EZENIA INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD SEPTEMBER 30, 2002
COMMISSION FILE NUMBER 0-25882

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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)

NORTHWEST PARK, 154 MIDDLESEX TURNPIKE, BURLINGTON, MASSACHUSETTS 01803
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

(781) 505-2100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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 / /

The number of shares outstanding of the registrant's Common Stock as of
November 1, 2002 was 13,631,880.

EZENIA! INC.

INDEX

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. These risks and uncertainties include our
ability to further develop or sell our enterprise collaboration software
business. Other risks and uncertainties include the considerations that are
discussed in the Management's Discussion and Analysis section of Ezenia!'s 2001
Annual Report on Form 10-K for the year ended December 31, 2001, such as the
evolution of Ezenia!'s market, dependence on major customers, rapid
technological change, competition, the ability to successfully implement the
Company's restructuring and cost reduction plan, risks associated with the
acquisition of InfoWorkSpace (including the Company's ability to integrate the
InfoWorkSpace product line and workforce) and other considerations that are
discussed further in the Management's Discussion and Analysis

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section of the Company's 2001 Annual Report on Form 10-K for the year ended
December 31, 2001 and in the Company's subsequent public filings.

The forward-looking statements contained in this report represent the Company's
judgment as of the date of this report. Ezenia! cautions readers not to place
undue reliance on such statements. The Company undertakes no obligation to
update publicly any forward-looking statements for any reason, even if new
information becomes available or other events occur in the future.

Note: Ezenia! is a registered trademark of Ezenia! Inc., and the Ezenia! Logo
and InfoWorkSpace are trademarks of Ezenia! Inc.

3

EZENIA! INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)

See accompanying notes.

4

EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE RELATED DATA)
(UNAUDITED)

See accompanying notes.

5

EZENIA! INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. In the opinion of
management, these financial statements contain all adjustments necessary for a
fair presentation of the results of these interim periods. In addition to normal
recurring adjustments, the financial statements for 2002 include a writedown of
inventory (see Note 5) and a provision for impairment of long-lived assets
associated with the Company's videoconferencing product line (see Note 2). The
financial statements for 2001 include a provision for loss on investment (see
Note 7) and accrual of restructuring costs. Certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted, although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading. These
financial statements should be read in conjunction with the Company's audited
financial statements included in the Company's 2001 Annual Report on Form 10-K
for the year ended December 31, 2001. The results of operations for the interim
periods shown are not necessarily indicative of the results for any future
interim period or for the entire fiscal year.

Certain amounts in 2001 have been reclassified to permit comparison with 2002
classifications.

2. GOING CONCERN

The Company has incurred substantial recurring operating losses and negative
cash flows, and at September 30, 2002, has limited cash resources. Also, the
Company is attempting to renegotiate the put agreement entered into in
connection with its acquisition of the InfoWorkSpace business unit (see Note 6),
but if unsuccessful, will not have sufficient cash to fulfill its obligations
under that agreement if exercised. 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, in addition to revising the
put agreement. In May 2001, the Company implemented a restructuring and cost
reduction plan to reduce operating costs in line with then anticipated revenues
with the ultimate objective of improving operating margins and becoming
cash-flow neutral from operations (see Note 14). Since the May 2001
restructuring, revenues have not materialized in line with the Company's
expectations. As a result, in July 2002 the Company implemented another
restructuring and cost reduction plan which consisted of the termination of 55
employees (approximately 50% of its workforce), closing its foreign sales
operations and significantly reducing sales and service operations of its
videoconferencing product lines. (Revenues from videoconferencing products and
services were $5.0 million for the nine months ended September 30, 2002 and
$10.4 million for the nine months ended September 30, 2001.) Costs of the July
restructuring were approximately $.4 million, principally severance payments to
foreign employees, of which approximately $.2 million was paid by September 30,
2002 and the remainder is expected to be paid by December 31, 2002.

In June 2002, the Company negotiated the termination of the lease of its
Burlington, Massachusetts headquarters and manufacturing facility and in July
2002 moved to more cost-efficient space.

In the quarter ended June 30, 2002, the Company recorded a writedown of
inventory (approximately $2.3 million) associated principally with the
videoconferencing product line and impairment of long-lived assets
(approximately $2.1 million) abandoned as part of the lease termination.

Effective August 1, 2002, the Company entered into a license agreement, a
promissory note and security agreement, and an asset purchase agreement in
connection with the Company's proposal to sell the patents and pending
applications associated with its videoconferencing business. These agreements
resulted in the Company receiving $2.5 million in cash on August 2, 2002, and
the Company received another $2.4 million in cash on October 30, 2002 at the
closing of the sale (see Note 3).

After the July restructuring and lease termination described above, the Company
estimates its cash-flow breakeven point to be approximately $3.5 million to $4.0
million in revenues per quarter. Future revenues are expected to be generated
primarily from sales and services associated with InfoWorkSpace products.

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There can be no assurance that the Company can achieve its revenue goals or
secure additional capital. 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. SALE OF PATENTS

On August 1, 2002, the Company entered into an agreement to sell all patents and
pending applications related to its videoconferencing products. In exchange for
an up-front license fee of $1.25 million, the Company granted a fully-paid,
non-exclusive, non-transferable license under the patents and pending
applications relating to the Company's videoconferencing technology. At the same
time, the Company received a loan for an additional $1.25 million, which was
secured by the licensed patents and pending applications. The Company will
retain a fully-paid, non-exclusive, non-transferable license for use in
connection with its videoconferencing and enterprise collaboration products. The
sale of the patents and pending applications was approved by Ezenia!
shareholders on October 28, 2002, and the sale completed on October 30, 2002. At
the closing, the Company received an additional $2.4 million and all amounts due
under the $1.25 million secured loan were forgiven.

4. 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.

5. INVENTORIES

Inventories consist of:

In the quarter ended June 30, 2002, the Company recorded a writedown of
inventory (approximately $2.3 million) associated principally with the
videoconferencing product line.

The Company has entered into a license agreement with a software vendor. Under
the terms of the agreement, the Company is obligated to purchase $7.5 million of
software licenses over the two year period ending March 26, 2003. The licenses
are resold with the Company's InfoWorkSpace products. At September 30, 2002, the
Company had acquired approximately $5.5 million of licenses under the agreement.

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6. ACQUISITIONS

On March 27, 2001, the Company completed the acquisition of all of the operating
assets and intellectual property of the InfoWorkSpace business unit of General
Dynamics Electronic Systems for $17 million in cash and 400,000 shares of the
Company's common stock valued, for purposes of the transaction, at $10.00 per
share. An advance of $6 million was paid in December 2000, $6 million was paid
at closing, $3 million was paid on July 2, 2001 and the final payment of $2
million was paid on January 4, 2002. The 400,000 shares issued were accompanied
by an option allowing the seller to put the shares to the Company at $10.00 per
share. The put option with respect to 110,000 shares was exercised by the seller
on January 4, 2002, and the shares were reacquired at an aggregate price of $1.1
million on January 25, 2002. The put agreement, as amended, gives the seller the
option to require the Company to repurchase the balance of 290,000 shares
beginning December 1, 2002 and expiring December 31, 2002. The put right shall
expire at such time as the last reported closing price of the common stock has
been equal to or greater than $11.00 per share for fifteen (15) consecutive
trading days. Common stock subject to the put option is reported as temporary
equity. For purposes of computing diluted earnings per share, such shares are
included in the calculation using the reverse treasury stock method when
dilutive.

Pursuant to the terms of the purchase agreement, the Company paid approximately
$1 million at the closing to cover the seller's transitional operating costs
(net of revenue earned during the period) for the period between the signing of
the purchase agreement and the closing of the transaction. The acquisition has
been accounted for as a purchase.

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.

Operating results of the InfoWorkSpace product line have been included in the
Company's financial statements from the acquisition date. The following table
presents unaudited pro forma consolidated operating results for the nine month
period ended September 30, 2001 as if the acquisition had occurred as of the
beginning of the period.

(In thousands)

Revenue $ 11,939
Net loss (24,011)

Basic loss per share $ (1.76)
Diluted loss per share $ (1.76)

The unaudited pro forma consolidated operating results are not necessarily
indicative of the operating results that would have been achieved had the
acquisition been consummated at the beginning of the periods presented, and
should not be construed as representative of future operating results.

7. LOSS ON INVESTMENT

Loss on investment represents an adjustment recorded during the nine month
period ended September 30, 2001 to reduce to zero the carrying value of the
Company's minority investment in a closely-held company.

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8. COMPREHENSIVE LOSS

Total comprehensive loss consists of the following:

9. GOODWILL AND INTANGIBLES

Effective January 1, 2002, the Company adopted the provisions of Statement of
Financial Accounting Standard (SFAS) No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS". This statement affects the Company's treatment of goodwill and other
intangible assets. The statement requires that goodwill existing at the date of
adoption be reviewed for possible impairment and that impairment tests be
periodically repeated, with impaired assets written down to fair value.
Additionally, existing goodwill and intangible assets must be assessed and
classified within the statement's criteria. Intangible assets with finite useful
lives will continue to be amortized over those periods. Amortization of goodwill
and intangible assets with indeterminable lives will cease. As a result, of the
adoption of SFAS No. 142, certain intangible assets totaling approximately $865
thousand were reclassified as goodwill as they did not meet the requirement for
classification as intangible assets under SFAS No. 142.

The Company completed the first step of the transitional goodwill impairment
test as required by SFAS No. 142 and has determined that the fair value of it
sole reporting unit exceeds its net assets indicating potential goodwill
impairment exists. The second step of the transitional goodwill impairment test
will be completed by December 31, 2002. An impairment loss recognized as a
result of a transitional goodwill impairment test, if any, shall be recognized
by the Company as the effect of a change in accounting principle. Accordingly,
if the Company determines that as a result of adopting SFAS No. 142, it has
incurred a transitional impairment loss relating to its goodwill, the Company
will restate its reported 2002 interim periods to effect the change in
accounting.

Had SFAS No. 142 been adopted for the three months and nine months periods
ending September 30, 2001, the impact on net loss and loss per share would have
been as follows:

At September 30, 2002, intangible assets subject to amortization have been fully
amortized. Aggregate amortization expense for the nine months ended September
30, 2002 was approximately $1.0 million.

10. NET LOSS PER SHARE

The Company reports earnings per share in accordance with the SFAS No. 128,
"Earnings per Share." Diluted earnings per share includes the effect of dilutive
stock options and shares subject to a put option (see Note 6) when dilutive.
Outstanding stock options at September 30, 2002 and 2001 were 2,415,265 and
2,664,898, respectively.

11. 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 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.

12. 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.

13. INCOME TAXES

The Federal Job Creation and Worker Assistance Act of 2002, enacted in March
2002, allowed the Company to carryback net operating losses incurred in 2001 for
a period of up to five years, rather than two years as had previously been the
case. The additional carryback period enabled the Company to file a carryback
claim in March 2002, resulting in the utilization of approximately $12.5 million
of net operating losses that would have expired in 2022 and the recovery of
approximately $2.7 million of income taxes paid in prior years, which was
received during the three months ended March 31, 2002.

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14. MAY 2001 AND JULY 2002 RESTRUCTURING AND COST REDUCTION PLANS

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 in the second quarter of 2001. These charges
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.

In July 2002, the Company implemented another restructuring and cost reduction
plan which consisted of the termination of 55 employees (approximately 50% of
its workforce), closing its foreign sales operations and significantly reducing
sales and service operation of its videoconferencing product lines. Cost of the
July restructuring was approximately $.4 million, principally severance payment
to foreign service employees, of which $.2 million was paid by September 30,
2002, and the remainder is expected to be paid by December 31, 2002.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

REVENUE Revenue decreased to $2.7 million for the quarter ended September
30, 2002 from $4.8 million reported for the quarter ended September 30, 2001.
Revenue decreased to $8.5 million in the nine months ended September 30, 2002
compared to $11.6 million for the nine months ended September 30, 2001. The
decrease in revenue was principally related to a significant decline in sales of
videoconferencing products and related service revenues, which accounted for
revenue of $1.3 million and $5.0 million for the three and nine month periods
ended September 30, 2002, respectively, as compared to $3.9 million and $10.4
million for the comparable periods of the prior year. This decrease was offset
by increases in revenues related to sales of the Company's InfoWorkSpace
products of $.4 million and $2.4 million for the three and nine month periods
ended September 30, 2002, respectively.

Revenue from international markets accounted for approximately 20% and 33%
of revenue for the quarters ended September 30, 2002 and 2001, respectively, and
27% and 43% for the nine month periods ended September 30, 2002 and 2001,
respectively.

GROSS PROFIT Cost of revenues includes material costs, costs of software
licenses, manufacturing labor and overhead and customer support costs. For the
periods ended June 30, 2002, cost of revenues included a charge of approximately
$2.3 million representing a writedown of inventory principally used in the
manufacture of videoconferencing products (see Note 2 to the Condensed
Consolidated Financial Statements). Gross profit as a percentage of revenue was
48.4% for the quarter ended September 30, 2002 as compared to 47.4% for the
quarter ended September 30, 2001. For the nine months ended September 30, 2002,
gross profit, excluding the inventory writedown referred to above, was 46.2%
compared to 36.8% in the corresponding period of 2001. The increase in margin is
primarily attributable to the overall decrease in manufacturing and service
costs that were reduced as part of the restructuring and cost reduction plan
implemented in May 2001 and July 2002.

RESEARCH AND DEVELOPMENT Research and development expenses decreased to
$971 thousand for the quarter ended September 30, 2002 from $1.9 million for the
quarter ended September 30, 2001. For the nine months ended September 30, 2002,
research and development expenses were $4.0 million compared to $6.4 million in
the corresponding period of 2001. The decrease is related to the Company's
restructuring and cost reduction plan implemented in May 2001 and July 2002.
This decrease is offset by increased costs attributable to the InfoWorkSpace
product line acquired in March 2001 of $.7 million for the nine month period
ended September 30, 2002.

SALES AND MARKETING Sales and marketing expenses decreased to $882 thousand
for the quarter ended September 30, 2002 from $1.4 million for the quarter ended
September 30, 2001. For the nine months ended September 30, 2002, sales and
marketing expenses were $3.6 million compared to $7.3 million in the
corresponding period of 2001. The decrease was primarily due to the Company's
restructuring and cost reduction plan implemented in May 2001 and July 2002.
Cost savings achieved from the restructuring and cost reduction plan were offset
by added sales and marketing expenses of approximately $.5 million attributable
to the InfoWorkSpace product line acquired in March 2001 for the nine month
period ended September 30, 2002.

GENERAL AND ADMINISTRATIVE General and administrative expenses decreased to
$541 thousand for the quarter ended September 30, 2002 from $615 thousand for
the quarter ended September 30, 2001. For the nine months ended September 30,
2002, general and administrative expenses were $1.8 million compared to $2.4
million in the corresponding period of 2001. The decrease was primarily due to
cost savings associated with the Company's restructuring and cost reduction plan
implemented in May 2001 and July 2002.

OCCUPANCY AND OTHER FACILITIES RELATED EXPENSES Occupancy costs were
approximately $600 thousand during the three month periods ended September 30,
2002 and 2001. For the nine months ended September 30, 2002 and 2001, the
occupancy related costs were approximately $2.5 million. 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

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United States, United Kingdom, Hong Kong and China. As of October 1, 2002, the
Company only occupies space in Colorado, Virginia and Burlingon, Massachusetts.

INTEREST INCOME (EXPENSE), NET Interest income (expense), net, consists of
interest income on cash, cash equivalents and marketable securities offset by
interest expense on the loan from Tandberg. Interest income (expense), net,
decreased to approximately ($14) thousand in the quarter ended September 30,
2002, from approximately $77 thousand in the quarter ended September 30, 2001.
For the nine months ended September 30, 2002, interest income (expense), net was
($4) thousand compared to $719 thousand for the corresponding period of 2001.
The difference was due principally to a decrease in the amount of cash available
for investment and an interest expense of $15 thousand on the loan from
Tandberg.

INCOME TAXES The Federal Job Creation and Worker Assistance Act of 2002,
enacted in March 2002, allowed the Company to carryback net operating losses
incurred in 2001 for a period of up to five years, rather than two years as had
previously been the case. The additional carryback period enabled the Company to
file a carryback claim in March 2002, resulting in the utilization of
approximately $12.5 million of net operating losses that would have expired in
2022 and the recovery of approximately $2.7 million of income taxes paid in
prior years. Provision for income taxes for the three and nine month periods
ended September 30, 2001 represent foreign taxes of the Company's international
subsidiary.

OTHER FACTORS WHICH MAY AFFECT FUTURE OPERATIONS There are a number of
business factors which singularly or combined may affect the Company's future
operating results. Some of them, including our ability to renegotiate the put
agreement, our ability to further develop or sell our enterprise collaboration
software business, liquidity, dependence on major customers, reduced demand for
traditional videoconferencing products, evolving market, rapid technological
change, competition, the ability to successfully implement the Company's
restructuring and cost reduction plan, InfoWorkSpace acquisition, protection of
proprietary technology and retention of key employees have been outlined in the
Company's 2001 Annual Report on Form 10-K for the year ended December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

The Company has incurred substantial recurring operating losses and negative
cash flows, and there is substantial doubt about the Company's ability to
continue as a going concern.

At September 30, 2002, the Company had cash, cash equivalents and marketable
securities of approximately $672 thousand.

Under the put option issued by the Company in connection with its acquisition of
the InfoWorkSpace business, the Company may be required to purchase another $2.9
million of its common stock in December 2002 (see Note 6 to the Condensed
Consolidated Financial Statements). The Company had losses from operations of
$14.6 million and a net loss of $10.7 million for the nine months ended
September 30, 2002.

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, in addition to revising the put agreement. The Company is
attempting to renegotiate the put agreement entered into in connection with its
acquisition of the InfoWorkSpace business unit (see Note 6), but if
unsuccessful, will not have sufficient cash to fulfill its obligations under
that agreement if exercised. In May 2001, the Company implemented a
restructuring and cost reduction plan to reduce operating costs in line with
then anticipated revenues with the ultimate objective of improving operating
margins and becoming cash-flow neutral from operations (see Note 14). Since the
May 2001 restructuring, revenues have not materialized in line with the
Company's expectations. As a result, in July 2002 the Company implemented
another restructuring and cost reduction plan which consisted of the termination
of 55 employees (approximately 50% of its workforce), closing its foreign sales
operations and significantly reducing sales and service operations of its
videoconferencing product lines. (Revenues from videoconferencing products and
services were $5.0 million for the nine months ended September 30, 2002 and
$10.4 million for the nine months ended September 30, 2001.) Costs of the July
restructuring were approximately $.4 million, principally severance payments to
foreign employees, of which approximately $.2 million was paid by September 30,
2002 and the remainder is expected to be paid by December 31, 2002.

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In June 2002, the Company negotiated the termination of the lease of its
Burlington, Massachusetts headquarters and manufacturing facility and in July
2002 moved to more cost-efficient space.

In the quarter ended June 30, 2002, the Company recorded a writedown of
inventory (approximately $2.3 million) associated principally with the
videoconferencing product line and impairment of long-lived assets
(approximately $2.1 million) abandoned as part of the lease termination.

After the July restructuring and lease termination described above, the Company
estimates its cash-flow breakeven point to be approximately $3.5 million to $4.0
million in revenues per quarter. Future revenues are expected to be generated
primarily from sales and services associated with InfoWorkSpace products.

On August 1, 2002, the Company entered into an agreement to sell all patents and
pending applications related to its videoconferencing products. In exchange for
an up-front license fee of $1.25 million, the Company granted a fully-paid,
non-exclusive, non-transferable license under the patents and pending
applications relating to the Company's videoconferencing technology. At the same
time, the Company received a loan for an additional $1.25 million, which was
secured by the licensed patents and pending applications. The Company will
retain a fully-paid, non-exclusive, non-transferable license for use in
connection with its videoconferencing and enterprise collaboration products. The
sale of the patents and pending applications was approved by Ezenia!
shareholders on October 28, 2002, and the sale completed on October 30, 2002. At
the closing, the Company received an additional $2.4 million and all amounts due
under the $1.25 million secured loan were forgiven.

The Company's common stock is presently listed on the Nasdaq SmallCap Market
under the symbol EZEN. All companies with securities listed on the Nasdaq
SmallCap Market are required to comply with certain continued listing standards,
including maintaining a minimum bid price of at least $1.00 per share. The
Company has been unable to meet these listing criteria. However, Nasdaq has
provided the Company a grace period through February 10, 2003 for compliance
with the bid price requirement. On August 14, 2002, Nasdaq notified the Company
that, if the Company is unable to satisfy the $1.00 minimum bid price
requirement within the allotted time period or, prior to that time, if the
Company is otherwise unable to meet the continued listing criteria of the Nasdaq
SmallCap Market, the Company's common stock will be subject to delisting. The
Company does not believe that it is currently in compliance with all listing
criteria other than the $1.00 minimum bid price requirement, and therefore is
also at risk of having its common stock delisted for failure to comply with
Nasdaq SmallCap Market listing criteria. There can be no assurance that the
Company will be able to satisfy the minimum bid price or other continued listing
criteria at any time in the future or that, if pursued, any request for
continued listing would be granted by Nasdaq. In the event that the Company's
common stock is delisted, the market value and liquidity of the Company's common
stock could be materially adversely affected.

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ITEM 3. 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
interest-bearing debt. Therefore, the Company believes the market risks
associated with these financial instruments are immaterial.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the 90 days prior to
the date of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
subsidiaries) required to be included in the Company's periodic SEC filings.

CHANGES IN INTERNAL CONTROLS. There were no significant changes in our internal
controls or to our knowledge, in other factors that could significantly affect
such internal controls subsequent to the date of their evaluation.

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PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

On October 30, 2002, the Company sold all of its patents and patent applications
relating to its multipoint videoconferencing business to Tandberg Telecom AS,
pursuant to an asset purchase agreement, dated as of August 1, 2002, as amended.
The asset purchase agreement was negotiated at arms' length following efforts by
the Company to realize value from those intellectual property assets. The
Company's shareholders approved the transaction on October 28, 2002.

In August, Tandberg paid the Company $1.25 million for a non-exclusive license
to the patents and patent applications and made a $1.25 million secured loan to
the Company. At the closing of the sale on October 30, 2002, Tandberg paid the
Company an additional $2.4 million in cash and forgave all amounts due under the
$1.25 million loan. As part of the transaction, the Company retained a
fully-paid, non-exclusive, non-transferable license to the transferred patents
and patent applications for use in connection with the Company's
videoconferencing and enterprise collaboration businesses.

The Company is not an affiliate of Tandberg or any of its affiliates. Other than
the transaction described above, the Company's only relationships with Tandberg
or its affiliates have been commercial arrangements entered into in the ordinary
course of business.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT

10.1* Asset Purchase Agreement dated as of August 1, 2002 between
the Registrant and Tandberg Telecom AS.
10.2 License Agreement dated as of August 1, 2002 between the
Registrant and Tandberg Telecom AS.
10.3 Promissory Note dated as of August 1, 2002 made by the
Registrant in favor of Tandberg Telecom AS.
10.4 Security Agreement dated as of August 1, 2002 between the
Registrant and Tandberg Telecom AS.
10.5 Ezenia! License Agreement dated as of October 30, 2002
between the Registrant and Tandberg Telecom AS.
99.1 Certification of the Company's Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

Copies of any of these exhibits are available without charge upon written
request to Investor Relations, Ezenia! Inc., Northwest Park, 154 Middlesex
Turnpike, Burlington, MA 01803.

* Incorporated by reference from Annex A to the Company's Proxy Statement
dated September 12, 2002.

(b) Reports on Form 8-K

A Current Report on Form 8-K was filed by the Company with the Securities and
Exchange Commission on August 22, 2002, reporting the Company's submission to
the Securities and Exchange Commission of a certification of Khoa D. Nguyen,
Chief Executive Officer and Chief Financial Officer of Ezenia! Inc., pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EZENIA! INC.

Date: November 14, 2002 By: /s/ Khoa D. Nguyen
-------------------------
Khoa D. Nguyen
Chairman, Chief Executive Officer and Chief
Financial Officer
(Principal Financial and Accounting Officer,
Authorized Officer)

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CERTIFICATIONS

I, Khoa D. Nguyen, the President and Chief Executive Officer of Ezenia! Inc.,
certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ezenia! Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material
information relating to the a registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely a affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 14, 2002 By: /s/ Khoa D. Nguyen
------------------------------
Khoa D. Nguyen
Chief Executive Officer

19

I, Khoa D. Nguyen, the Chief Financial Officer of Ezenia! Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ezenia! Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that material
information relating to the a registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely a affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 14, 2002 By: /s/ Khoa D. Nguyen
-------------------------------
Khoa D. Nguyen
Chief Financial Officer

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