit. The confidential information has been filed
    separately with the Securities and Exchange Commission.



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibit 2.1
    filed with the Registrants Report on Form 8-K dated
    June 28, 2000.                                                                                                                                                                               
|   
|(2) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed in response to
    Item 16(a), Exhibits, of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-85821), which was declared effective on
    October 21, 1999.



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##### Table of Contents





|    |                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Incorporated by reference to Exhibit 10.4
    filed with the Registrants Registration Statement on
    Form S-8 dated February 4, 2000.                                                                                                        
|   
|(4) | Incorporated by reference to
    Exhibit No. 10.18 of the Registrants
    Registration Statement on Form S-1, as amended (File
    No. 333-96235), which was declared effective on
    April 4, 2000.                                          
|   
|(5) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal
    year ended April 30, 2000, as filed with the SEC on
    July 31, 2000.
|   
|(6) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated November 14, 2000.                                                                                                       
|   
|(7) | Incorporated by reference to Exhibit 99.1
    filed with the Registrants Registration Statement on
    Form S-8 dated December 4, 2000.                                                                                                        
|   
|(8) | Incorporated by reference to identically numbered
    exhibits (unless otherwise indicated) filed with the
    Registrants Annual Report on Form 10-K for the fiscal year
    ended April 30, 2001, as filed with the SEC on July 2,
    2001.