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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2008

Commission File Number 0-25882

EZENIA! INC.

(Exact name of registrant as specified in its charter)

14 Celina Ave, Suite 17-18, Nashua, New Hampshire 03063

(Address of principal executive offices, including zip code)

(603) 589-7600

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock $.01 par value

Preferred Stock Purchase Rights

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes    o       No    x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act

Yes    o       No    x

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.           x

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.       Large Accelerated Filer   o       Accelerated Filer   o       Non-Accelerated Filer   o       Smaller Reporting Company   x

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes    o       No    x

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant was $6,889,362 (computed by reference to the price at which the Registrant’s common stock was last sold on the OTC Bulletin Board on June 30, 2008).

The number of shares outstanding of the Registrant’s common stock as of March 23, 2009 was 14,658,217.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held May 26, 2009 are incorporated by reference into Part III hereof. With the exception of the portion of such Proxy Statement that is expressly incorporated herein, such Proxy Statement shall not be deemed filed as part of this Annual Report on Form 10-K.

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Ezenia! Inc.

2008 Form 10-K Annual Report

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

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PART I

This Annual Report on Form 10-K contains 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.  Actual results could differ materially from those set forth in the forward-looking statements.  Certain factors that might cause such a difference are discussed in this report, including in Item 1A “Risk Factors” beginning on page 9.

ITEM 1. BUSINESS

Founded in 1991, Ezenia! Inc., a Delaware corporation (“Ezenia”, “we”, or the “Company”), develops and markets products that enable organizations to provide technically advanced high-quality group communication to commercial, governmental, consumer and institutional users. Our products allow individuals and groups, regardless of proximity constraints, to interact and share information in a natural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse, or keyboard-to-keyboard flexibly, securely and in real-time. Using our products, individuals can interact through a natural meeting experience, allowing groups to work together effectively and disseminate vital information quickly in an extremely secure manner using advanced technology for both network security and data encryption.

We offer one of the most comprehensive commercially available lines of group communication products.  Our InfoWorkSpace software product (“IWS”) enables voice communication, instant messaging, white boarding, virtual workspaces, and video across a wide range of networks including local area networks, and wide area networks.  Furthermore, because our products are well suited for operating from small enclave environments to large multi-locations on public networks, they can be deployed with relative ease at small sites or in locations with a large number of users.  Users can be virtually anywhere on the planet so long as they have network access.

We sold IWS and related services to customers in the federal government, mostly in the Department of Defense (“DoD”) and the intelligence community, either directly, or in many instances, in partnership with the premier defense contractors and/or integrators.  It is in our interest to leverage these partnerships with well-established contractors and/or integrators to further expand the deployment and provide the support of IWS in large-scale opportunities.

Company Background and Evolution — True Collaboration versus Videoconferencing

In 1991, Ezenia, known at the time as VideoServer, designed, developed, manufactured, and sold Multipoint Control Systems or Units (“MCS” or “MCU”) for both the circuit-oriented, Integrated Services Digital Network -based and packet-switched, Internet Protocol -based videoconferencing applications. Our MCS was unique at the time with its PC-based, flexible hardware design approach and system configurations, leveraging commercial off-the-shelf base operating systems.  At that time, traditional videoconferencing vendors concentrated mostly on the development of more and more sophisticated, standard-based endpoints to be used in point-to-point videoconferencing.  We focused our business, not on the endpoints, but on systems deployed in the infrastructure backroom, to enable three or more sites or parties involved in videoconferencing to properly communicate among themselves, by switching video sources based on audio processing of current and immediately preceding speakers. Our technical advantages were derived by masking and compensating for incompatibilities between endpoints from different manufacturers, algorithmic transcoding, compensation for different bandwidth requirements, and simultaneous multi-windowed video arrangements on the monitor known as “Hollywood Squares,” just to name a few.

In the late 1990’s, we fully realized the limitations and narrow applications of our videoconferencing products which, among many deficiencies, are monolithic, require highly specialized support and services, stand apart from the normal office environment that most information workers are accustomed to, and do not provide a solution to the need to truly collaborate and disseminate information in real time.  Contrary to how most videoconferencing vendors would like to indoctrinate potential customers, video — in particular talking heads as in the case of most

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video conferences — was and is, now more than ever, far from being the “piece de resistance” of true, meaningful real-time collaboration. Furthermore, its monolithic approach, whereby you either get a successful videoconference session or get nothing, relegates all other more critical collaboration activities second to video talking heads.  Most importantly, the lack of presence awareness detection and the inability to leverage the web for ease of access, prevent flexible, on-demand, free-flowing collaboration sessions whereby participants can come, go, or be invited at will.

In March 2001, we completed the first phase of our transformation with the acquisition of the IWS business from General Dynamics.  As an application solution and technology built on top of Placeware’s (see “Third-Party Technology” below) web conferencing technology, IWS:

·                   Allows users to be aware of the online presence of colleagues, enables true multimedia collaboration sessions starting with the simplest instant messaging (keyboard-to-keyboard) and expanding to the most complex all-encompassing (mouse-to-mouse) sharing and dissemination of mission critical information simultaneously with in-session, super-imposed audio conferencing and/or video streaming;

·                   Leverages commercially off-the-shelf base operating systems such as the Windows and Solaris platforms; and

·                   Fits into the virtual office environment with which most information workers are familiar.

The use and growth of real-time collaborative technologies within commercial or governmental enterprises, while still early in their adoption curve, are beginning to accelerate.  The investment in information and collaborative technologies helps customers flatten their organizations, improve enterprise wide communication, shorten the decision-making process, and facilitate real-time reactions to critical issues.  Rather than just providing access to inert data stored on a server, the goal today is to find ways to enable information workers to collaborate and share their expertise to derive knowledge from databases in real-time and in a secure environment.  Collaborative technologies are about creating informational value through better, faster and more efficient human interaction and cooperation, not just more data.  Businesses and governmental organizations today need solutions that make it easier for people to work together, share information and expertise, coordinate activities across departments, networks, agencies, building complexes, facilities spread all over the country, and field deployments around the world.

We are moving forward with this strategy and expect to introduce new improvements and products in the future that are intended to broadly enhance our already comprehensive capabilities.  We intend to concentrate on technical advancements that allow users to convey critical information that must be delivered and that ensures security to our customers.

Products

Our expertise is in developing products that deliver highly secure and flexible support for informational collaboration, in-session audio conferencing, and video streaming capabilities across a wide range of platforms.  Our products have been designed with a scaleable, modular architecture to give customers the flexibility to add capacity, processing power, and conferencing features as the customer network and application requirements grow. Using a common set of hardware and software building blocks, customers can choose from a wide range of product configurations that differ in capacity, price, network connectivity and features, all of which share the same operating software user interface. Products may be configured for use in customer premises environments or may be configured with specialized packaging for use in a telephone carrier’s central office setting. We believe a key differentiator for our products is the built-in robust security features, which allows them to be installed in some of the highest clearance and security sites in the market.

InfoWorkSpace

IWS is a comprehensive suite of collaboration applications designed to allow any organization to more efficiently communicate, particularly when attempting to work as, and within, a group.  From an overall perspective, IWS, when used effectively can reduce or even eliminate dependency on travel, traditional video conferencing, traditional audio conferencing and the phone, and even e-mail and file servers.  Essentially, IWS presents and

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enables a corporate campus or enterprise whose resources can be accessed by an information worker through his or her own desktop or laptop PC.  Users can browse through the virtual campus, facility, or building to locate the room to be used for a meeting, or just pick the needed contact(s) and initiate the meeting with the click of the mouse.

Our customers, including the U.S. intelligence community, the U.S. Joint Forces Command, and various branches of the U.S. Armed Forces including the Marines, Navy, Air Force and Army, have leveraged the flexibility of IWS to aid in a myriad of missions.  From daily mission briefs to medevac procedures in Afghanistan to operational support in Iraq, IWS has increasingly become a vital part of the U.S. defense network.  The stability, scalability and security of IWS allow our customers to depend on our software to complete mission-critical assignments and save lives in some of the world’s most dangerous areas.

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

IWS security infrastructure is built upon the best practices that have been in use in operating systems for decades.  Much like a UNIX administrator can restrict access to a directory or even a file to a limited set of users, IWS administrators can lock rooms down to prevent users from seeing sensitive data that is outside their area of responsibility. Permission-based access allows administrators to finely tune a user’s access profile to the file level.  Data can be encrypted using standard SSL protocols and access can be controlled with PKI and X.509 certificates.  All data within the application can be audited and searched for specific words or patterns of words.  IWS provides a high level of security capabilities and a safety net to capture any breaches that may arise from human errors.

The stability, scalability, flexibility and security capabilities of IWS are critically important for our customers, but the true power of IWS is in its collaboration applications.  Users can participate in an interactive conference with absolutely no set up procedures.  This is a significant leap forward from where the industry was just a few years ago, using videoconferences as the only interactive medium.  IWS eliminates the need to have a heavy piece of hardware at each terminal point of collaboration, to schedule a conference with a bridge operator, or to have a whole new network infrastructure to support an interactive conferencing capability.  Information workers, once logged into IWS, can initiate a conference by going to a virtual room and inviting the participants as needed.  Rooms are either pre-defined or created on demand as needs dictate. Once inside a room, either by joining or being invited into a session, participants can have an audio conference straight from the software. With IWS, no set up is required and no additional cost is incurred.  Participants even can be in multiple rooms at the same time, offering a more productive virtual environment than in the physical world. Participants can share and work on documents from the file cabinet associated with a room. Users can have an interactive whiteboard session and save the results. Users also can manage their calendars and participate in message boards and save that information to the server where they can access it at any time from any place.

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

·                   Text chat, in a one-to-one arrangement, in a conference environment, or in multiple combinations of one-on-one and/or conference environments;

·                   Audio chat, in a one-to-one arrangement, in a conference environment, or in multiple combinations of one-on-one and/or conference environments;

·                   Interactive whiteboard which all users can see and modify in real time;

·                   Application sharing which allows the screen view of any application on any desktop or laptop PC of any information worker to be broadcasted to all other participants;

·                   Secured file cabinet, from which permission-based access allows for documents to be stored, retrieved, and monitored at any time from any place;

·                   EZinFORM, a forms manager designed for an agency to document a task order where multiple sites and people are deployed on a mission that requires rapid updates to critical events;

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·                   EZinCMD, a unit commander can consolidate views and people into a critical command and control battlefield situation for rapid response;

·                   Multi-Level security allows users of one security level to have real-time collaboration sessions with users at another security level;

·                   SSL and PKI encryption, which, when configured, renders traffic secure across the wire;

·                   Full system auditing, which allows all data and actions to be audited and searchable;

·                   Informal meetings, a lightweight application that provides all interactive capabilities;

·                   Virtual campuses, buildings, offices and persistent meetings, a robust all encompassing application that provides rich, secure scalable real-time collaborative capabilities and recreates the office environment with facilities like file cabinet, document storage and retrieval message board, calendaring, etc.; and

·                   Virtual auditorium-style meetings with geographically dispersed presenter panels and large audiences, coupled with full function multimedia presentations and recordings, including in-band audio, as well as seating control and assignment, private sidebar discussions, moderator control, audience Q&A sessions, etc.

Market and Channels

We market our IWS products and related services to customers within the U.S. federal government, primarily to the DoD and to the intelligence community worldwide. We also provide these products and services to the defense and intelligence organizations of foreign allies of the U. S. government.

IWS products and services are licensed on an annual subscription and renewal basis, during which software updates and basic technical support are included as part of base offerings. Enhanced service offerings are also offered in a subscription model. Training, installation, and customization are sold on an “as needed” basis.

The worldwide government marketplace is best understood as a matrix of customers, sales vehicles (contracts), and sales channels.  We employ a sales model which is an analog to this government market matrix. IWS products and related services are available to specific segments of the government, using various vehicles, including our GSA Schedule, and multiple channels both directly, with our own sales force, and indirectly with partners such as General Dynamics, Harris Corporation, Science and Applications International Corporations, and Northrop Grumman, among others.

During the year ended December 31, 2008, approximately 45% of our sales of IWS and related services were through our indirect channels. Our top end-user customers for IWS products and related services in 2008 were the Armed Forces, and intelligence, and security agencies. Sales to these customers accounted for approximately 36%, and 38%, respectively, of total revenue in 2008.

We conduct our sales and marketing activities from our principal offices in Nashua, New Hampshire, and Sterling, Virginia.

Research and Product Development

We believe that our future success depends on our ability to continue to enhance and expand our existing enterprise collaboration products and to develop new products that maintain our technology leadership. We have invested and will continue to invest in the development of products and core technologies while also leveraging the integration of “best-of-breed” software components through strategic partnerships. Extensive product development input is obtained via direct feedback from end users and suggested improvements from strategic partners and resellers.  We carefully monitor the migration of industry standards and remain committed to developing products utilizing such standards.  This includes the development of interoperable collaboration products to meet either industry needs and/or DoD-driven interoperability criteria, while maintaining a keen focus on the security aspects of enterprise collaboration, including solutions in the web conferencing arena.

As of December 31, 2008, our research and development staff consisted primarily of software engineers augmented with U.S.-based and U.S.-citizen software contractors. Many of our software engineers carry either secret or top-secret levels of security clearance. Our research and development expenditures were approximately $2.1 million and $2.4 million in 2008 and 2007, respectively, representing approximately 32% and 26% of revenue, respectively.

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We account for research and development costs in accordance with several accounting pronouncements, including Statement of Financial Accounting Standards (“SFAS”) No. 2, “ Accounting for Research and Development Costs,” and SFAS No. 86, “ Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” . SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers.  During the quarter ended March 31, 2006, we released Version 3.0 of our InfoWorkSpace software product.  In connection with this development effort, a total of $140,000 was capitalized and amortized on a straight-line method over the remaining estimated economic life of the product, which was determined to be two years.

Judgment is required in determining when technological feasibility of a product is established. In most cases, we have determined that technological feasibility for our software products/updates is reached shortly before the products are released to production. Costs incurred after technological feasibility have historically not been material, and accordingly, were expensed when incurred in these instances

Customer Support and Service

We provide technical support and services to our resellers and direct customers. A high level of continuing service and support is critical to our objective of developing long-lasting relationships with customers and partners. Our partners and resellers offer a broad range of support including installation, maintenance and on-site and headquarters-level technical support of products to their end-user customers. We provide a comprehensive service program including problem management, training, diagnostic tools, software updates and upgrades, as well as spare parts programs to facilitate and supplement the efforts of our partners and resellers.

We offer a technical support hotline to our resellers and customers, which is staffed by our network engineers who generally provide either immediate or same-day responses to most questions. As our products have built-in remote diagnostic capabilities, most problems can be diagnosed without incurring travel expenses for on-site visits. When necessary, however, support engineers are dispatched to the customer’s facility for critical situations. All of our support engineers carry various levels of security clearance.

Third-Party Technology

We license technology from third-parties, including software which is integrated with internally developed software, and used in our products to perform key functions.  There can be no assurance that functionally similar technology will continue to be available on commercially reasonable terms in the future, or at all.  In particular, in April 2007 we entered into a new agreement with Microsoft Corporation, with an effective date of January 1, 2007, to extend an existing software distribution license agreement through December 2008. This agreement was subsequently amended to, among other things, extend the payment terms through June 2011. The software distribution license agreement allows us to integrate Microsoft’s Live Communication software into our IWS product line.

Competition

The market for multimedia collaboration is an emerging segment with new vendors entering the competitive landscape and old vendors from existing industries. Furthermore, multimedia collaboration can also be grouped into two main groups: real-time synchronous solutions versus asynchronous products.  While most vendors adopt the client-server architecture, some insist on the merit of peer-to-peer. Still yet, large vendors offer both types of products. From another perspective, vendors could be classified into two classes of providers:  The first group provides customer-premise solutions while the second implements a hosted environment.

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Even though our business primarily focuses on the real-time synchronous, client-server, customer-premise market segment within the government, depending upon the possible perspectives, various vendors could be considered as likely competitors, including Adobe, Cisco, EMC, IBM, Oracle, etc., in this intensely contested market segment.

Many of these companies, as well as other current and potential competitors, have substantially greater financial, technical, and sales and marketing resources than us. If we are unable to retain our existing customers in the U.S. government, or are unable to convince a sufficient number of new companies or customers with an interest in collaborative technologies to adopt our IWS collaborative software product over alternative technologies marketed by our competitors, our financial results will suffer, through price reductions and loss of market share.

The principal competitive factors in the market for multimedia collaboration are security, scalability, reliability, price, performance, network management capabilities, integration, breadth of capabilities, customer support and interoperability. We plan to compete by offering the best-of-breed enterprise solutions encompassing all of these factors.  However, we cannot be certain that potential customers will be attracted to our products, especially if our competitors invest substantially more money into their products and technology.

Proprietary Rights

We rely on a combination of contractual rights, trade secrets and copyright laws to establish and protect our intellectual property rights. We believe that, because of the rapid pace of technological change in the data communications and telecommunications industries, intellectual property protection for our products is only one factor in our success, complementing the knowledge, abilities and experience of our employees, the frequency of our product enhancements, our relationships with our partners, our relationships with our customers and their satisfaction with the performance of IWS, the effectiveness of our marketing activities, and the responsiveness and quality of our services.

Employees

At December 31, 2008, we employed 38 people on a full-time basis. None of our employees is represented by a labor organization.

Our success depends, to a significant degree, upon the continuing contributions of our key management, sales, marketing and research and development personnel, many of whom would be difficult to replace, including Khoa Nguyen, our Chief Executive Officer and President.  We do not carry key-man life insurance on any of our employees, including Mr. Nguyen.  We do not have employment contracts with our key personnel other than Mr. Nguyen. We believe that our future success will depend in large part upon our ability to attract additional key employees and retain our key employees.

Availability of Filings

You may access, free of charge, through our website at www.ezenia.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports, all filed pursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The information contained on our web site is not incorporated by reference into this document and should not be considered a part of this report.  Our web site address is included in this document as an inactive textual reference only.

ITEM 1A. RISK FACTORS

The risks and uncertainties described below are not the only ones that we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect our company in the future. If any of these risks were to occur, our business, financial condition, or results of operations could be materially and adversely affected. This section includes or refers to certain forward-looking statements; you should read the explanation of the qualifications and limitations on such forward-looking statements found in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Recent adverse economic and market conditions may result in further budgetary constraints within the defense and intelligence communities, as well as a downturn in spending on real-time collaboration solutions by other users, that could adversely affect our revenues and results of operations.

Unfavorable changes in economic and market conditions, including inflation, recession, or other changes, may result in further budgetary constraints on governmental users, and lower spending by commercial, consumer and institutional users, of real-time collaboration solutions. If demand for real-time collaboration products declines significantly, or government or corporate spending for those products declines, our business, results of operations, and financial condition would be adversely affected. Challenging economic conditions also may impair the ability of our customers to pay for products and services they have purchased. The adverse effects of any sustained downturn in spending on our operating results may be exacerbated by our investment in expanding our sales, service, engineering, and marketing organizations, which may continue despite any such downturn. There is no assurance that, if operations were to deteriorate and additional financing were to become necessary, we would be able to obtain financing in amounts sufficient to meet operating requirements or at terms which are satisfactory and which allow us to remain competitive.

We may be unable to return to profitability .

As further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, despite our net loss in 2008, management believes that its existing cash and other resources are sufficient to fund operations for at least the next 12 months. However, we can provide no assurances that we will achieve our goal of consistent quarterly revenue and profit growth, both of which are largely dependent on whether we can meet our future new order bookings targets. If we are unable to secure new orders, we may not be able to generate sufficient revenue and may not be able to return to profitability.

A significant portion of our revenue is attributable to a small number of major customers, none of whom is obligated to continue to use our products and services.

While we are focusing efforts on broadening our customer base, sales to a relatively small number of customers within the U.S. government, specifically within the DoD and the intelligence community, have accounted for a significant portion of revenue.  This concentration of customers may cause revenue and operating results to fluctuate from quarter-to-quarter based on major customers’ requirements, and the timing of their orders and shipments. Our agreements with customers generally do not include minimum purchase commitments or exclusivity arrangements.  Our operating results could be materially and adversely affected if any present major customer were to reduce its level of orders, change to another vendor, realize a reduction in approved funding for collaborative technologies, or delay paying or fail to pay amounts due to us.

The continued redirection of budget funds and increased competition within our Department of Defense customer base would negatively impact our results of operations and financial condition.

We believe our revenue has declined due to the redirections of the IT budget by DISA to competing solutions selected for the Net-Centric Enterprise Services (NCES) programs. We believe that, while there are potential opportunities for limited recovery and new sales in our existing DOD customer base, the redirection of budget funds and the promotion of competing solutions by DISA will continue to result in the reduction of renewals and elimination of new purchases of IWS by our customers, thereby creating losses within our core business. Coupled with the currently difficult economic conditions which lengthen the business development and sales activities on the commercial segment, we anticipate continued downward pressure on revenue and profitability for the foreseeable future.

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Loss of access to certain third-party technology utilized in our products could materially harm our business.

We utilize certain technology which we license from third parties, including software which is integrated with internally developed software, and use in our products to perform key functions.  There can be no assurance that functionally similar technology will continue to be available on commercially reasonable terms in the future, or at all.  In April 2007 we entered into a new agreement with Microsoft Corporation to extend an existing software distribution license agreement through December 2008. This agreement was subsequently amended to, among other things, extend its payment terms through June 2011.  This software distribution license agreement allows us to integrate Microsoft’s Live Communication software with our proprietary software, to create IWS.  Loss of access to this third-party technology could result in material harm to our business and results of operations.

Our success depends upon market acceptance of our collaboration products.

Sales of real-time collaboration products account for substantially all of our revenue. As a result, our success depends on the acceptance and the rate of adoption of Internet-based collaboration products, in general, and our IWS product, in particular.  We can provide no assurance that any of the markets for our products will develop to the extent, in the manner, or at the rate anticipated by us.  In particular, while our sales have historically been within certain organizations of the U.S. government and intelligence community, we are pursuing the sale of our products in the commercial market as well.  There can be no assurance of success in the commercial market for IWS, or other products that we may introduce in 2009 or beyond. In addition, future prices that we are able to obtain for our products may decrease as a result of new product introductions by others, price competition, technological change or other factors.

If we are unable to adapt to the rapid pace of change in our market, our business could be adversely affected.

Our market is characterized by changing technology, emerging industry standards, evolving network developments and product introductions.  The adoption rate of new technologies and products may adversely impact near-term growth of the conferencing market as users evaluate the alternatives. For 2009 we plan to continue investments in the enhancement and development of our current and new products to address the evolving technology landscape.  Our success will depend, in part, upon our ability through continued investments to maintain technological leadership, to enhance our existing product offerings, and to develop new products that achieve market acceptance.

Our results of operations would suffer if we are unable to effectively compete in the market for multimedia collaboration products.

The market for multimedia collaboration products is highly competitive. A number of companies have introduced competitive products. Furthermore, the market may attract new entrants. Some competitors have longer operating histories and greater financial, technical, sales, and marketing resources.  If we were unable to retain our existing customers, or convince a sufficient number of new customers to adopt our collaborative software products over competitive alternatives, our financial results would suffer.

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

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If we release products containing defects or experience delays in releasing new products, our competitive position could be adversely effected.

As part of our strategy, we expect to release new products and new versions of our existing products.  Even if our new versions of existing products contain the features and functionality that our customers desire, if we are unable to timely introduce these new products or product releases, our competitive position will be harmed.  We can provide no assurances that we will be able to successfully complete the development of currently planned or future products or product releases in a timely manner.  Also, due to the complexity of our products, internal quality assurance testing and customer testing of pre-commercial releases may reveal product performance issues or desirable product enhancements that could cause delays in development and release of future products or current upgrades of our existing products.

The loss of or failure to retain or attract talented directors, officers and personnel could harm our business.

Our success depends, to a significant degree, upon the continuing contributions of our key management, sales, marketing, and research and development personnel, some of whom would be difficult to replace, including Khoa Nguyen, our Chief Executive Officer and President.  We do not carry key-man life insurance on any of our employees, including Mr. Nguyen.  We do not have employment contracts with our key personnel other than Mr. Nguyen. We believe that our future success will depend in large part upon our ability to retain and attract such key employees.

Currently, we have five directors on our Board of Directors, three of whom meet the standards for independence as specified by the SEC and the national stock exchanges.  Historically, we have strived to have an audit committee comprised of at least three independent directors, as required by the national stock exchanges.  Currently, we have two directors serving on our audit committee.  We are continuing in our attempts to identify additional qualified individuals to serve as independent directors.  However, highly-qualified individuals may not be available or willing to serve as directors and there can be no assurance that we will be able to identify, recruit and ultimately secure the services of such individuals in a timely manner or at all.

The trading price of our common stock may continue to be volatile, which may adversely affect our business, and investors in our common stock may experience substantial losses.

The market price of our common stock, like that of other technology companies, is highly volatile and is subject to wide fluctuations in response to quarterly variations in operating results, or other events or factors. Our stock price may also be affected by broader market trends unrelated to our performance.  Due to this volatility, investors in our common stock may experience substantial losses.

Our common stock is traded on the OTC Bulletin Board, making it a less liquid investment than if it were traded on a national securities exchange.

The shares of our common stock were delisted from The Nasdaq National Market in August 2003 and are now traded on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of our stock due to low trading volume or obtain accurate quotations as to the market value of our stock. In addition, we are subject to Rule 15c2-11 promulgated by the SEC. If we fail to meet criteria set forth in such Rule (for example, by failing to file periodic reports as required by the Exchange Act), various practice requirements are imposed on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transactions prior to sale. Consequently, the Rule may have a material adverse effect on the ability of broker-dealers to sell our securities, which may materially affect the ability of stockholders to sell the securities in the secondary market. The listing of our securities on the OTC Bulletin Board may make it more difficult for investors to trade in our securities, which could lead to further declines in our share price. Our shares being traded on the OTC Bulletin Board also makes it more difficult for us to raise additional capital, as we may incur additional costs under state blue-sky laws if we were to sell additional securities.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments as of the date of this report.

ITEM 2. DESCRIPTION OF PROPERTY

Our corporate office and principal research, development and manufacturing facility is located in Nashua, New Hampshire, in an approximately 12,000 square foot facility.  We currently lease this facility pursuant to a lease agreement that terminates in 2010. We also have a sales office located in Sterling, Virginia, which we lease pursuant to a lease agreement that terminates in 2010.  During 2007, we completed our consolidation of our Colorado Springs and Nashua facilities in Nashua, New Hampshire. We currently lease office space in Colorado Springs under an operating lease that terminates in November 2011.  The Colorado facility is currently available for sublease.

ITEM 3. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims that arise in the ordinary course of business. We believe that the outcomes of these matters will not materially and adversely affect our business, financial position or financial results.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

There were no matters submitted during the fourth quarter of 2008 to a vote of security holders through solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Since 2003, our common stock has been quoted on the OTC Bulletin Board, under the symbol “EZEN.OB”.  The following table sets forth, for the periods indicated, the high and low bid or sale prices per share of our common stock as reported on the OTC Bulletin Board.

As of March 16, 2009, we had approximately 112 stockholders of record. This does not reflect persons or entities that hold their stock in nominee or “street” name through various brokerage firms. We have not paid dividends on our common stock and we anticipate that we will reinvest future earnings, if any, and therefore, do not intend to pay dividends in the foreseeable future.

See Part III, Item 12 for information regarding securities authorized for issuance under our equity compensation plans.

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ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements.

(1) 2007 amounts include a charge of $1.45 million to reserve for excess purchase commitments under the Microsoft license agreement, which was recorded as a component of cost of product revenue, and income tax expense of $711,000 primarily related to an increase in the valuation allowance for deferred tax assets recorded in 2006 and 2005.

(2) 2006 amounts include a tax benefit of $513,000 , or $0.04 per share, related to a reduction in the valuation allowance associated with deferred tax assets of approximately $579,000  offset by approximately $66,000  of current federal and state tax expense.

(3) 2005 amounts include a tax benefit of $91,000 , or $0.01per share, related to a reduction in the valuation allowance associated with deferred tax assets.

(4) 2004 amounts include a tax benefit of $1.4 million, or $0.10 per share, related to a net benefit of approximately $819,000  as a result of the ITC settlement, and approximately $608,000  relating to a tax refund for tax years 1996, 1997, and 1998.

Quarterly financial information (unaudited)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Safe Harbor For Forward Looking Statements

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements and Notes included in Item 8 of this Annual Report. MD&A contains “forward-looking” statements and information which involve risks and uncertainties.  Statements indicating that we “expect,” “estimate,” “believe,” “are planning,” “plan to,” “intend” or “will” are forward-looking, as are other statements concerning our business strategy, our proposed new product offerings, key differentiators in our market, changes in the competitive landscape, future financial results, our ability to generate cash and to meet our working capital needs, and other events that have not yet occurred. These forward-looking statements are neither promises nor guarantees, but involve risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements. Factors that may cause such differences include, but are not limited to, the impact of global economic and political conditions on our business, our ability to maintain or accurately forecast revenue growth, our history of liquidity concerns and operating losses,  customer acceptance of our IWS product and other new products, our ability to compete in an intensely competitive market, our ability to develop and introduce new products or enhancements on schedule and that respond to customer requirements and rapid technological change, our dependence on the U.S. government as our largest customer, budgetary constraints within the defense and intelligence communities, our ability to select and implement appropriate business models, plans and strategies and to execute on them, our ability to identify, hire, train, motivate, and retain highly qualified management/other key personnel and our ability to manage changes and transitions in management/other key personnel, our reliance on third-party technology, and unauthorized use or misappropriation of our intellectual property, as well as the risk factors discussed in Item 1A of this Annual Report and in other periodic reports filed with the SEC.  Readers should not place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We disclaim any obligation to publicly update or revise any such statement to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those contained in the forward-looking statements.

Overview

In 2008, revenue was down 26% when compared to the year ended December 31, 2007.  We experienced an operating loss of $3.1 million in 2008 compared to an operating loss of $4.4 million in 2007, and a net loss of $3.1 million in 2008 compared to net loss of $4.5 million in 2007, resulting in a loss of $0.21 per share in 2008, compared to a loss of $0.31 per share in 2007.  Revenue relating to our IWS product decreased approximately 20% in 2008 compared to 2007.  Gross profit increased 12% when compared to 2007 as a result of a charge in 2007 of $1.45 million to reserve for excess purchase commitments with Microsoft. Operating expenses decreased $0.9 million to $7.2 million for 2008, as compared to $8.1 million for the year ended December 31, 2007. The decrease of our operating expenses in 2008 was a result of our spending reductions in all areas of the company in response to declining revenue. Our other income decreased by approximately $500,000 year over year as we saw a decrease in our interest earned due to lower interest rates and a lower average cash balance. In 2007, we had an income tax expense of $711,000 which reflected an increase in our deferred tax valuation allowance in compliance with Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes” (“SFAS No.109”).

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In 2007 we entered into a new agreement with Microsoft to extend an existing software distribution license agreement through December 2008.  Under the agreement, we were required to purchase a minimum of $1.7 million during 2007 and $2.75 million of licenses during 2008, plus purchase an additional $0.5 million over the life of the two year agreement. During 2007 we reviewed our forecast for license sales over the balance of the agreement and recorded a charge of $1.45 million to reserve for an excess purchase commitment.  The charge was recorded as a component of cost of product revenue during the year ended December 31, 2007.

In December 2008, the Microsoft agreement was amended to extend the term through June 2011 and reduce the remaining purchase commitment to $2.75 million, $154,000 of which was satisfied during 2008.  The amended agreement requires that we  make minimum payments of $1.0 million, $1.1 million and $0.5 million during 2009, 2010 and 2011, respectively.  In addition to the remaining $2.6 million license purchase commitment, we have approximately $670,000  of prepaid licenses on hand that have yet to be deployed to customers.  During 2008 we  continued to experience a decline in the volume of our customer license renewals.  As of December 31, 2008, the we reviewed our forecast for license sales through the amended term (June 2011) and believe that the $1.45 million reserve remains the appropriate reserve for the excess purchase commitment.   The computation of the excess purchase commitment reserve requires management to make certain assumptions regarding future license renewals and sales growth.  Actual results may differ materially from management’s estimates.

Although our revenue has declined as a result of the redirections of IT budget by the Defense Information System Agency (DISA), coupled with the currently difficult economic conditions which lengthen the business development and sales activities on the commercial segment, our immediate focus is to continue to enhance our existing various collaborative product and service offerings and to develop and ultimately deploy the next generation of products and services, via aggressive and concentrated sales, service, engineering, and marketing efforts. We plan to continue to vigorously defend and endeavor to protect our customer base within the military and intelligence community, while pursuing new opportunities with various agencies and first responders dealing with the threat of terrorism and natural disasters, as well as emerging commercial applications. This focus is subject to change as the driving influence in our future direction is based on the needs and requirements of our customer base, both current and future, and may be adversely affected by current economic and market conditions.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our 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, revenue 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, income taxes and warranty obligations. We base our estimates on historical experience and on various other assumptions that we believe 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 affect the preparation of our consolidated financial statements.

Revenue Recognition

Product revenue consists of sales of IWS software licenses and maintenance agreements, IWS product related training, installation, and consulting, and video products.  Revenue from sales of IWS software license and maintenance agreements is recognized ratably over the subscription software license contract  periods, which are generally one year, pursuant to the guidance provided by Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” (“SOP 97-2”), issued by the American Institute of Certified Public Accountants (“AICPA”).  Revenue from IWS training, installation, and consulting services are recognized as the services are performed provided there is vendor specific objective evidence of fair value which is the price charged when the services are sold separately.

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Product development revenue relates to contracts involving customization of the IWS product according to a customer’s specifications.  We account for product development revenue in conformity with the guidance provided by SOP 81-1, “Accounting For Performance of Construction Type and Certain Production Type Contracts” issued by the AICPA.  When reliable estimates are available for the costs and efforts necessary to complete the product development and the contract does not include contractual milestones or other acceptance criteria, product development revenue is recognized under the percentage-of-completion contract method based upon input measures, such as hours.  When such estimates are not available, we defer all revenue recognition until we have completed the contract and have no further obligations to the customer.  Revenue associated with contracts for product development revenue with milestone-based deliverables requiring a customer’s acceptance is recognized upon the customer’s acceptance in accordance with the terms of the contract.  The associated cost recognition with these deliverables or milestones is deferred until the terms of acceptance are satisfied and revenue is recognized. Certain of our product development contracts are subject to government audit and retroactive adjustment of the direct and indirect costs used to determine the contract billings.  Product development revenue and accounts receivable reported in the financial statements are recorded at the amount expected to be received.  Product development revenue is adjusted to actual upon final audit and retroactive adjustment.  Estimated contractual allowances are provided based on management’s evaluation of current contract terms.

Products and software licenses are sold without any contractual right of return by the customer.  Deferred revenue represents amounts received from customers under subscription software licenses, maintenance agreements, or for product sales in advance of revenue recognition.  Judgments are required in evaluating the creditworthiness of our customers.  In all instances, revenue is not recognized until we have determined, at the outset of the arrangement that collectability is reasonably assured.  Amounts billed to customers related to shipping and handling charges are recorded upon shipment and the related costs are included in cost of goods sold.

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

At December 31, 2008, our accounts receivable balance of approximately $0.8 million is reported net of allowances of approximately $28,000. We believe our reported allowances are adequate. If the financial conditions of our customers were to deteriorate, however, resulting in their inability to make payments, we may need to record additional allowances, which would result in additional expenses being recorded for the period in which such determination was made.

Accounting for Share-Based Compensation

We have stock option plans that provide for the purchase of our common stock by certain of our employees and directors. Effective January 1, 2006, we adopted SFAS No. 123R, “Share-Based Payment,” and began recognizing compensation expense for our share-based payments based on the fair value of the awards. Share-based payments include stock option grants under our stock option plans.

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The determination of the fair value of share-based payment awards on the date of grant include the expected life of the award, the expected stock price volatility over the expected life of the awards, expected dividend yield, and risk-free interest rate. Expected volatilities are based on historical volatility of our common stock.  We base the expected term of the options on our historical option exercise data with a minimum life expectancy equal to the vesting period of the option.  We base the risk-free interest rate on the U.S. Treasury yield in effect at the time of the grant for a term closest to the expected life of the options. Expected dividend yield is not considered as we have not made any dividend payments and have no plans of doing so in the foreseeable future. Forfeitures are estimated based upon our historical experience. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

We recorded $703,000 and $475,000 of share based compensation expense in 2008 and 2007, respectively.

Income Taxes

The calculation of tax assets and liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws.  Deferred tax assets and liabilities are determined at the end of each year based on the future tax consequences that can be attributed to net operating loss and credit carryovers as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  The deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.  The realization of deferred tax assets is dependant upon the generation of future taxable income.  In determining the valuation allowance, we consider past performance, expected future taxable income, and qualitative factors when estimating future taxable income.  Our forecast of expected future taxable income is for future periods that can be reasonably estimated.  Changes in results that differ materially from our current expectations may cause us to change our judgment on future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount we have previously recorded.

Based upon our assessment of current and future taxable income, and our analysis of the future tax consequences attributable to net operating loss and credit carryovers at December 31, 2006 and 2005, we released approximately $579,000 and $138,000 of valuation allowance against deferred tax assets in 2006 and 2005, respectively, resulting in a net deferred tax asset of approximately $717,000 as of December 31, 2006.

As of December 31, 2007, we concluded that the actual realization  of the net deferred tax asset balance of $717,000 was in question due to the loss in 2007 and the uncertainty of future taxable income.  We therefore provided a full reserve against the deferred tax assets in 2007, which has remained unchanged as of December 31, 2008.

Results of Operations — Years Ended December 31, 2008 and 2007

Revenue

Revenue declined 26% in 2008 to approximately $6.7 million when compared to 2007. Product revenue related to IWS declined approximately $1.7 million or 20%, while product development revenue declined by approximately $638,000 as only one new small contract was awarded to us in 2008. Product development revenue is revenue related to product customization work performed for customers seeking enhancements to our current product.  The decline in license revenue in 2008 was the result of a shortfall in license renewals primarily due to DISA (Defense Information Systems Agency) and the second NCES (Net-Centric Enterprise Services) contract award to our competitor, which resulted in a number of our existing customers not renewing their licenses and/or reducing the number of licenses used. We believe that if we successfully execute on our strategy, we will be able to compensate for this decline in license renewals by the introduction of our product to new customers.

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Gross profit

Cost of revenue includes material costs, costs of third-party software licenses, direct labor and overhead, customer support costs, and engineering and development costs associated with sponsored and customized product development revenue. Gross profit as a percentage of revenue increased in 2008 to 61.5%, from 40.9% in 2007. The increase in gross profit is primarily attributed to a charge in 2007 of $1.45 million to reserve for excess purchase commitments under the Microsoft license agreement as well as an increase in gross margin in 2008 related to product development work. The $1.45 million charge was recorded as a component of cost of product revenue during 2007. Development revenue for 2008 includes $67,000 related to the completion of reviews of our development projects from 2004 to 2007, and the release of associated revenue reserves. This revenue has no corresponding cost and contributes to a higher margin overall in 2008.

Research and development

Research and development expenses include payroll, employee benefits, other headcount-related costs, and miscellaneous costs associated with product development. Research and development expenses decreased to approximately $2.1 million in the year ended December 31, 2008, from approximately $2.4 million in 2007. This decrease is primarily attributable to a reduction of employees, supply and consulting costs.

Sales and marketing

Sales and marketing expenses include payroll, employee benefits, and other headcount-related costs associated with sales and marketing personnel along with expenses pertaining to advertising, tradeshows, seminars, and other marketing-related programs.  Sales and marketing expenses of approximately $2.0 million in 2008 remained consistent from those in the year ended December 31, 2007.

General and administrative

General and administrative costs include payroll, employee benefits, and other headcount-related costs associated with the finance, human resources, management information systems, and other administrative headcount, and legal and investor relations costs, and other administrative fees.  General and administrative expenses decreased 14% to approximately $2.4 million in the year ended December 31, 2008, from approximately $2.8 million in 2007.   The decrease is primarily related to decreases in headcount related costs and legal and professional expenses offset by increases in share-based compensation expenses.  During 2007, we also initiated an unsuccessful bid-protest action against the U.S. Department of the Army with regard to the second NCES contract.  We incurred legal fees related to this action, which were not repeated in 2008.

Occupancy and other facilities-related expenses

Occupancy and other facilities-related expenses decreased 36% to approximately $317,000 in the year ended December 31, 2008, from approximately $493,000 in 2007. These costs include rent expense and other operating costs associated with our headquarters in Nashua, New Hampshire, and our sales offices in Sterling, Virginia. This decrease is primarily due to the consolidation of the Colorado office with the New Hampshire office.

Restructuring charge

We recorded a $215,000 charge to operations in 2007 in recognition of our consolidation of our Colorado Springs and Nashua facilities in Nashua, New Hampshire, which was completed in December 2007. An additional restructuring charge of $219,000 was recorded in 2008, as we have experienced delays in finding a subtenant for the Colorado facility. The charge represents the estimated future costs of the lease pertaining to the Colorado Springs facility, net of expected sublease proceeds.

Interest income

Interest income consists of interest on cash and cash equivalents.  Interest income decreased to approximately $155,000 in 2008 from approximately $545,000 in 2007. The decrease in 2008 was primarily related to a decrease in the interest rates and a reduced cash balance.

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Other income

Other income consists primarily of gains and losses related to short term mutual fund investments. In 2008, we incurred a decline in the market value of our short term investments of approximately $98,000 from a gain of approximately $29,000 in 2007.

Income tax benefit

Due to the uncertainty of future taxable income, we have not recorded an income tax benefit for the losses incurred in 2008 and 2007. In 2007, we recorded an income tax provision of $717,000 related to the increase in the valuation allowance for deferred tax assets that were recorded in 2006 and 2005.

Liquidity and Capital Resources

At December 31, 2008, we had cash and cash equivalents of approximately $6.8 million.  We incurred a loss from operations of approximately $3.1 million for the year ended December 31, 2008, and a net loss for the year of approximately $3.1 million, as compared with an operating loss in 2007 of approximately $4.4 million, and a net loss of approximately $4.5 million in 2007.

We used cash for operations of $2.6 million in fiscal year 2008 compared to expending cash of $2.3 million in 2007. Cash expended for operating activities in 2008 was primarily the result of a net loss and a decline in deferred revenue, offset by a decrease in accounts receivable and non-cash items such as depreciation, and share-based compensation. Cash used by operating activities in 2007 was primarily the result of a net loss and a decline in deferred revenue offset by decreases in accounts receivable and prepaid software licenses, and non-cash items such as depreciation, amortization of capitalized software and share based compensation.

We invested approximately $45,000 in property and equipment in fiscal 2008 compared to $266,000 in fiscal 2007. We generated cash from financing activities of $13,000 in 2008 as compared to $28,000 in 2007 primarily from proceeds of sales of our common stock pursuant to our various stock plans.  In November 2007, we implemented the first stock repurchase under the stock repurchase program authorized by our Board of Directors.  The amount spent on the repurchases in 2007 was $84,000. There were no stock repurchases in 2008.

We lease our primary facility in Nashua, New Hampshire, under an operating lease, which expires in June 2010. In July 2007, we signed an additional lease for 6,000 square feet adjacent to our existing rented space in Nashua, New Hampshire.  This lease will expire in August 2010. We also have leased office space, located in Sterling, Virginia which expires in 2010.  Future minimum lease obligations at December 31, 2008, under all of these non-cancelable operating leases are $120,000 in 2009 and $64,000 in 2010.

In September 2007, we announced our plan to consolidate our Colorado Springs and Nashua facilities in Nashua, New Hampshire by the end of 2007.  We recorded a restructuring charge of $215,000 to cover the expected lease payments of the Colorado Springs facility, net of expected proceeds. In 2008 we reassessed our exposure in consideration of the current real estate market and interest in the space to-date by potential subtenants.  Based on the resulting conclusions, we recorded an additional restructuring charge of $219,000 was taken in 2008. The space is leased by us through November 2011 and is currently available for subleasing. We estimate that we will have to pay $287,000, net of expected sublease income, over the remaining lease term. Our gross remaining obligation on the lease, including estimated operating expenses, is approximately $453,000.

In April 2007, we entered into a new agreement with Microsoft to extend an existing software distribution license agreement through December 2008.  Under the agreement, we are required to purchase a minimum of $1.7 million and $2.75 million of licenses during 2007 and 2008 respectively, plus purchase an additional $0.5 million over the life of the two year agreement. During 2007 we reviewed our forecast for license sales over the balance of the agreement and recorded a charge of $1.45 million to reserve for an excess purchase commitment.  The charge was recorded as a component of cost of product revenue during the year ended December 31, 2007.

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In December 2008, the Microsoft agreement was amended to extend the term through June 2011 and reduce the remaining purchase commitment to $2.75 million, $154,000 of which was satisfied during 2008.  The amended agreement requires that we make minimum payments of $1.0 million, $1.1 million and $0.5 million during 2009, 2010 and 2011, respectively.  In addition to the remaining $2.6 million license purchase commitment, we have approximately $670,000 of prepaid licenses on hand that have yet to be deployed to customers.  During 2008 we continued to experience a decline in the volume of our customer license renewals.  As of December 31, 2008, we reviewed our forecast for license sales through the amended term (June 2011) and believe that the $1.45 million reserve remains the appropriate reserve for the excess purchase commitment.   The computation of the excess purchase commitment reserve requires management to make certain assumptions regarding future license renewals and sales growth.  Actual results may differ materially from management’s estimates.

We include standard intellectual property indemnification provisions in our licensing agreements in the ordinary course of business. Pursuant to our product license agreements, we will indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally business partners or customers, in connection with certain patent, copyright or other intellectual property infringement claims by third parties with respect to our products. Other agreements with our customers provide indemnification for claims relating to property damage or personal injury resulting from the performance of services by us or our subcontractors. Historically, our costs to defend lawsuits or settle claims relating to such indemnity agreements have been insignificant. Accordingly, the estimated fair value of these indemnification provisions is immaterial.

In May 2003, after failing to comply with certain continued listing standards for the NASDAQ SmallCap Market, including maintaining a minimum bid price of at least $1.00 per share, or the requirement to have a minimum of $2.5 million in stockholders equity, we received a delisting notification from NASDAQ.  After exercising our right for an appeal of this determination to a NASDAQ Listing Qualifications Panel, the Panel determined to delist our securities from The NASDAQ Stock Market in August 2003. Since then, our common stock has been quoted on the OTC Bulletin Board.  The market value and liquidity of our common stock, as well as our ability to raise additional capital, has been and may continue to be materially adversely affected by this delisting decision.

Operating costs are continually under review and adjusted accordingly. With the decline in revenue in 2008, we took the necessary steps to reduce spending to the appropriate levels.  We are committed to continue making the necessary improvements to our infrastructure in 2009 which we believe is necessary in order to compete successfully in the ever-increasingly competitive collaborative software market.

Order bookings, which are purchase orders placed by customers, are not recorded as revenue or recognized as revenue until all requirements of that order are satisfied, although the cash flow received from these orders may more closely follow the receipt date of the order.  Accordingly, management believes that its existing cash resources will be sufficient to fund its anticipated working capital and capital expenditure needs for at least the next twelve months.

The following table summarizes our outstanding contractual obligations:

We estimate sublease rental for the property in the amount of $20,000 in 2009, $48,000 in 2010 and $44,000 in 2011.

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Recent Accounting pronouncements

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”) an interpretation of SFAS 109 on January 1, 2007.  We have determined that the realization of $2.0 million in federal tax credits is in doubt.  As a result of the implementation of FIN 48, we would have recognized a $2.0 million increase in the liability for unrecognized tax benefits had we recognized any benefit associated with the credits in prior periods.  However, due to past net operating losses, no benefit has been recognized; accordingly, no liability has been recognized.  As a result, at the adoption date of FIN 48, January 1, 2007 and also at December 31, 2007 and December 31, 2008 we had no unrecognized tax benefits.

At December 31, 2008, we had federal and state net operating loss (“NOL”) carryforwards of $64.5 million and $14.1 million, respectively, expiring at various dates through 2028. Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership change limitations that have occurred previously or that could occur in the future provided by Section 382 of the Internal Revenue Code of 1986, as well as similar state provisions. These ownership changes may limit the amount of NOL that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since our formation, we have raised capital through the issuance of capital stock on several occasions which, combined with the purchasing stockholders’ subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382, or could result in a change of control in the future upon subsequent disposition. We have not currently completed a study to assess whether a change of control has occurred or whether there have been multiple changes of control since our formation due to the significant complexity and cost associated with such study and due to the possibility of additional changes in control in the future. If we have experienced a change of control at any time since our formation, utilization of our NOL carryforwards would be subject to an annual limitation under Section 382. Further, until a study is completed and any limitation known, no amounts are being presented as an uncertain tax position under FIN 48.

We recognize interest and penalties related to uncertain tax positions in income tax expense.  As of December 31, 2008, we had no accrued interest or penalties related to uncertain tax positions.

The tax years 2004 through 2007 remain open to examination by the major taxing jurisdictions to which we are subject. The Internal Revenue Service completed an audit of our consolidated federal income tax return for the 2005 tax year with no adjustments.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157).   SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and FSP FAS 157-2, “Effective Date of FASB Statement No. 157.” Collectively, the FSPs defer the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items that are recognized or disclosed at fair value on a recurring basis at least annually, and amend the scope of SFAS 157. We adopted SFAS 157 in 2008 except for those items specifically deferred under FSP FAS 157-2. We are currently evaluating the impact of the full adoption of SFAS 157 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, “ Business Combinations” (“SFAS No. 141R”). SFAS No. 141R expands the scope of acquisition accounting to all transactions under which control of a business is obtained. Principally, SFAS No. 141R requires that contingent consideration as well as contingent assets and liabilities be recorded at fair value on the acquisition date and that certain transaction and restructuring costs be expensed. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. As application of this statement is prospective and applicable to business combinations that occur after its effective date, we do not anticipate that SFAS No. 141R will have a material, if any, impact on our consolidated financial position and results of operations.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To date, we have not utilized derivative financial instruments or derivative commodity instruments. We invest 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 we have no debt other than our contractual lease obligations. A 10% change in interest rates would not have a material impact on our financial position, operating results or cash flows. We have closed our foreign offices, and sales to foreign customers from the United States are in U.S. dollars.  Therefore, we have no significant foreign currency risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Ezenia! Inc.:

We have audited the accompanying consolidated balance sheets of Ezenia! Inc. and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended.  Our audits also included the financial statement schedule listed in the accompanying index at Item 15.  These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal controls over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 Ezenia! Inc. and subsidiaries as of December 31, 2008 and 2007 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ VITALE, CATURANO & COMPANY, P.C.

Boston, Massachusetts

March 23, 2009

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Consolidated Balance Sheets

(In thousands, except for share and per share related data)

See accompanying notes.

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Consolidated Statements of Operations

(In thousands, except for share and per share related data)

See accompanying notes.

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Consolidated Statements of Stockholders’ Equity

(In thousands, except for share related data)

See accompanying notes.

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Consolidated Statements of Cash Flows

(In thousands)

See accompanying notes.

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Notes to the Consolidated Financial Statements

1.  Nature of Business and Basis of Presentation

Ezenia! Inc. (“Ezenia”, “we”, or the “Company”) operates in one business segment, which is the design, development, production, marketing and sale of real-time group collaboration and communication solutions for corporate and governmental networks and eBusiness.  Founded in 1991, we develop and market products that enable organizations to provide high-quality group communication and collaboration capabilities to commercial, governmental, consumer and institutional users. Our products allow individuals and groups, regardless of proximity constraints, to interact and share information in a natural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse, or keyboard-to-keyboard, flexibly, securely and in real time.  Using our products, individuals can interact through a natural meeting experience, allowing groups to work together effectively and disseminate vital information quickly in a secure environment.  .

The consolidated financial statements include the accounts of Ezenia and its wholly owned subsidiaries Ezenia International, Inc. and Ezenia Latin America, Inc.  All significant inter-company transactions and balances have been eliminated.  All assets and liabilities of Ezenia’s foreign subsidiaries are translated at the rate of exchange at the end of the year, while sales and expense are translated at the average rate in effect during the year.  The net effect of these translation adjustments was immaterial for all periods presented.

2.  Summary of Significant Accounting Policies

Use of Estimates

The preparation of the 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, if any, at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from these estimates.

Revenue Recognition

Product revenue consists of sales of InfoWorkSpace (“IWS”) software licenses and maintenance agreements, IWS product related training, installation, and consulting, and video products.  Revenue from sales of IWS software licenses and maintenance agreements is recognized ratably over the subscription software license contract periods, which are generally one year, pursuant to the guidance provided by Statement of Position (“SOP”) 97-2, “Software Revenue Recognition” issued by the American Institute of Certified Public Accountants (“AICPA”). Revenue from IWS training, installation, and consulting services are recognized as the services are performed because we believe we have established vendor specific objective evidence of fair value based on the price charged when the services are sold separately.

Revenue from video product sales is recognized upon shipment to the customer and the fulfillment of all contractual terms and conditions, pursuant to the guidance provided by Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements” issued by the Securities and Exchange Commission.

Product development revenue relates to contracts involving customization of the IWS product according to customer specifications.  We account for product development revenue in conformity with the guidance provided by SOP 81-1, “Accounting For Performance of Construction Type and Certain Production Type Contracts” issued by the AICPA.  When reliable estimates are available for the costs and efforts necessary to complete the product development and the contract does not include contractual milestones or other acceptance criteria, product development revenue is recognized under the percentage-of-completion contract method based upon input measures, such as hours.  When such estimates are not available, we defer all revenue recognition until we have completed the contract and have no further obligations to the customer.  Revenue associated with contracts for product development revenue with milestone-based deliverables requiring a customer’s acceptance is recognized upon the customer’s acceptance in accordance with terms of the contract.  The associated cost recognition with these deliverables or milestones is deferred until the terms of acceptance are satisfied and revenue is recognized. 

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As of December 31, 2008 and 2007, we had no unbilled receivables or deferred costs related to milestone contracts. Certain of our product development contracts are subject to government audit and retroactive adjustment of the direct and indirect costs used to determine the contract billings.  Product development revenue and accounts receivable reported in the financial statements are recorded at the amount expected to be received.  Product development revenue is adjusted to actual upon final audit and retroactive adjustment.  Estimated contractual allowances are provided based on management’s evaluation of current contract terms. During 2008, the government completed a review of the 2004-2007 development contracts. Based upon these reviews we recorded $67,000 of revenue which had initially been deferred pending the completion of the reviews.

Products and software licenses are sold without any contractual right of return by the customer.  Deferred revenue represents amounts received from customers under subscription software licenses, maintenance agreements, or for product sales in advance of revenue recognition.  Judgments are required in evaluating the creditworthiness of our customers.  In all instances, revenue is not recognized until we have determined, at the outset of the arrangement that collectability is reasonably assured.  Amounts billed to customers related to shipping and handling charges are recorded as revenue upon shipment and the related costs are included in cost of goods sold.

Third-Party Technology

Our IWS product incorporates third-party technology in the form of software licenses, which we purchase from other software vendors.  Software licenses purchased from vendors are reported as prepaid licenses and, when deployed, amortized to cost of revenue over the subscription period, which is generally one year.

Advertising

Advertising costs are included in sales and marketing expense.  We use our website as our main form of advertising along with participating in various industry-related trade shows and currently do not incur material advertising costs. Advertising costs are expensed as incurred. Advertising expense was approximately $17,000 and $24,000 in fiscal years 2008 and 2007, respectively.

Cash Equivalents

We consider all highly liquid investments with a maturity of 90 days or less at the date of purchase, or investments that can be converted to cash quickly such as mutual funds, to be cash equivalents.

Financial Instruments and Concentrations of Credit Risk

Our financial instruments consist primarily of cash and cash equivalents, trade receivables, accounts payable and accrued expenses.  The carrying value of these financial instruments approximates fair value due to their short term to maturity.  Financial instruments, which potentially subject us to concentrations of credit risk, are cash equivalents and accounts receivable.

Major financial institutions maintain all our cash equivalents. At times, balances may exceed federally insured limits. We have not experienced any losses in such accounts, and believe we are not exposed to any significant credit risk on cash and cash equivalents.  Concentration of credit risk with respect to accounts receivable is limited to certain customers to whom we make substantial sales.  To reduce risk, we routinely assess the financial strength of our customers.  We maintain an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience.  Actual losses when incurred are charged to the allowance.  Write-offs related to accounts receivable have been within management’s expectations.

Revenue from one customer accounted for approximately 35% of total revenue in 2008 and 33% of total revenue in 2007.  Accounts receivable from this customer accounted for approximately 29% and 3% of the balances at December 31, 2008 and 2007, respectively. A second customer accounted for approximately 28% of total revenue in 2008 and 16% of total revenue in 2007.  This customer’s accounts receivable balance accounted for approximately 43% and 28% of the balance at December 31, 2008 and 2007, respectively.  A third customer accounted for approximately 10% of total revenue in 2008 and 8% of total revenue in 2007. Revenue from international markets was immaterial in 2008 and 2007, respectively.

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Equipment and Improvements

Equipment and improvements are stated at cost and depreciated using the straight-line method over the following estimated useful lives:

Repairs and maintenance costs are expensed as incurred.

Research and Development Costs

We account for research and development costs in accordance with several accounting pronouncements, including Statement of Financial Accounting Standard (“SFAS”) No. 2, “ Accounting for Research and Development Costs” , and SFAS No. 86, “ Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed” .  SFAS No. 86 specifies that costs incurred internally in researching and developing a computer software product should be charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs should be capitalized until the product is available for general release to customers.  During the quarter ended March 31, 2006, we released version 3.0 of our IWS software product.  In connection with this development effort, a total of $140,000 of costs were capitalized and amortized on a straight-line basis over the estimated economic life of the product, which we determined to be two years. The carrying value at December 31, 2008 is zero.

Judgment is required in determining when technological feasibility of a product is established. In most cases, we have determined that technological feasibility for our software products/updates is reached shortly before the products are released to manufacturing. Costs incurred after technological feasibility is established have historically not been material, and accordingly, were expensed when incurred in these instances.

Income Taxes

Deferred tax assets and liabilities are determined at the end of each year based on the future tax consequences that can be attributed to net operating loss and credit carryovers as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  The deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.  The realization of deferred tax assets is dependent upon the generation of future taxable income.  In determining the valuation allowance, we consider past performance, expected future taxable income, and qualitative factors which we consider to be appropriate to be considered in estimating future taxable income.  Our forecast of expected future taxable income is for future periods that can be reasonably estimated.  Results that differ materially from our current expectations may cause us to change our judgment on future taxable income. These changes, if any, may require us to adjust our existing tax valuation allowance higher or lower than the amount we have recorded.

As of December 31, 2007, we concluded that the realization of the net deferred tax asset balance of $717,000 was uncertain due to the loss in 2007 and the uncertainty of future taxable income.  We therefore provided a full reserve against the deferred tax assets in 2007, which has remained unchanged as of December 31, 2008.

Net Loss Per Share

We report net loss per share in accordance with SFAS No. 128, “ Earnings per Share .” Diluted earnings per share include the effect of dilutive stock options.

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Shares used in computing basic and diluted net loss per share are as follows: