EZENIA INC - 10-K Annual Report

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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, 2001

COMMISSION FILE NUMBER 0-25882

EZENIA! INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 04-3114212
(STATE OR OTHER JURISDICTION OF INCORPORATION (IRS EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)

63 THIRD AVENUE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(781) 229-2000
(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

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 / /

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.

The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 25, 2002 was $3,271,899 (based on the last reported sale
price on the Nasdaq National Market on that date).

The number of shares outstanding of the Registrant's common stock as of
March 25, 2002 was 13,631,880.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement to be delivered to Shareholders in
connection with the Annual Meeting of Shareholders to be held May 22, 2002 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.

EZENIA! INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

This Report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties, including without limitation those discussed in
Item 7 under the heading "Factors which may affect future operations." Such
forward-looking statements speak only as of the date on which they are made, and
the Company cautions readers not to place undue reliance on such statements.

Note: Ezenia!, the Ezenia! Logo, Ezenia! Interactivity, InfoWorkSpace,
LaunchPad and Encounter are trademarks of Ezenia! Inc.

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PART I

ITEM 1. BUSINESS

Founded in 1991, Ezenia! Inc. develops and markets products that enable
organizations to provide high-quality group communication and collaboration
capabilities to commercial, consumer and institutional users. The Company's
products allow individuals and groups that are geographically distant from each
other to interact and share information in a natural, spontaneous way --
voice-to-voice, face-to-face, flexibly and in real-time -- via a wide range of
networks. Using our products, disparately located individuals can interact
through a natural meeting experience, allowing groups to work together
effectively and disseminate vital information quickly. The Company's products
enable seamless connectivity across a wide range of networks including LANs,
intranets, the Internet, ISDN, ATM and frame relay.

We believe Ezenia! offers one of the most comprehensive sets of collaborative
products available. For example, between our legacy ISDN videoconferencing
products, our IP-based Encounter and InfoWorkSpace products, we enable
videoconferencing, voice communication, instant messaging, whiteboarding and
virtual workspaces. Furthermore, because our products include both software only
solutions and configurable hardware solutions, in contrast to the products
offered by our competitors, Ezenia!'s products can be deployed easily at small
sites or in locations with a large number of users.

Ezenia! sells its products worldwide through leading resellers, integrators and
remarketers of collaboration, videoconferencing and networking solutions,
including Tandberg, Sony, General Dynamics and NTT-ME, each of which is widely
acknowledged as a leader in its field. Ezenia! also sells directly to providers
of conferencing services and end-users of collaboration products.

INDUSTRY BACKGROUND

MULTIMEDIA CONFERENCING

The current market for interactive collaboration has evolved from the earlier
videoconferencing sector. In the late 1980s, the videoconferencing market was
fragmented, with each vendor providing a proprietary solution. This market was
limited by the lack of interoperability between the various products available.
If one company had a product from vendor A, it would be unable to communicate
with a company that had a videoconferencing product from vendor B.

The videoconferencing market began to grow in the early 1990s spurred by the
International Telecommunications Union's (ITU) introduction of the H.320
standard for videoconferencing over switched digital circuit networks. For the
first time, a standard framework allowed equipment from different manufacturers
to communicate with each other. Since the advantage of these services is dial-up
communications, without regard to the type of equipment being used at the
receiving ends of the transmission, compatibility is particularly important for
communication via these networks.

In May 1996, an important expansion of conferencing standards was realized with
the introduction of the H.323 standard governing real-time collaboration over IP
(Internet Protocol) networks, including local area networks (LANs), corporate
intranets and the Internet. Enabling conferencing over traditional business
networks provides a foundation for the adoption of this application as a
mainstream business tool. The majority of endpoint vendors who market H.320
compliant products have introduced or announced their intention to introduce
H.323 compliant endpoints as well.

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Through the 1990s the videoconferencing industry experienced moderate growth,
but the size of the total market was limited by difficult access to ISDN and
expensive videoconferencing hardware. Beyond the technical difficulties, users
felt that videoconferencing was limited and that a more complete solution was
needed. As organizations became more decentralized and dispersed, users sought
solutions that would allow them to do more than simply talk and see other users
online.

With the explosive growth of the Internet and the innovated technologies that
followed, a new class of applications emerged. Real-time collaboration takes the
best elements of videoconferencing and joins them with the ubiquity and
ease-of-use of the Internet. Where videoconferencing requires expensive hardware
and focuses on quality video, real-time collaboration uses video when necessary
but goes beyond it by offering a more complete solution, enabling teams to work
more effectively from disperse locations. Real-time solutions often bring video
and audio conferencing to the desktop and can include such other features as
integrating data conferencing, whiteboarding, instant messaging and virtual
meeting spaces.

The use of real-time collaborative technologies within the enterprise is still
in its infancy. During the next two to four years, the Company expects to see
the accelerated growth of real-time collaboration. The investment in information
and collaborative technologies today has already helped flatten organizations
and improve enterprise wide communication. The goal today is not to provide
access to legacy data stored on a server, but to find ways to enable knowledge
workers to collaborate and share their expertise. Collaborative technologies are
about creating value through better human interaction, not just better
information. Businesses and government organizations today need solutions that
make it easier for people to work together, to share information and expertise
across the building, country or around the world.

The use of real-time collaboration and videoconferencing technology has also
made its way outside the enterprise and is being used across the public
Internet. Sometimes called the Web talk or Web interactivity market, Web sites
today are enhancing their services by providing interactive voice and video
communication services. For example, some e-business sites are using Web
interactivity to resolve one of the biggest issues in e-commerce: poor customer
service caused by lack of human interaction. Other sites are using Web
interactivity to improve Web site retention by enabling lively voice chat
communities of interest.

THE EZENIA! SOLUTION

Ezenia! was founded in 1991 to develop a new generation of solutions architected
for the multimedia collaboration market. The Ezenia! product line is built on an
industry standard hardware and software platform that combines a powerful set of
real-time collaboration applications with management tools and network
connectivity features that aim to address the requirements of today's customers
and, the Company believes, are positioned to meet emerging requirements. Ezenia!
competes in three key markets:

Enterprise Collaboration - Ezenia! solutions are being used across the world to
allow teams to work together more effectively from dispersed locations. With the
Company's products, individuals and teams can collaborate face-to-face,
voice-to-voice, while sharing data such as a presentation or spreadsheet.

Web Interactivity - Ezenia! solutions can enhance a Web site by enabling
interactive voice communication. With the Company's products, Web sites can host
voice chat communities, hold online events or bring the human touch to the
e-commerce process by online access to customer service representatives.

Conferencing - The Company provides products that allow users of traditional
videoconferencing equipment to hold large multi-location meetings as well as
enabling them to bridge and connect the world of ISDN conferencing with IP-based
users.

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PRODUCTS

The Company's technology manages audio, video and data when more than two sites
participate in a collaborative conference and also allows for point-to-point
instant messaging between two or more participants. In the past, solutions have
been available to connect people on a point-to-point basis. Today, an increasing
number of users are finding group collaboration and group chat to be an even
more effective way of communicating. The Company believes group capabilities
will be one of the key requirements for the long-term growth of the real-time
collaboration market.

Ezenia!'s expertise is in developing products that deliver flexible support for
video, audio and data collaboration across a wide range of platforms. The
Company's products have been designed within a scaleable, modular architecture
to allow the customer to add capacity, processing power and conferencing
features as the customer's 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.

The Ezenia! family of products includes:

ENCOUNTER - The Encounter family includes the Encounter 3000 NetServer, the
Encounter 1000 NetServer and the Encounter 3000 NetGate. The Encounter NetServer
enables users on IP networks -- corporate LANs, intranets or the Internet -- to
create and participate in group, multimedia conferences. The Encounter NetGate
enables multimedia conferencing between ISDN and IP endpoints.

EZENIA! INTERACTIVITY - Ezenia! Interactivity enables Web sites and portals to
host live, interactive voice chat rooms and interactive events, such as online
"talk shows." Designed to be integrated with the host organization's existing
Web infrastructure, Ezenia! Interactivity is a scalable solution consisting of a
server platform, controlling software and a developer's toolkit.

SERIES 2000 - The Series 2000 family of servers provide the optimal solution for
companies looking to deliver multimedia conferencing over dedicated or circuit
switched networks. These servers include network interface modules that support
all major types of connectivity, including Primary Rate ISDN, Basic Rate ISDN
and ATM, and E1 and T1 access. The Company's solutions also support large hybrid
networks, such as T1, E1, BRI, V.35/RS-499, ATM and Frame Relay. Ezenia!'s
open-system architecture interoperates with any endpoint-based on the H.320
standard and any circuit-based digital network or mix of networks.

INFOWORKSPACE - InfoWorkSpace from Ezenia! provides dispersed workers a secure
virtual workspace for team collaboration. Easily accessible through a Web
browser or application client, users meet in virtual buildings and rooms via the
Internet. In these virtual workspaces, they communicate in real-time using
powerful capabilities.

Instant messaging, whiteboarding, screen sharing and text chat are among the
wide array of collaboration tools. The ability to discuss projects, share
information and allow remote users to modify documents can significantly improve
team communication and accelerate the decision-making process.

Users can instantly contact partners in their organization using our on-line or
off-line messaging options and bring them into the environment for real-time
collaboration.

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ENCOUNTER FAMILY OF CONFERENCING PRODUCTS

The Company began shipping the first products in its Encounter family of network
servers and gateways in March 1998. The Encounter product family allows
individuals and groups that are geographically distant from each other to
interact and share information in a natural, spontaneous way -- voice-to-voice,
face-to-face, flexibly and in real-time -- via any type of network. The
Encounter family is being used by enterprise customers and distance learning
facilities across the world.

The Encounter product line includes:

- - Encounter 1000 NetServer: Collaboration server marketed to small
enterprises and workgroups. Encounter 1000 NetServer is a software-based
product that runs on a standard Windows NT Server.

- - Encounter 3000 NetServer: Real-time collaboration server designed to
support the largest enterprise and service provider customers.

- - Encounter 3000 NetGate: Gateway solution that allows traditional
videoconferencing systems to participate in IP-based collaboration
sessions.

ENCOUNTER NETSERVER

The Encounter NetServer is designed to allow groups of users to come together
online and work collaboratively. The product allows users to interact and share
information in a natural, spontaneous way -- voice-to-voice and face-to-face.
The solution comes in two main versions: Encounter 1000 NetServer is a
software-based solution designed for small workgroups; the Encounter 3000
NetServer is a hardware-based solution designed for large enterprises and
service providers. Both products provide the same core feature set and are
managed by the same unified Web-based interface.

The Encounter 3000 NetServer is delivered as a complete system ready for
deployment. The NetServer is based on an industry standard PC platform using an
Intel Pentium control processor for control and incorporates high-performance
digital signal processors for real-time video and audio processing. The
Encounter 3000 NetServer operates on a Windows(R) NT platform and leverages
Microsoft IIS. It supports as many as 90 conference endpoints and can reside
anywhere in a TCP/IP network.

The Encounter 3000 NetServer is available in two chassis versions, the workgroup
and enterprise chassis. The only difference between the chassis types is the
physical size and number of slots within the chassis. All multimedia processing
is handled by the Multimedia Processing Unit (MPU) that are common to both
chassis. These MPUs are PCI-based boards that leverage Digital Signal Processors
(DSPs) to ensure a high level of audio quality.

The complete Encounter 3000 product line is based upon a modular architecture to
ensure simple and flexible upgrade options. Systems can be purchased supporting
anywhere from 8 to 64 connected users. System capacity can easily be increased
by adding additional processing and network modules into the Encounter chassis.
This approach ensures that the Encounter series can expand to support increasing
levels of user demand. As the required capacity increases, more processing
modules can be installed into a chassis to provide an increased port count. Each
processing module provides dedicated digital signal processing (DSP)
capabilities. This ensures that as user demand increases additional processing
cycles are being added to the system in parallel. This approach avoids
overloading a single processor with more and more requests as user capacity is
increased.

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Encounter NetServer provides a simple-to-use, Web-based interface, eCMS
(Encounter Centralized Management System) that allows users to schedule and
manage conferences. The Encounter eCMS application also supports scheduling
of public conferences. These provide a conferencing space for users to join
on a first-come-first-served basis. eCMS supports the creation and scheduling
of publicly listed conferences in which the user need only specify the
maximum number of H.323 users and maximum number of POTS (plain old telephone
system) users. No specific user information needs to be entered unless
desired by the conference administrator. This significantly reduces the
burden on conference administrators for meetings, which do not require a list
of participants.

The Encounter NetServer also includes the Encounter Gatekeeper software, which
provides the administrator a highly configurable means for managing access and
bandwidth utilization policies for the system IP conferencing environment. The
Encounter Gatekeeper is a software application, which can run on the Encounter
NetServer or on a separate NT Server.

The Encounter 1000 NetServer, which is geared towards smaller workgroups or more
distributed organizations, provides all the same capabilities as the Encounter
3000 NetServer such as continuous presence, T.120 data conferencing and audio
mixing, and also includes both eCMS and the Encounter Gatekeeper. Unlike the
Encounter 3000, however, the Encounter 1000 is completely software-based,
running on a standard Windows NT Server. The Encounter 1000 contains no special
software and ships as a CD-ROM for easy installation. Where the Encounter 3000
uses hardware-based DSP to manage the multimedia streams, Encounter 1000 uses
the host Pentium processor for all media processing. Because it is
software-based, and runs on any standard Windows NT Server, it is a lower cost
solution for smaller workgroups where the scalability of the Encounter 3000
NetServer is not needed.

The Encounter NetServer has a variety of features, some of which are listed
below:

- - Flexible video viewing choices include voice-activated video-switching,
user selected video switching and Continuous Presence, where four video
windows are viewed at the same time.
- - Audio transcoding allows each endpoint to experience optimal voice quality,
while minimizing bandwidth utilized.
- - Built-in voice gateway allows up to 24 phone users to participate in
conference sessions.
- - Interactive Voice Response (IVR) allows phone users to easily enter their
conference by providing conference and password information using touch
tones (DTMF).
- - Password-controlled entry to conferences provides security for conference
participants.
- - Conference cascading allows conferences to span between any two Encounter
3000 NetServers, no matter where they are located. This allows for the
distribution of Encounter 3000 NetServer conferencing resources to where
they most make sense in the network and allows for the creation of
conferences that are larger than the capacity of a single Encounter 3000
NetServer.
- - With ConferenceNow! endpoint users can create and join multipoint
conferences on Encounter 3000 NetServer on an ad-hoc basis, as easily as
placing a point-to-point call.
- - Calendar-based reservation and scheduling system for control of multiple
NetServers, eCMS allows users and administrators to view, schedule and
manage their own conferencing session through an intuitive Web browser
interface.
- - Recording of detailed usage information facilitates accurate billing and
reporting.

ENCOUNTER 3000 NETGATE

The Encounter 3000 NetGate enables multimedia conferencing between H.320 and
H.323 endpoints. The Encounter NetGate reconciles the differences in the network
protocols allowing users to collaborate in real-time via audio, video and data,
regardless of their network type.

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The Encounter 3000 NetGate shares many of the same characteristics of the
Encounter 3000 NetServer. The system is delivered as a complete system based on
an industry standard PC platform using an Intel Pentium control processor for
control and incorporates high-performance digital signal processors for
real-time video and audio processing. The Encounter 3000 NetGate operates on a
Windows(R) NT platform and leverages Microsoft IIS. It supports as many as 16
conference sessions.

The Encounter 3000 NetServer is available in two chassis versions, the workgroup
and enterprise chassis. The only difference between the chassis types is the
physical size and number of slots within the chassis. All multimedia processing
is handled by the Multimedia Processing Unit (MPU) that are common to both
chassis. These MPUs are PCI-based boards that leverage Digital Signal Processors
(DSPs) to ensure a high level of audio quality. The Encounter 3000 NetGate
supports a variety of network interface including 10/100BaseT Ethernet, Dual
port T1/PRI, Dual port E1/PRI, Quad port BRI and Dual port V.35/V.36/RS-449 DDM
making it possible to connect with just about any type of network.

The Encounter NetGate has numerous features, some of which are listed below:

- - Supports restricted and unrestricted rates of 2B up to 768 Kbps IMUXed and
384 Kbps H0, allowing for a high-quality conferencing experience.
- - Direct Inward Dialing (DID) and IVR facilitate WAN to LAN dialing.
- - Dynamically selects best available video standard (supports H.261 and
H.263) per session based on endpoint capabilities.
- - Real-time voice transcoding optimizes performance on a call-by-call basis.
- - Direct connection between the Encounter 3000 NetGate and Ezenia! Series
2000 MCS without incurring costly line charges.
- - LAN to WAN, WAN to LAN calls and administrator-initiated gateway calls
supported at all transfer rates, providing call flexibility.
- - Tandem gateway support (NetGate to NetGate) provides cost-effective means
for bridging WAN or LAN links.
- - Web-browser based administrative user interface allows system
administrators to configure, manage and monitor gateway activity, including
customization of system-wide behavior for support of T.120, WAN to LAN and
LAN to WAN calls.

EZENIA! INTERACTIVITY - BRING LIFE TO THE WEB

Ezenia! Interactivity allows companies to add easy-to-use voice interactivity to
their Web sites. With Ezenia! Interactivity, individuals and groups can meet on
the Web and talk with each other in a high-quality audio environment, adding the
natural ease and richness of conversation to their Internet experience. Ezenia!
Interactivity enables Web sites and portals to host voice and video chat rooms,
where family, friends, colleagues or communities of interest can meet and talk.
Sites can draw large or specialized audiences by hosting events such as online
talk shows that allow listeners to interact with celebrity guests or experts on
a hot topic. Ezenia! Interactivity consists of two components: The Interactivity
software and Media Service Provider (MSP) subsystems.

The Interactivity Server software provides an application programmer interface,
based on Microsoft Component Object Model (COM) technology. The software
interfaces exposed by an Interactivity Server allows Web content developers to
integrate interactivity into Web site while maintaining the sites current look
and feel. The interfaces allow the control of the underlying technology to be
completely hidden from the user - the user simply sees the browser and whatever
your Web site looks like. To enter an interactive session, the user simply
clicks on a hyperlink or an icon and they enter the session - "click to talk."

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The Media Service Provider is the platform that connects users engaging in
interactivity-enabled Web sites, providing low bandwidth audio and audio mixing.
The MSP is based on the Company's Encounter technology and ships with Ezenia!
Interactivity as a complete system ready for deployment. The MSP is based on an
industry standard PC platform using an Intel Pentium control processor for
control and incorporates high-performance digital signal processors for
real-time audio processing. It supports as many as 64 simultaneous users per
system.

SERIES 2000 MCS

The Series 2000 MCS product line of servers designed for switched digital
circuit networks include a number of basic platform configurations that are
expanded by the customer's selection of optional processing modules and software
applications. The platforms, configured for the typical end-user, range in list
price from under $20,000 to more than $200,000. Each Series 2000 MCS
configuration is built from a common set of processing modules, network
interfaces, software systems and optional features.

The following table lists the basic chassis configurations offered by the
Company and the typical target market and application in which each is used. In
this table, user capacity is a measure of the number of simultaneous conference
sites that can be connected to the Series 2000 MCS.

Each of these systems may be interconnected to provide support for larger
conferences.

The Ezenia! Series 2000 MCS has an extensive number of available software and
hardware features, some of which are listed in the following table.

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NETWORK SERVICES AND MANAGEMENT
-------------------------------

Outbound Dialing........................ Automatic MCS dial-out capability
Conference Monitor...................... Real-time monitor of conference activities and status
Bandwidth Management.................... Bandwidth aggregation using inverse multiplexing
Event Management........................ System activity and alarms applications for network
management

Network Diagnostics..................... Network loop-back and problem isolation tool kit
Premise Switching....................... Integrated ISDN switching functionality

The Company offers add-on software to its installed base in the form of either
major new software releases or unbundled software options. Customers may
purchase new software releases on an as-needed basis or as part of a maintenance
agreement. Unbundled software options are priced separately and are not part of
maintenance agreements.

INFOWORKSPACE

InfoWorkSpace is a suite of Web-enabled collaboration and conferencing
applications that help an organization build an online community and structure
its knowledge management enterprise. The suite is a Web-based package of
collaborative solutions that facilitate communication, data conferencing and
knowledge management among dispersed members of any workgroup. InfoWorkSpace has
been named the collaborative software standard for both the U.S. Air Force and
U.S. Army command and control systems.

InfoWorkSpace applications are in Java, accessed via a Web browser or Java
Client, and include instant messaging (IM), chat, IP audio, Web video,
application sharing, application casting, desktop conferencing, virtual meetings
and Web presentations. InfoWorkSpace Version 2.5 is the latest generation of
this technology, instituting the lessons learned in global deployments and
during major exercises for the Department of Defense and National Intelligence
Community. InfoWorkSpace 2.5 provides increased functionality, has a redesigned
user interface and provides a more modular and adaptable product for integration
with distinct customer systems and software.

To set up and maintain a virtual work place environment, a dedicated
InfoWorkSpace server is inserted in the existing operation. Its purpose is not
to replace the function of current operating workstations, but to enhance them.
This additional equipment is set up for the primary purpose of managing and
protecting the virtual space, the organization's documents and for controlling
access. The server needs to be powerful enough to meet demanding needs of a
growing or busy organization. Currently, InfoWorkSpace client software is
available for Windows 98/NT/2000/XP and Sun Solaris 2.6 - Solaris 8 platforms.

InfoWorkSpace comes pre-configured with the following modular components -
database server, Web server, Lightweight Directory Access Protocol (LDAP) server
and a real-time messaging server. These components form the software
architecture that the InfoWorkSpace software relies upon to provide
functionality to the user. For those organizations running Exchange 2000 for
scheduling and email, InfoWorkSpace provides interfaces to the Exchange
2000/Active Directory environment. Other external LDAP servers can be supported
if an organization has already invested in directory services for their
enterprise.

The InfoWorkSpace has a variety of features, some of which are listed below:

- - Accessible via either browser (with Java 2 plug-in) or Java application
client.

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- - Integration between the LaunchPad instant messenger environment and the
InfoWorkSpace meeting rooms provides a seamless collaborative experience
for all users.
- - Firewall/Proxy Compatibility - All data can be transmitted across port 80
when necessary. Voice requires the addition of UDP port 8084.
- - Federated Servers - The ability of multiple servers to form one seamless
collaborative enterprise with unitary login-in, federated user contact and
seamless navigation.
- - Advanced Security - InfoWorkSpace supports the use of Secure Socket Layer
(SSL) encryption (for data transmission privacy) and X.509v3 Digital
Certificates (for authentication purposes).
- - Administration - InfoWorkSpace provides extensive administration interfaces
for centralized management of the collaborative environment.
- - Application casting via "Shared View."
- - Microsoft Outlook integration and virtual session calendar (My Meetings, My
Room's Meetings, etc.).
- - Address book with user profiles that can be searched based on user's
experience and knowledge keywords.
- - Document management via the room file cabinet and the user's personal
document briefcase.
- - Collaborative Tools - Whiteboard, text editor, bulletin board, discussion
groups and text chat (public and private).
- - Audio and video (from Web cameras and IP audio to H.323).
- - Presence detection (whether the user is just using the LaunchPad instant
messenger or the InfoWorkSpace meeting room).

MARKET AND CHANNELS

Ezenia! sells its products, technologies and solutions primarily to large-scale
corporations, government entities, educational institutions, telecommunication
providers and resellers and distributors both domestically and internationally.
Ezenia! delivers its products through distributors, dealers, vertical market
resellers, systems integrators and OEMs who meet the Company's criteria, as well
as to major end-users.

A large portion of the Company's revenue continues to come from OEM partners. In
2001, PictureTel and VTEL accounted for 13% and 6% of revenue, respectively. In
2000, PictureTel and VTEL accounted for 26% and 17% of revenue, respectively. In
1999, PictureTel and VTEL accounted for 24% and 25% of revenue, respectively.
Revenue from international markets accounted for 41%, 40% and 27% of the
Company's revenue for the years ended December 31, 2001, 2000 and 1999,
respectively.

Ezenia! conducts its sales and marketing activities from its principal offices
in Burlington, Massachusetts, as well as from two other North American sales
locations, its European headquarters in the United Kingdom and offices in Hong
Kong and China.

RESEARCH AND PRODUCT DEVELOPMENT

The Company believes that its future success depends on its ability to
continue to enhance and expand its existing products and to develop new
products that maintain its technology leadership. Ezenia! has invested, and
expects to continue to invest, in the development of products and core
technologies. Extensive product development input is obtained from customers,
partners and service providers and through the Company's active participation
and leadership in industry groups responsible for establishing technical
standards such as the ITU and the IETF.

Since its founding, the Company's research and development effort has been
directed towards the development of standards-based collaboration server
technology. In concert with the evolution of industry standards, these efforts
currently are focused on extending the breadth of network services supported
beyond switched digital services to include local area networks, corporate
intranets, the Internet and ATM. This includes the development of

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multipoint products for particular network types and gateway products to provide
interoperability between dissimilar network types. Development is also underway
to support emerging data conferencing applications, provide additional
conferencing management capabilities including enhanced user interfaces and to
add higher capacities to the product families.

At December 31, 2001, Ezenia!'s research and development staff consisted of 49
employees, principally software engineers. The Company's net research and
development expenditures were $8.2 million, $14.4 million and $15.1 million in
2001, 2000 and 1999, representing 54%, 51% and 26% of revenue in those years.
All software development costs have been expensed as incurred because costs
eligible for capitalization have not been material to date.

CUSTOMER SUPPORT AND SERVICE

The Company provides technical support and services to its resellers and direct
customers. A high level of continuing service and support is critical to the
Company's objective of developing long-term relationships with customers. The
Company's 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. Ezenia! provides a comprehensive service program
including problem management, training, diagnostic tools, hardware repair
services, software updates and upgrades and spare parts programs to facilitate
and supplement the efforts of the Company's resellers.

The Company offers a technical support hotline to its resellers and customers.
Network support engineers answer technical support calls placed by the support
engineers of the Company's resellers and by its direct customers. The engineers
generally provide same-day responses to questions that cannot be resolved during
the initial call. The products are designed with advanced remote diagnostic
capabilities that permit a reseller's or the Company's support engineers to
immediately begin the process of diagnosing any problems in the field, thereby
reducing both response time and cost. When necessary, however, support engineers
are dispatched to the customer's facility.

The Company warranties its software products for 90 days. During this 90-day
warranty period, the Company will investigate all reported problems and will
follow escalation procedures to provide resolution. The Company warranties its
hardware products for 12 months. During this warranty period, the Company will
repair or replace any failed hardware component. The Company also offers
post-warranty support programs ranging from services on a time-and-materials
basis to full-service contracts on a 24-hour, 7-days-a-week basis and a full
suite of training courses.

MANUFACTURING

The Company's manufacturing operations consist primarily of materials
management, quality control, test engineering, production, shipping and
logistics. The Company employs an outsourced manufacturing model in which it
designs the significant hardware subassemblies for its products and uses
independent third-party contract assembly companies to perform printed circuit
board assembly and other production activities with internal efforts generally
limited to final product configuration, assembly and testing. This manufacturing
model offers the capability to quickly fulfill orders with limited lead times
thus providing enhanced customer satisfaction and improved inventory management.
All products are functionally tested utilizing state-of-the-art equipment
designed for "burn-in," diagnostic testing and stress screen testing to assure
the reliability and quality of the Company's products. The Company achieved
International Standard Organization (ISO) 9002 certification in 1994 and each
year since has been re-certified.

13

Although the Company generally uses standard parts and components for its
products, certain components, including key digital signal processors are
presently available only from single sources or from limited sources such as
Texas Instruments, Motorola and 8X8. The Company has no supply commitments from
its vendors, and generally purchases components on a purchase order basis as
opposed to entering into long-term procurement agreements with vendors. The
Company has been able to obtain adequate supplies of components in a timely
manner from current vendors, or when necessary to meet production needs, from
alternate vendors. The Company believes that, for digital signal processors in
particular, alternative sources of supply would be difficult to develop over a
short period of time and an interruption in supply or a significant increase in
the price of these components would adversely affect the Company's operating
results and business.

Because of the generally short cycle between order and shipment and because the
majority of the Company's sales in each quarter results from orders booked in
that quarter, the Company does not have a material backlog.

COMPETITION

The market for multimedia collaboration products is highly competitive. We
consider our primary competitors to be Polycom, RADvision and Lucent. We also
face competition or potential competition from companies that provide similar,
but not directly competing products, such as FVC, Centra, WebEx and IBM Lotus,
or companies that could expand their offerings and develop a product similar to
ours such as Microsoft. Many of these companies, as well as other current and
potential competitors, have substantially greater financial, technical and
sales and marketing resources than the Company. If we are unable to convince
companies with collaboration and videoconferencing needs to adopt our
videoconferencing, Encounter and InfoWorkSpace collaboration products over
the current 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, and should continue to be, breadth of capabilities, demonstrated
interoperability, price, performance, network management capabilities,
reliability, 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 can not be certain that potential customers will
be attracted to our products, especially if our competitors were to invest
substantially more money into their products and technology.

The Company currently competes, or expects to compete, directly or indirectly
with the following category of companies:

- - Real-time collaboration companies, such as Cu-See-Me Networks, Centra,
WebEx and RADvision

- - Web interactivity companies, such as Hearme.com, Firetalk and Lipstream

- - Conferencing companies, such as Accord and Lucent

PROPRIETARY RIGHTS

The Company holds ten U.S. patents, two corresponding patents in foreign
jurisdictions and has several patent applications pending in the United States
and other jurisdictions. In addition, the Company relies on a combination of
contractual rights, trade secrets and copyright laws to establish and protect
its intellectual property rights. The Company believes that, because of the
rapid pace of technological change in the data communications and
telecommunications industries, the intellectual property protection for its
products is only one factor in the Company's success, complementing the
knowledge, abilities and experience of the Company's

14

employees, the frequency of its product enhancements, its relationships with its
partners, the effectiveness of its marketing activities and the timeliness and
quality of its support services.

On June 16, 2000, the Company settled its patent infringement suit against
Accord Networks Ltd. ("Accord") in the United States District Court for the
District of Massachusetts. The settlement agreement, among other things,
provided that the Company receive $6,500,000 in return for a covenant not to sue
with respect to the patents that were the subject of the litigation. The Company
received $500,000 at the time the agreement was signed, and by December 31,
2000, received an additional $5,025,000. The final $975,000 is being held in
escrow until certain tax matters related to the settlement are resolved with tax
authorities in Israel.

EMPLOYEES

At December 31, 2001, the Company employed a total of 116 persons, including 49
in research and development, 38 in sales, marketing and customer support, 7 in
manufacturing and 22 in finance and administration. 10 of the Company's
employees were located internationally and the remainder were located in the
United States. None of the Company's employees are represented by a labor
organization, and the Company believes that its relations with employees are
good.

The Company's success depends, to a significant degree, upon the continuing
contributions of its key management, sales, marketing and research and
development personnel, many of whom would be difficult to replace, including
Khoa Nguyen, the Company's Chief Executive Officer. The Company does not have
employment contracts with its key personnel other than Khoa Nguyen. The Company
believes that its future success will depend in large part upon its ability to
attract and retain such key employees.

15

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are:

Khoa Nguyen was named Chairman of the Board of Directors in March 2000, has
served as President and CEO of the Company since April 1998 and has served as a
Director since December 1997. Previously he had been Executive Vice President
and Chief Operating Officer since September 1997. Prior to joining the Company,
Mr. Nguyen was employed at PictureTel Corporation, a videoconferencing company,
where he served as Vice President of Engineering from January 1993 to February
1994, and as Chief Technology Officer and General Manager of the Group Systems
and Networking Products divisions from February 1994 to August 1996. From August
1991 to December 1992, he was Vice President of Engineering at VTEL Corporation,
a videoconferencing company, and has also held various engineering management
positions with International Business Machines, a computer manufacturer.

Stephen G. Bassett has served as Chief Financial Officer, Treasurer, and
Secretary since January 2000. Prior to joining the Company, Mr. Bassett was
employed as an independent financial consultant from May 1996 to December 1999.
From October 1981 to May 1996, he served as an Audit Partner with Ernst & Young
LLP and from June 1969 to October 1981 held other various financial positions
with Ernst & Young LLP, an accounting firm.

Paul W. Haverstock joined Ezenia! in April 2001 as its Vice President of
Research and Development. Prior to joining the Company, Mr. Haverstock was
employed at Lotus Development Corporation (an IBM subsidiary), a software
development company, where he served as General Manager, Lotus Sametime from
June 1998 to March 2001, as Director of Advanced Software Development, Iris
Associates (an IBM/Lotus subsidiary) from January 1998 to May 1998, and as
Director Software Development, Lotus Domino from January 1995 to December 1997.

Edward C. Wade has served as Vice President of Operations since October 1997. He
served at PictureTel Corporation, a video conferencing company, as Director of
Manufacturing for the Group & Network Systems Divisions from March 1991 until
October 1997. From July 1988 until March 1991, he served as Vice President of
Materials Management for Symbol Technologies, a supplier of hand-held terminals
and bar code scanning devices. Previously, Mr. Wade held various manufacturing
and materials management positions for Polaroid Corporation, a manufacturer of
commercial and industrial instant photographic and digital imaging devices.

Officers are elected on an annual basis to serve at the discretion of the Board
of Directors.

16

ITEM 2. DESCRIPTION OF PROPERTY

The Company's corporate office and principal research, development and
manufacturing facility is located in Burlington, Massachusetts, in a 60,000
square foot facility. At the Company's current level of operations, the
Burlington facility has significant excess capacity. The Company is exploring
alternatives to move to a smaller more cost-efficient facility. Because of the
depressed real estate market in Massachusetts, at the current time, the Company
cannot estimate when such a move will be completed, if at all.

The Company's European headquarters is located in a 6,500 square foot facility
in Wokingham, Berkshire, United Kingdom, which the Company leases under a
five-year agreement expiring in February 2005 and is utilized principally for
sales, marketing and customer service activities. The Company also has
sales/service offices located in Alexandria, Virginia; Beijing, China and Hong
Kong and a development/service office in Colorado Springs, Colorado.

ITEM 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the last quarter
of the fiscal year ended December 31, 2001.

17

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Nasdaq National Market under the symbol
"EZEN." The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq National
Market.

As of March 25, 2002, the Company had approximately 107 shareholders of record.
This does not reflect persons or entities who hold their stock in nominee or
"street" name through various brokerage firms. The Company has not paid
dividends on its common stock. The Company anticipates it will continue to
reinvest earnings to finance future growth and, therefore, does not intend to
pay dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

(In thousands, except per share amounts)

(1) 2001 amounts include a charge to operations of $2.0 million, or $0.15 per
share, related to the restructuring of certain of the Company's operations, a
write-down of goodwill and other long-term assets totaling $7.1 million, or
$0.52 per share, and a tax benefit of $2.2 million, or $0.16 per share, relating
to the reversal of reserves recorded in prior years.
(2) 2000 amounts include the establishment of a valuation allowance for deferred
tax assets recorded in prior years approximating $7.8 million, or $0.57 per
share, income, net of tax, recognized from the settlement of the Accord
litigation of $5.5 million, or $0.40 per share, and a gain recognized from the
sale of the Company's network access card product line of $3.3 million, or $0.24
per share.
(3) 1998 amounts include a pre-tax charge to operations totaling $1.3 million,
or $0.10 per share after taxes, related to the restructuring of certain of the
Company's operations.
(4) 1997 amounts include a pre-tax charge to operations of $14.0 million, or
$0.69 per share after taxes, for purchased research and development related to
the acquisition of the network access card business unit of Promptus
Communications, Inc.

18

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

SIGNIFICANT ACCOUNTING POLICIES

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

REVENUE RECOGNITION Our policy is to recognize revenue from product sales upon
shipment to our customers and the fulfillment of all contractual terms and
conditions, pursuant to the guidance provided by Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements (SAB 101), issued by the
Securities and Exchange Commission.

Revenue from sales of InfoWorkSpace software licenses and maintenance agreements
is recognized ratably over the subscription contract periods. Products and
software licenses are sold without any contractual right of return to the
customer. Judgments are required in evaluating the credit worthiness of our
customers. Credit is not extended to customers and revenue is not recognized
until we have determined that the risk of uncollectibility is minimal.

ALLOWANCE FOR DOUBTFUL ACCOUNTS Our policy is to maintain allowances for
estimated losses resulting from the inability of our customers to make required
payments. Credit limits are established through a process of reviewing the
financial history and stability of each customer. Where appropriate, we obtain
credit rating reports and financial statements of the customer when determining
or modifying their credit limits. We regularly evaluate the collectibility of
our trade receivable balances based on a combination of factors. When a
customer's account balance becomes past due, we initiate dialogue with the
customer to determine the cause. If it is determined that the customer will be
unable to meet its financial obligation to us, such as in the case of a
bankruptcy filing, deterioration in the customer's operating results or
financial position or other material events impacting their business, we record
a specific allowance to reduce the related receivable to the amount we expect to
recover given all information presently available.

Historically, the Company has not experienced significant bad debt losses. At
December 31, 2001, our accounts receivable balance of $2.3 million is reported
net of allowances of approximately $900 thousand. 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.

INVENTORY RESERVES As a designer, developer and manufacturer of real-time
collaboration solutions, we are exposed to a number of economic and industry
factors that could result in portions of our inventory becoming either obsolete
or in excess of anticipated usage. These factors include, but are not limited
to, technological changes in our markets, our ability to meet changing customer
requirements, competitive pressures in products and prices and the availability
of key components from our suppliers. Our policy is to establish inventory
reserves when conditions exist that suggest that our inventory may be in excess
of anticipated demand or is obsolete based upon our assumptions about future
demand for our products and market conditions. We regularly evaluate the ability
to realize the value of our inventory based on a combination of factors
including the following: historical usage rates, forecasted sales or usage,
product end of life dates, estimated current and future market values and new
product introductions. Purchasing requirements and alternative usage avenues are
explored within these processes to mitigate inventory exposure. When recorded,
our reserves are intended to reduce the carrying value of our

19

inventory to its net realizable value. At December 31, 2001, our inventory of
$3.9 million is stated net of inventory reserves of approximately $1.9 million.
If actual demand for our products deteriorate or market conditions are less
favorable than those that we project, additional inventory reserves may be
required.

IMPAIRMENT The Company reviews the carrying values of long-lived assets and
amortizable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss for an asset to be held and used is recognized
when the estimated fair value of the asset is less than its carrying value. The
fair value of long-lived assets is generally based on estimated future cash
flows from operations. The estimates reflect the Company's assumptions about
selling prices, production and sales volume levels, costs and market conditions
over the estimated remaining operating period, which generally ranges from one
to five years. If the Company's assumptions related to assets to be held and
used are inaccurate, additional write-downs may be required in the future.

PRODUCT WARRANTIES Our products are sold with warranty provisions that require
us to remedy deficiencies in quality or performance of our products over a
specified period of time at no cost to our customers. Our policy is to establish
warranty reserves at the time of sale at levels that represent our estimate of
the costs that will be incurred to fulfill those warranty requirements. We
believe that our recorded liability at December 31, 2001, is adequate to cover
our future cost of materials, labor and overhead for the servicing of our
products sold through that date. If actual product failures, or material or
service delivery costs differ from our estimates, our warranty liability would
need to be revised accordingly.

RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

REVENUE Revenue decreased to $15.1 million in 2001 from $28.1 million in
2000. The decrease in revenue was principally related to a significant
decline in sales of ISDN products and related service revenues as the
videoconferencing market continued to weaken. In particular, sales of ISDN
products and related services to two of the Company's largest customers,
PictureTel Corporation and VTEL Corporation, were significantly lower than in
the year ended December 31, 2000. ISDN product revenue from PictureTel was
$1.9 million in 2001 compared to $6.9 million in 2000. ISDN product revenue
from VTEL was $.8 million in 2001 compared to $2.5 million in 2000. In
addition to the decline in sales of ISDN products and services, the overall
decrease in revenue is also attributable to the sale of the Company's network
access card (NAC) product line in September 2000. Revenue from the sales of
NAC products approximated $3.3 million during the year ended December 31,
2000. These decreases were offset by $1.9 million of revenue associated with
the Company's InfoWorkSpace product line acquired in March 2001.

Revenue decreased to $28.1 million in 2000 from $58.1 million in 1999. The
decrease was primarily related to the beginning of the decline in sales of ISDN
products and related service revenues as the videoconferencing market started to
weaken. In particular ISDN product revenue from sales to PictureTel decreased to
$6.9 million in 2000 from $13.0 million in 1999. ISDN product revenue from sales
to VTEL decreased to $2.5 million in 2000 from $11.1 million in 1999. Revenue
from the sales of NAC products decreased by $2.4 million in 2000, as compared to
1999, attributable in part to the sale of the NAC product line in September
2000.

GROSS PROFIT Cost of revenues includes material costs, manufacturing labor and
overhead and customer support costs. Gross profit as a percentage of revenues
decreased in 2001 to 37.4% from 48.5% in 2000 and 62.3% in 1999. Reduction in
margin for each of the last two years was primarily attributable to the overall
decrease in revenues and the related disproportionate effect of fixed
manufacturing and service cost included in cost of revenues.

RESEARCH AND DEVELOPMENT Research and development expenses decreased to $8.2
million for the year ended December 31, 2001 from $14.4 million for the year
ended December 31, 2000. The Company's spending decrease was partially
attributable to the elimination of engineering expenses of approximately $1.5
million related to the NAC product line sold in September 2000. Approximately
$6.7 million of the decrease is attributable to a reduction in staff and related
expenses due to completion of various projects and the Company's restructuring
and cost reduction plan implemented in May 2001 offset by increased costs of
approximately $2.0 million associated with the acquisition of InfoWorkSpace in
March 2001. Research and development expenses decreased to $14.4 million in 2000
from $15.1 million in 1999 primarily due to a decline in network access card
product related expenses of $.4 million and completion of engineering projects.

SALES AND MARKETING Sales and marketing expenses decreased to $8.6 million in
2001 from $10.7 million in 2000. The decreased spending was primarily due to
the Company's restructuring and cost reduction plan that went into effect at
the end of May 2001. Cost savings achieved from the restructuring and cost
reduction plan were offset by added sales and marketing

20

expenses of approximately $1.0 million attributable to the InfoWorkSpace product
line acquired in March 2001. Sales and marketing expenses decreased to $10.7
million in 2000 from $11.5 million in 1999. The decreased spending was primarily
due to the transition from an ISDN product focus to a concentration on IP and
Internet products.

GENERAL AND ADMINISTRATIVE General and administrative expenses decreased to $3.1
million in 2001 compared to $3.9 million in 2000. The decrease was primarily due
to cost savings associated with the restructuring and cost reduction plan
implemented in May 2001. General and administrative expenses decreased to $3.9
million in 2000 from $4.1 million in 1999. The decrease was primarily due to
reduction of expenditures related to the Company's corporate-wide financial
accounting, manufacturing and sales and distribution system, which was
implemented during 1999.

OCCUPANCY AND OTHER FACILITIES RELATED EXPENSES Occupancy and other facilities
related expenses represent rent expense and other operating costs associated
with the Company's headquarters and manufacturing facility in Burlington,
Massachusetts and various other sales and development offices in the United
States, United Kingdom, Hong Kong and China. Costs are essentially fixed and
generally only change when new offices are opened or leases are renegotiated.
The increase to $3.5 million in 2001 from $3.2 million in 2000 relates primarily
to added occupancy costs associated with the acquisition of the InfoWorkSpace
product line in March 2001.

INTEREST INCOME, NET Interest income, net, consists of interest on cash, cash
equivalents and marketable securities. Interest income decreased to
approximately $.9 million in 2001 from $2.5 million in 2000. Interest income in
1999 was $2.3 million. The decrease in 2001 was due primarily to a reduction in
the amount of cash available for investment. The increase in 2000 was primarily
related to higher rates of return on investments.

INCOME TAX The amount reported as income tax benefit in 2001 relates primarily
to the reversal of tax reserves recorded in prior years. The Company determined
that the tax reserves were no longer required because the related potential tax
exposures were favorably resolved during the fourth quarter of 2001. In 2000 the
Company recorded a valuation allowance of approximately $7.8 million to reduce
the carrying value of deferred tax assets recorded in prior years to zero and
$975 thousand related to the settlement of litigation with Accord.

LITIGATION On June 16, 2000, the Company settled its patent infringement suit
against Accord in the United States District Court for the District of
Massachusetts. The settlement agreement, among other things, provided that the
Company receive $6,500,000 in return for a covenant not to sue with respect to
the patents that were the subject of the litigation. The Company received
$500,000 at the time the agreement was signed and by December 31, 2000 received
an additional $5,025,000. The final $975,000 is being held in escrow until
certain tax matters related to the settlement are resolved with tax authorities
in Israel.

FACTORS WHICH MAY AFFECT FUTURE OPERATIONS This Annual Report includes
discussions of its long-term growth outlook, including various forward-looking
statements. The following risks and uncertainties, among others, could affect
the degree to which such expectations are realized.

LIQUIDITY. As further described under Liquidity and Capital Resources,
the Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital, increase revenue or substantially
improve operating margins.

DEPENDENCE ON MAJOR CUSTOMERS. While the Company is focusing efforts on
broadening its reseller, distribution and OEM sales channels, sales to a
relatively small number of customers have accounted for a significant portion of
the Company's revenue. The Company believes that its dependence on a relatively
small number of customers will continue during 2002. This concentration of
customers may cause revenues and operating results to fluctuate from
quarter-to-quarter based on major customers' requirements and the timing of
their orders and shipments. The Company's agreements with its customers
generally do not include minimum purchase commitments or exclusivity
arrangements. The Company's operating results could be materially and adversely
affected if any present or future major customer were to choose to reduce its
level of orders, were to change to another vendor for purchases of a similar
product, were to combine their operations with another company who had an
established relationship with another vendor for purchases of a similar product,
were to experience financial, operational or other difficulties or were to delay
paying or fail to pay amounts due the Company.

REDUCED DEMAND FOR TRADITIONAL VIDEOCONFERENCING PRODUCTS. Traditional
videoconferencing technology such as ISDN has had a rapid decline. The Company's
ISDN revenue declined to $6.2 million in 2001 from $16.1 million in 2000. The
Company has broadened its product offerings with the acquisition of the
InfoWorkSpace product line in March 2001 and continues to develop and sell
IP-based products. To date, however, revenues from sales of these products has
not offset the decline in revenues from sales of traditional ISDN-based
videoconferencing products.

21

EVOLVING MARKETS. Sales of real-time collaboration products account for an
increasing portion of the Company's revenue. The Company's success depends, to a
significant extent, on the acceptance and the rate of adoption of IP and
Internet-based collaboration products, in general, and Encounter and
InfoWorkSpace products in particular. There is inadequate experience to predict
whether real-time collaboration products will ultimately be accepted by the
market. There can be no assurance that any of the markets for the Company's
products will develop to the extent, in the manner, or at the rate anticipated
by the Company. In addition, future prices the Company is able to obtain for its
products may decrease as a result of new product introductions by others, price
competition, technological change or other factors.

RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards,
emerging network architectures and frequent new 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. The
Company has invested, and for 2002 plans to continue to invest, in product
development and products incorporating certain of these new technologies. Many
other companies are also developing products incorporating these new
technologies that are competitive with the Company's current and future
offerings. The Company's success will depend, in part, upon its ability through
continued investments to maintain technological leadership, to enhance and
expand its existing product offerings and to select and develop in a timely
manner new products that achieve market acceptance.

COMPETITION. The market for multimedia collaboration products is highly
competitive. The Company expects competition to increase significantly in the
future. A number of companies have introduced or announced their intention to
introduce products that could be competitive with the Company's products, and
the rapidly evolving nature of the markets in which the Company competes may
attract other new entrants as they perceive opportunities. Some of the Company's
current and potential competitors have longer operating histories and greater
financial, technical and sales and marketing resources. If the Company is unable
to convince companies with collaboration and videoconferencing needs to adopt
the Encounter and InfoWorkSpace collaboration products over the current
technologies marketed by competitors, the Company's financial results will
suffer, through price reductions and loss of market share.

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, customer support and security. The Company plans to compete by
offering collaboration and enterprise products with a broad range of
capabilities and high performance. However, the Company cannot be certain that
potential customers will be attracted to the Company's products, especially if
competitors were to invest substantially more money into their products and
technology.

INFOWORKSPACE ACQUISITION. On March 27, 2001, the Company entered into a
purchase agreement to acquire all of the operating assets and intellectual
property of the InfoWorkSpace, a business unit of General Dynamics Electronic
Systems. The Company entered into the purchase agreement with the expectation
that the transaction will result in certain benefits including, among other
things, benefits relating to expanded and complementary product offerings,
enhanced revenues, increased market opportunity, new technology and the addition
of engineering personnel. InfoWorkSpace products are currently used primarily by
government organizations, including the Department of Defense and the
Intelligence Community. While continuing to develop the government business, the
Company's intention is to market and sell the InfoWorkSpace collaboration
products commercially. The Company cannot assure that its commercial marketing
efforts will be sufficient or that its businesses will achieve revenues,
specific net income or loss levels, efficiencies or synergies that justify the
acquisition or that the acquisition will result in increased earnings in any
future period.

InfoWorkSpace products provide knowledge workers a secure virtual workspace for
project and team collaboration. InfoWorkSpace products are currently used
primarily by government organizations, including Defense Department agencies and
the Intelligence Community.

PROTECTION OF PROPRIETARY TECHNOLOGY. The Company's success depends, to a
large extent, on its ability to protect its proprietary technology. The Company
currently holds ten U.S. patents, two corresponding patents in foreign
jurisdictions and has several patent applications pending. In addition to its
patents, the Company relies primarily on a combination of contractual rights,
trade secrets and copyrights to protect its intellectual property rights.

RETENTION OF KEY EMPLOYEES. The Company's success depends, to a significant
degree, upon the continuing contributions of its key management, sales,
marketing and research and development personnel, many of whom would be
difficult to replace, including Khoa Nguyen, the Company's Chief Executive
Officer. The Company does not have employment

22

contracts with its key personnel other than Khoa Nguyen. The Company believes
that its future success will depend in large part upon its ability to attract
and retain such key employees.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, the Company had cash, cash equivalents and marketable
securities of approximately $5.5 million, which are regularly invested in
short-term money market funds, government securities and commercial paper. The
Company had committed an aggregate of $3.1 million of this amount for a $2.0
million installment paid in January 2002, in connection with its acquisition of
the InfoWorkSpace business and $1.1 million paid in January 2002 upon exercise
of a put option for 110,000 shares of the Company's common stock (see Note 3 of
Notes to Consolidated Financial Statements). In addition, in connection with the
put option, the Company may be required to purchase another $2.9 million of its
common stock in December 2002. The Company had losses from operations of $33.6
million and $21.4 million for the years ended December 31, 2001 and 2000,
respectively.

The Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital, increase revenue or substantially
improve operating margins. There appears little likelihood of securing
additional capital on reasonable terms, if at all, in the near future. In May
2001, the Company implemented a restructuring and cost reduction plan to
reduce operating costs in line with anticipated revenues with the ultimate
objective of improving operating margins and becoming cash-flow neutral from
operations. As a result of these actions, the Company recorded charges of
approximately $2.0 million of which all but approximately $100 thousand had
been paid by December 31, 2001. These charges, reported as restructuring
expense, primarily represented severance costs related to the termination of
90 employees, constituting approximately 50% of the Company's workforce at
the time the cost reduction plan was implemented. The reduction in workforce
covered all functional areas, including research and development, sales and
marketing, general and administrative, manufacturing and technical support.

Operating costs at the end of December 2001 were in line with the Company's
expectations. The Company estimates its cash-flow breakeven point to be
approximately $24 million to $26 million in annual sales. If the Company is not
successful in meeting its revenue targets, it may not be able to generate cash
flows sufficient to continue operations.

The Company's common stock is presently listed on the Nasdaq National Market
("Nasdaq NMS") under the symbol EZEN. All companies listed on Nasdaq are
required to comply with certain continued listing standards, including
maintaining a minimum bid price of at least $1.00. As of February 14, 2002, the
Company did not meet this standard since its common stock had not traded at a
minimum bid price of at least $1.00 over the previous 30 consecutive trading
days. Pursuant to the rules of The Nasdaq Stock Market, the Company has until
May 15, 2002 to meet the required $1.00 minimum bid price for its common stock
for at least 10 consecutive trading days. There can be no assurance that the
Company's common stock will meet the required $1.00 minimum bid price at any
time in the future or that any appeal by the Company of any delisting
determination would be successful. In the event that the Company's common stock
is delisted from Nasdaq NMS, the market value and liquidity of the Company's
common stock could be materially adversely affected.

23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To date, the Company has not utilized derivative financial instruments or
derivative commodity instruments. The Company invests cash in highly liquid
investments, consisting of highly rated U.S. and state government securities,
commercial paper and short-term money market funds. These investments are
subject to minimal credit and market risk and the Company has no debt.
Therefore, the Company believes the market risks associated with these financial
instruments are immaterial.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Ezenia! Inc.

We have audited the accompanying consolidated balance sheets of Ezenia! Inc. and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Ezenia!
Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

The accompanying financial statements have been prepared assuming that
Ezenia! Inc. will continue as a going concern. As more fully described in
Note 2, the Company has incurred substantial recurring operating losses and
negative cash flows. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 7, 2002,
except for the last paragraph of Note 9, as to which the date is
March 14, 2002

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CONSOLIDATED BALANCE SHEETS

SEE ACCOMPANYING NOTES.

26

CONSOLIDATED STATEMENTS OF OPERATIONS

SEE ACCOMPANYING NOTES.

27

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for share related data)

SEE ACCOMPANYING NOTES.

28

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

SEE ACCOMPANYING NOTES.

29

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS

Ezenia! Inc. operates in one business segment, which is the design, development,
manufacturing, marketing and sale of real-time collaboration solutions for
corporate networks and eBusiness. Founded in 1991, Ezenia! develops and markets
products that enable organizations to provide high-quality group communication
and collaboration capabilities to commercial, consumer and institutional users.

2. GOING CONCERN

The Company has incurred substantial recurring operating losses and negative
cash flows, and at December 31, 2001, has limited cash resources.

The Company's ability to continue as a going concern is dependent upon its
ability to raise additional capital, increase revenue or substantially
improve operating margins. There appears little likelihood of securing
additional capital on reasonable terms, if at all, in the near future. In May
2001, the Company implemented a restructuring and cost reduction plan to
reduce operating costs in line with anticipated revenues with the ultimate
objective of improving operating margins and becoming cash-flow neutral from
operations. As a result of these actions, the Company recorded charges of
approximately $2.0 million, of which all but approximately $100 thousand had
been paid by December 31, 2001. These charges, reported as restructuring
expense, primarily represented severance costs related to the termination of
90 employees, constituting approximately 50% of the Company's workforce at
the time the cost reduction plan was implemented. The reduction in workforce
covered all functional areas, including research and development, sales and
marketing, general and administrative, manufacturing and technical support.

Operating costs were in line with the Company's expectations for the quarters
ended September 30, 2001 and December 31, 2001. The Company's success in
achieving its goal of being cash-flow neutral is largely dependent on whether it
can meet its future revenue targets.

In addition, the restructuring and cost reduction plan calls for the Company to
close down its Burlington, Massachusetts facility and move its office
headquarters to a smaller, more cost efficient facility. Because of the
depressed real estate market in Massachusetts at the current time the Company
cannot estimate when such a move will be completed, if at all.

There can be no assurance that the Company can achieve the above-mentioned
actions. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. All assets and liabilities of the Company's
foreign subsidiaries are translated at the rate of exchange at the end of the
year, while sales and expenses are translated at the average rates in effect
during the year. The net effect of these translation adjustments is shown in the
accompanying financial statements as a component of stockholders' equity.

Certain amounts represented in 2000 and 1999 have been reclassified to permit
comparison with 2001 classifications.

SIGNIFICANT ESTIMATES AND ASSUMPTIONS

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 revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

REVENUE RECOGNITION

Revenue from product sales is recognized upon shipment. The Company's products
are generally delivered without significant post-sale obligations to the
customer. If significant obligations exist, revenue recognition is deferred
until the obligations are satisfied. Estimated product warranty costs are
accrued at the time of sale. Revenue from sales of

30

InfoWorkSpace software licenses is recognized ratably over the subscription
period, generally one year. Revenue from maintenance agreements is recognized
ratably over the terms of the agreements, and other service revenue is
recognized as the services are performed.

SOFTWARE LICENSES

The Company's InfoWorkSpace products incorporate software licenses, which the
Company purchases from other software vendors. Software licenses purchased from
vendors are reported as inventory until the sale of the underlying InfoWorkSpace
subscription license. At which time, they are reported as prepaid licenses and
amortized over the subscription period.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

All of the Company's cash equivalents and marketable securities are classified
as available-for-sale and, accordingly are carried at fair value based on quoted
market prices. Unrealized gains and losses were not material in 2001, 2000 or
1999. Realized gains and losses are included in net interest income. The Company
considers all liquid investments with a maturity of three months or less at the
date of purchase to be cash equivalents. Cash equivalents and marketable
securities consist of highly rated U.S. and state government securities,
commercial paper and short-term money market funds.

CONCENTRATIONS OF CREDIT RISK

Revenue from three customers accounted for 31%, 48%, and 53% of total revenues
in 2001, 2000 and 1999, respectively. Accounts receivable from these customers
amounted to approximately $1.0 million and $1.6 million at December 31, 2001 and
2000, respectively. Export sales were $6.1 million, $11.3 million and $15.7
million in 2001, 2000 and 1999, respectively.

Financial instruments, which potentially subject the Company to concentrations
of credit risk, are cash equivalents, marketable securities and accounts
receivable. All of the Company's cash equivalents and marketable securities are
maintained by major financial institutions. Concentration of credit risk with
respect to accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce risk, the Company routinely assesses
the financial strength of its customers. Write-offs related to accounts
receivable have been within management's expectations.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost determined
using the first-in, first-out method.

EQUIPMENT AND IMPROVEMENTS

Equipment and improvements are stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:

Computer and office equipment 3 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of lease term or estimated
useful life

DEFERRED REVENUE

Deferred revenue represents amounts received from customers under subscription
software licenses, maintenance agreements or for product sales in advance of
revenue recognition.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to expense as incurred. To date,
costs of internally developed software eligible for capitalization have been
immaterial and have been expensed as incurred.

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INCOME TAXES

Income taxes have been provided using the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes."

NET INCOME (LOSS) PER SHARE

The Company reports earnings per share in accordance with the SFAS No. 128,
"Earnings per Share." Diluted earnings per share include the effect of dilutive
stock options and shares subject to a put option (see Note 3) when dilutive.

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