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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended: December 31, 2003

OR

For the transition period from              to             

Commission file number: 0-25186

CAPTARIS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (425) 455-6000

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

Preferred Stock Purchase Rights

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.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

Aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2003 (the Company’s most recent completed second fiscal quarter) was $104,655,151 (based upon the closing sale price of $3.44 per share on the Nasdaq National Market on such date).

Number of shares of Common Stock outstanding as of March 5, 2004 was 32,118,963

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Captaris, Inc.’s Proxy Statement for its 2004 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A not later than 120 days after December 31, 2003 is incorporated by reference in Part III hereof.

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CAPTARIS, INC.

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PART I

This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements. These statements relate to future events or the Company’s future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in the “Factors That May Affect Our Business, Future Operating Results, Financial Condition and Market Price of Our Stock” section included elsewhere in this report. These factors may cause the Company’s actual results to differ materially from any forward-looking statement. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events except as required by securities laws.

Item 1. BUSINESS

We are a provider of business information delivery solutions that integrate, process and automate the flow of messages, data and documents primarily for medium and large-sized enterprises, which we consider to be enterprises with more than 100 employees. We produce a suite of products and services, in partnership with leading enterprise technology companies, delivered through a global distribution network. These products address the fax server market, divided into network fax and production fax, e-document delivery, business process automation, workflow and mobile business markets. We distribute our products primarily through independent distributors and value-added resellers. Our products run on off-the-shelf server hardware, Windows NT, Windows 2000, Windows 2003 and Microsoft.NET, and interface with a wide variety of telephony and computer equipment. We were incorporated in the State of Washington in 1982.

Industry Background

Businesses are optimizing and automating internal processes to improve customer service, increase employee productivity, decrease costs and more efficiently disseminate information. As the amount of information exchanged between organizations increases, and the diversity of the delivery formats and combinations used by organizations to exchange this information becomes more complex, there is a growing need for organizations to find new ways to manage business information and resources in a more timely and cost-effective manner.

The growth in data and document management presents additional opportunities for accessing, processing and sending information. For example, organizations are utilizing electronic document exchange systems and services to store, forward and broadcast their growing volume of e-document traffic in an efficient manner. Electronic messaging over local area networks (“LAN”s), the Internet and corporate intranets has emerged as another way to access data and disseminate information. This rapid increase in multiple forms of data and document management has further accentuated the need for enterprises to optimize and integrate their information management capabilities. Gartner, a leading market research firm that provides research for information technology solutions, has seen many vendors react to enterprise needs to manage content life cycle as well as better integrate applications and information delivery technologies. According to Gartner, there are needs in the enterprise to better integrate applications and information delivery applications. Gartner calls this concept content/process fusion, which is “to combine content management and business process management for better vertical process automation, customer communications management and compliance.” (Gartner FirstTake, “Captaris Buys Teamplate for Content/Process Fusion,” October 2003.) The acquisition of Teamplate effectively enables us to integrate business information delivery with workflow automation solutions.

Fueling additional interest in the business information delivery area are new compliance rules. New emphasis on process and system investments is being driven by the changes in the business operating landscape driven by regulations associated with the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (“HIPAA”) and other government regulations.

Strategy

In early 2003, we concluded our resources were spread across too many product lines and markets, and in mid-2003, we narrowed our focus to enterprise business information delivery solutions. This focus targets mid to large size enterprises to manage the flow of messages, data and documents and improve business process performance through integration of content and processes corporate wide, while leveraging existing information technology systems.

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As part of the change in strategic direction, in the third quarter of 2003, we divested the CallXpress voice mail and unified messaging product line and the MediaLinq outsource fax division. We believe this shift in strategic direction will allow continued significant investment in what we believe to be higher growth opportunities in the business information delivery solutions area.

We also acquired Teamplate, Inc. (“Teamplate”) in the third quarter of 2003, which develops and markets business process automation software built on the Microsoft.NET architecture platform. Our decision to enter the workflow market is a natural extension and complement to our existing RightFax product offering, a market leader in enterprise fax and e-document delivery solutions.

We believe that mobile business applications and particularly mobile access to groupware and corporate data, is a differentiating technology component of our core products. As such, we intend to invest judiciously in opportunities in the mobile business solutions area to enhance access capabilities of our business process automation and information delivery solutions to mobile devices and interfaces.

We regularly evaluate our product lines and operating units not only for their contribution to current results, but also for their potential for long-term benefits. Based upon the results of such evaluations, we may continue to divest or take other actions to improve the performance of product lines and/or operating units.

Key components of the Company’s strategy include:

Focus on the enterprise market. We target mid to large enterprises, including divisions and subsidiaries of Fortune 1000 companies. Our strategy is to continue to invest in new product and service development and innovative marketing initiatives to gain market share and further meet the needs of these enterprises.

Grow through strategic acquisitions. We believe that growth through strategic acquisitions of complementary technologies, products and distribution channels offers the potential for significant competitive advantage. Our open platform facilitates the rapid integration of, and linkage to, other complementary technologies, especially as we integrate web services into our overall architecture. We believe we are therefore able to accelerate introduction of new technologies to the market through acquisition, and to respond rapidly to industry changes and opportunities.

Expand worldwide support and maintenance program. We intend to continue expanding our services portfolio, which includes technical support, training, maintenance and professional services. We are striving to increase the percentage of our customers who contract for maintenance and technical support plans and to increase enterprise-level service agreement offerings. After instituting improvements in technical support and software upgrade programs, we are in the process of making first year maintenance a requirement for customers. The Captaris Developer Program, launched in July 2003, provides developers with application programming interface (“API”) support across the entire Captaris product line, including RightFax. This program feeds innovations into the Captaris Solutions Catalog of certified third party applications, which launched in May 2003 with a first set of catalog entries including FaxFiler, an extensive archiving system for RightFax deployments.

Capitalize on installed base. We intend to capitalize on our installed base by extending our product offerings into other departments within our customer base, as well as offering add-on modules, software upgrades and new products, which are designed to provide increased capacity and functionality.

Diversify distribution architecture. We target enterprises primarily through distributors and value-added resellers. We also distribute through strategic partner relationships and an enterprise sales force. We believe the use of multiple distribution channels and routes to market that target many of the same potential customers increases the likelihood that our products and services will be sold to a particular customer.

Leverage strategic technology partnerships worldwide. We continue to broaden our distribution channels by expanding our direct sales efforts and by continuing to enter into distribution agreements with private label original equipment manufacturers (“OEM”s) and strategic partners, including Microsoft Corporation, FileNet Corporation, Oracle Corporation, SAP Corporation, Siebel Systems, Inc., IBM Corporation’s Lotus Software, Xerox Corporation, Hewlett Packard Company and others.

Pursue global opportunities. We believe that the market for business information delivery solutions outside the United States will experience growth in the next few years. To pursue these opportunities, we intend to continue to localize our products for specific markets and to actively recruit new international resellers, distributors and strategic partners.

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Pursue mobile business solutions market. In early 2001, we announced that we were expanding our business strategy to focus on the mobile business solutions market and particularly mobile access to groupware and corporate data, which we believed were markets likely to experience significant growth. Such growth in this portion of the market has not materialized at the rate expected, and accordingly, our investment in mobility products is primarily intended to leverage and enhance our business process automation and electronic delivery products. We intend to invest judiciously in this area until such time as we believe market adoption for such stand-alone products is likely to increase to the level necessary for us to experience a profitable contribution.

Products and Services

Our product lines include computer- and mobility-oriented products. Our computer-oriented product lines target the fax server, document delivery and information exchange markets and focus on high-performance fax processing, e-document delivery and business process automation as well as Internet and corporate intranet information access. The mobility market adds a key competitive differentiator to our business process automation and document delivery offerings by allowing customers to use our products to enhance productivity and to access information from a wide variety of Web-enabled devices. The following summary provides an overview of our products and services.

Enhanced Electronic Document Delivery Products

RightFax

RightFax provides organizations with enterprise fax and advanced electronic document delivery solutions. The RightFax product suite offers a range of solutions that provide software for simple desktop faxing over a network capturing high volumes of business-critical data from back-office applications and delivering this data electronically to multiple recipients.

With the release of the RightFax 8.5 product line in 2002, product bundles offer customers simple solutions that are designed to fit within their existing corporate IT infrastructure. As their business needs expand, upgrade packages are designed to make it easy for them to move beyond day-to-day faxing to automating their key business processes and optimizing workflow. This is accomplished by using the more advanced RightFax solutions that are designed to integrate with enterprise applications developed by companies such as Microsoft Corporation, IBM Corporation’s Lotus Software, Oracle Corporation, Siebel Systems, Inc., SAP Corporation, Xerox Corporation, Hewlett Packard Company and FileNet Corporation.

RightFax products allow end-users to fax any document directly from applications running on their desktop or workstation. In addition, incoming faxes can be directly routed to end-users’ desktops and can also be sent from or received into their e-mail inboxes. The products are designed to ensure that faxes are secure, kept confidential and to eliminate the need for individuals to walk to fax machines, wait in line, or search for faxes. The same fax system is designed to integrate with other critical business applications, including operational and accounting applications, that generate documents typically printed on forms and mailed. RightFax automates this process by creating electronic images of the documents and delivering them automatically and instantaneously via fax, e-mail or over the Internet. For organizations that receive substantial amounts of inbound faxes, such as mortgage or insurance companies, these documents are received electronically and automatically routed to the intended recipient. This saves companies’ time and money while improving accuracy and reliability by eliminating manual processes and the expense of mailing documents. RightFax products are also designed to improve cash flow by reducing the time necessary to exchange invoices, statements and other electronic commerce documents with customers, vendors and partners.

The primary offerings in the RightFax product line include several new vertical and strategic partner offerings that were launched in the fourth quarter of 2003 consisting of the following:

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In 2004, we plan to release additional vertical packages, new product release versions and integrated offerings with RightFax and our new Teamplate product, offering additional workflow capabilities to RightFax.

Business Process Automation Products

Teamplate.NET

In September 2003, we acquired Teamplate, Inc., a provider of rapid business process automation. Teamplate’s workflow management server Teamplate for .NET is a workflow platform built on the Microsoft .NET Framework for Web Services. Teamplate for .NET is a business process workflow technology developed to take full advantage of the .NET environment, making it an easily and reliably integrated workflow solution. With the 4.0 version, Teamplate integrates business processing with Microsoft Outlook, reducing training costs, and accelerating user acceptance. Teamplate for .NET is specifically suited to improve operational processes for midsize and large businesses that have standardized on Microsoft technologies. We believe Teamplate for .NET offers significant advantages over past workflow automation approaches with a design that facilitates rapid, understandable, affordable, and robust solutions that are highly scalable. Used to streamline the interaction between business people and enterprise software applications, Teamplate workflow solutions are implemented by managers in any functional area of a business.

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CMS Wizard

The Teamplate Workflow Wizard combines with Microsoft Content Management Server (“CMS”) to deliver modern business process workflow to support any Web publishing process. Teamplate enhances CMS’s native workflow capabilities to support multi-party approval processes. It also provides extensive documentation support to record the “who, what, when and where” of business-critical Web publishing. The Workflow Wizard is delivered as an easy-to-use extension that leverages CMS’s own user interface, making it simple for administrators, editors and Web publishers to create simple or complex approval workflows with minimal training. Teamplate Workflow Wizard for Microsoft CMS is sold separately and may be upgraded to the full Teamplate for .NET product for further customization and integration beyond the Microsoft CMS environment.

SharePoint Wizard

The Teamplate Workflow Wizard combines with Microsoft SharePoint Products and Technologies to deliver business process workflow to portals and collaborative workspaces maintained by Microsoft SharePoint. Teamplate structures the collaboration between groups, systems and individuals and provides accountability by documenting and recording collaboration activities. Typical business process applications include publishing approvals, archiving processes, and collaborative document review and editing. The Workflow Wizard is delivered as an easy-to-use extension that leverages SharePoint’s own user interface, making it simple for SharePoint users and administrators to create simple or complex workflows with minimal training.

Mobile Business Solutions Products

Infinite Mobile Delivery

We believe our mobility offerings represent a competitive differentiator as an added extension of our core product offerings. The Infinite product line is designed to function as a set of technologies that provide a mobile access component for mobile viewing, printing and notification in support of current and future product offerings.

Infinite WAP Gateway and Push Proxy Gateway

Infinite Wireless Application Protocol (“WAP”) Gateway is a scalable product designed to meet the needs of mobile operators, Internet service providers (“ISP”s) and enterprise markets. WAP Gateways are an essential component in WAP communications processes and a necessity for providing WAP services to customers, particularly in international markets. In addition, Infinite WAP Gateways have been purchased by financial services companies interested in managing and securing their wireless communications flow from end-to-end by deploying the WAP Gateway behind their own corporate firewall.

In December 2003, we announced the new Infinite Push Proxy Gateway (“PPG”). This product is a natural companion to the Infinite WAP Gateway and can also be used independently to allow applications to send Short Message Service (“SMS”), Wireless Application Protocol, Push and Multimedia Messaging Service (“MMS”) notifications to mobile users.

Professional Services

The Captaris Solutions Team provides strategic technology consulting, custom development, integration of third party technologies and other services. Our services include:

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Distribution

We sell our products primarily through an indirect channel of resellers and distributors, strategic partnerships and OEM and private label agreements, as well as through our team of global/national account managers that hold dedicated business relationships with named accounts out of the Fortune-100 list. We believe the use of multiple distribution channels that access many of the same potential customers increases the likelihood that our products will be sold to a particular customer.

Revenue from the acceleration and conclusion of an OEM agreement with Cisco Systems, Inc. represented 14% of the Company’s net revenue for the year ended December 31, 2003. Excluding revenue from the Cisco OEM agreement, no single customer represented more than 10% of the Company’s net revenue for the years ended December 31, 2003, 2002 and 2001.

We have OEM agreements with several partners, including FileNet, AVST and the Xpedite division of PTEK, Inc. These partners market and sell RightFax products and services in conjunction with their own core products and service portfolios, adding more value to their customers with an integrated go-to-market approach. In some cases, these OEM agreements provide minimum revenue commitments.

Domestic Distribution

In the United States, our sales force sells most of our enterprise fax and electronic document delivery products through an indirect channel of value-added resellers, independent software vendors, and professional services companies specializing in custom systems development. These resellers are small to medium-sized, regionally focused organizations. In addition, we market our products directly to end-user customers through a direct sales force and a diverse mix of direct marketing activities.

Resellers attend Captaris-sponsored training sessions on system usage, installation, maintenance and customer support. Advanced training is also available from us on an ongoing basis. All resellers are subject to agreements with us covering matters such as payment terms, protection of proprietary rights and non-exclusivity of sales territories. These agreements generally do not restrict the dealer’s ability to carry competitive products.

International Distribution

We continue to develop broad coverage of international markets through a variety of dealer, distributor, and strategic relationships. We are actively recruiting new resellers and distributors in international markets. We have sales and support offices in the Netherlands, Hong Kong, Australia and Dubai. We also have sales and support personnel in the United Kingdom and Germany. We conduct business transactions in U.S. dollars, Canadian dollars, Australian dollars, U.K. pounds sterling and the Euro.

International revenue was 22.5%, 24.2% and 26.6% of total net revenue for 2003, 2002 and 2001, respectively. Additional financial information relating to our international operations is set forth in Note 18 of our financial statements.

Product Support

We sell a variety of support packages primarily to end-users of our e-document products in addition to bundling 30 days of telephone support with each of our software licenses. Our maintenance and support agreements provide customers with telephone support and unspecified upgrades and updates on a when-and-if-available basis, as well as bug fixes. Our maintenance

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and support agreements generally have terms from one to five years and the revenue associated with these agreements is recognized straight-line over the life of the contract. Telephone support is provided via support specialists located in our offices in Tucson, Arizona, Portland, Oregon, Bellevue, Washington, Sydney, Australia and Nieuwegein, Netherlands.

We also launched a new online training program called The Captaris Learning Center in October 2003 to meet a number of strategic goals, including the ability to allow our customers to register for courses online, manage their curriculum, track their class history, receive training announcements on a regular basis, complete online surveys of classes taken and register and take Web-based training from one location. This is a subscription-based service and we recognize the revenue from this service straight-line over the term of the subscription.

Product Development

We have established expertise in the development of systems that route, process, render and deliver a variety of messaging, data and documents, including fax, voice, e-mail and corporate content, as well as integration with back-end office systems and databases. These systems handle message, data and document delivery spanning a wide range of input and output types. Additionally, we have expertise in the development of LAN and Internet software applications, integrations and services. We believe that our expertise in these areas enables us to efficiently bring to market innovative software products.

Our development of our product offerings is centrally coordinated in our corporate headquarters in Bellevue, Washington. We maintain four primary product development centers: Bellevue, Washington, Tucson, Arizona, Portland, Oregon, and Calgary, Canada. In total, we employ 83 engineers, technicians and quality assurance specialists in our development centers as of December 31, 2003. The integration of technologies has allowed us to consolidate and leverage development efforts among these groups. We expect these cross-development efforts to continue in the future.

We internally develop or acquire our defining core technologies, but believe that it is more cost-effective to license from third parties certain broad-based, generic or non-strategic components of our products, such as database software, imaging, and network connection software. Whenever practical, we will license and integrate such technology into our product offerings in order to decrease the cost of development and shorten the time to market. We also believe that the acquisition of new technology and new product offerings is consistent with our strategic initiatives, and we will continue to pursue such opportunities as they become available.

For our product offerings to continue to achieve acceptance and remain competitive, we believe it will be necessary to continue to develop enhanced versions of our software applications. We expect to continue to expend significant research and development efforts in developing new technology.

We intend to continue to develop versions of our products that have been prepared for localization in foreign markets. This globalization effort includes converting client interfaces and documentation into foreign languages. The effort will also include the expansion of internal character sets to accommodate a broader set of potential foreign languages. We expect to continue to expend research and development resources on these efforts.

Proprietary Rights

We rely on a combination of patents, copyrights, trademarks and trade secret laws, nondisclosure and other agreements and technical measures to protect our proprietary technology. We own seven U.S. patents, including one patent received in the area of unified messaging, five patents in the area of fax technology that were purchased in 2000 and one patent in the area of speech compression that was purchased in 2002. The issued patents will expire between 2014 and 2019. We also own 11 pending patent applications in the U.S. and internationally in a wide range of areas, including telephony, fax, unified messaging and mobility-related messaging. There can be no assurance that our efforts to protect our proprietary rights will be successful. In particular, there can be no assurance that our current or future patent applications will be granted or that our current or future issued patents will not be challenged, invalidated or circumvented, or that the rights granted under any such patents will provide competitive advantages to us.

We have periodically received letters and other communications from third parties asserting patent rights and requesting royalty payments. Following analysis, we do not believe it necessary, in most cases, to license any of the patent rights. In those cases in which we have determined a license of patent rights was necessary, we have entered into a license agreement.

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We license certain portions of our technology from third parties under written agreements, some of which contain provisions for ongoing royalty payments. Our royalty expense was 1.1% of revenue in 2003 and less than 1% of revenue in 2002 and 2001.

Competition

The business information delivery and business process management markets are quickly evolving, highly competitive and subject to rapid technological change. Moreover, we expect to face increasing competitive pressures from both current and future competitors in the markets we serve. The principal competitive factors applicable to our products and services include:

Our competitive position with respect to these factors varies depending on the market. For our enhanced electronic document delivery products, we believe that we compete favorably in our target markets. For our business process automation products, we face many competitors, large and small. However, competitors offering similar products designed for rapid deployment by knowledge workers, using similar architecture are generally small companies. With the acquisition of Teamplate in September 2003, we are a recent entrant into the business process automation market. Our mobility products are bundled with our electronic document delivery and business process automation products. While we believe that our mobile products are feature-rich and compare favorably against other entrants in the mobility market, the lack of market acceptance of stand-alone mobility products creates an increased level of uncertainty with respect to our competitive position.

Because we offer a wide range of products and services for several types of enterprises, we have a broad range of competitors. Some of our competitors are substantially larger than us and have significantly greater financial, sales, marketing, distribution, technical, development and other resources.

In the market for electronic document delivery products, our principal competitors are Esker, Inc. S.A., Biscom, Inc., TOPCALL International AG, Omtool, Ltd., Fenestrae and GFI Software, Ltd. Our fax server products also compete with vendors offering a range of alternative fax solutions, including operating systems containing fax and document transmission features, low-end fax modem products, desktop fax software, single-platform fax software products and customized proprietary software solutions.

The direct competitors of our business process automation products include K2.net (SourceCode Technology Holdings, Ltd.), Metastorm, Ultimus, Inc., and Skelta Software, Pvt. Ltd.

Order Fulfillment

Our order fulfillment operations consist primarily of compact disc duplication, documentation fulfillment and distribution of fax boards. We contract with outside vendors to provide full systems integration and assembly in certain product distribution situations.

Our products incorporate a number of commercially available application cards and fax cards that enable integration with certain fax servers. We currently purchase fax boards from Brooktrout, Inc. and the Dialogic division of Intel, Inc. We depend upon these third-party manufacturers for fax boards. If these manufacturers terminate their relationships with us or are unable to fill orders on a timely basis, or experience quality performance issues, we may be unable to meet customer demands, which could delay or decrease our revenue or otherwise have an adverse impact on our operations.

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Employees

As of December 31, 2003, we had 315 full-time employees, including 53 in finance and administration, 7 in order fulfillment, 83 in engineering and product development and 172 in sales, marketing and technical support. Our employees enter into agreements containing confidentiality restrictions. We have never had a work stoppage, and no employees are represented by a labor organization. We consider our employee relations to be good.

Available Information

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Exchange Act are available free of charge on our website as soon as reasonably practicable after the reports have been filed with or furnished to the Securities and Exchange Commission (“SEC”) at http://www.captaris.com under “About—Investor Relations—SEC Filings.” In addition, the following corporate governance materials of Captaris are also available in the “About— Investor Relations” section of the Company’s website at http://www.captaris.com and a copy of the materials will be mailed to you upon request to Captaris, Investor Relations, 10885 NE 4^th Street, Bellevue, WA 98004.

The Captaris Ethics Guidebook is comprised of three sections: Ethical Business Practices, Accounting Practices Complaint Process, and Code of Ethics for our CEO and senior financial officers. If we waive any material provision of our Code of Ethics for our CEO and senior financial officers or substantively change the code, we will disclose that fact on our website within five business days.

FACTORS THAT MAY AFFECT OUR BUSINESS, FUTURE OPERATING RESULTS,

FINANCIAL CONDITION AND MARKET PRICE OF OUR STOCK

The following factors may materially adversely affect our business, financial condition or results of operations. In that event, the trading price of our common stock could decline and shareholders may lose part or all of their investment. Therefore, shareholders should carefully consider the risks described below before making an investment decision.

Our stock price has been highly volatile.

The market price of our common stock has been and may continue to be highly volatile. The future price of our common stock may fluctuate in response to factors, involving our competitors or us, such as:

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In addition, the market prices of securities issued by many companies, particularly in high-technology industries, are volatile for reasons unrelated to the operating performance of the specific companies. This industry volatility, along with broad market fluctuations, may adversely affect the market price of our common stock.

Our quarterly sales patterns fluctuate, causing our quarterly operating results to vary. These operating results may fall below expectations of securities analysts and investors.

We expect our operating results to fluctuate significantly from quarter to quarter in the future. Because of these fluctuations, our operating results for a particular quarter may fall below the expectations of securities analysts and investors. If this occurs, the trading price of our common stock may decline. Such fluctuations could cause period-to-period comparisons to be less than meaningful. Numerous factors contribute to the unpredictability of our operating results, including:

Most of our software product revenue comes from current quarter orders and sales, of which a substantial portion has, at times, occurred in the last month of the quarter. We do not maintain a large backlog of orders and most of our distributors maintain little or no inventory. Order fulfillment cycles are typically short and often as short as one to two days. Accordingly, the timing of customer orders can cause significant variations in quarterly results of operations. Because we sell our products to end-customers through various third parties, such as value-added resellers and independent distributors, we are unable to project with certainty the actual orders, sales, and revenue these third parties will generate in a given quarter. The combination of these factors impairs and delays our ability to know when revenue and earnings will be higher or lower than expected. We base product development and other operating expenses on our expected revenue. Because our expenses are relatively fixed in the short term, we may be unable to adjust our spending in time to compensate for any unexpected shortfall in quarterly revenue.

We depend on third parties for certain key components of our products.

Our fax products operate on standard computer hardware, most of which is readily available. However, only two domestic suppliers can provide fax processing circuit boards to meet our specifications. Historically, we have relied almost exclusively on Brooktrout, Inc. for fax boards. We rely on this supplier primarily because of volume price discounts and the cost and effort required to develop software for alternate fax boards. Significant changes in technology, issues regarding quality performance, delays, interruptions or reductions in our supply of fax boards, or unfavorable changes to price and delivery terms could adversely affect our business.

We rely heavily on independent distributors and value-added resellers.

A substantial majority of our revenue depends on a network of computer-oriented value-added resellers and independent distributors. There is intense competition for the attention of these resellers from our competitors and from providers of other products distributed through these channels. Many of these resellers do not have the financial resources to withstand a downturn in their businesses. We may not be able to maintain or expand our network of resellers in the future. Moreover, our resellers may not maintain or expand their present level of efforts to sell our products. If we lose a major dealer or reseller, or if our dealers and resellers lose interest in selling our products, our business, results of operations and financial condition may be adversely affected.

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Failure to establish and maintain strategic relationships could limit our ability to maintain or increase revenue.

Creating and maintaining strategic relationships is important to our success, because these relationships enable us to market and distribute our products to a larger customer base than we could otherwise reach through our direct marketing efforts. We may not be successful in creating new strategic relationships on acceptable terms, if at all. Moreover, although we view our strategic relationships as an important factor in the successful commercialization of our products, our current strategic partners may not view their relationships with us as significant for their own businesses, and any one of them could reassess their commitment to us in the future. Further, our strategic relationships are generally non-exclusive, which means our strategic partners may develop relationships with some of our competitors. Failure of one or more of our strategic partners to successfully develop and sustain a market for our products, or the termination of one or more of our strategic relationships, could adversely affect our ability to maintain or increase revenue.

Additionally, our strategic partners from time to time require us to customize our products and/or develop further enhancements or capabilities. If we are unable to meet these requests in a timely manner, our relationships with our partners and operating results could be negatively impacted.

Our market is highly competitive.

The business solutions market is highly competitive and is rapidly changing. We may not have the financial resources, marketing, distribution and service capability, and depth of key personnel or technological knowledge to continue to compete successfully in each of our markets.

We believe the main competitive factors affecting our business are breadth and quality of software alternatives, product integration, ability to respond to technological change, relationships with distributors, strategic partners, value-added resellers and systems integrators, price, size of the installed base, level of customer support and professional services.

In the market for LAN-based fax systems, our principal competitors are Esker, Inc. S.A., Biscom, Inc., TOPCALL International AG, Omtool, Ltd., Fenestrae and GFI Software, Ltd. Our fax server products also compete broadly with vendors offering a range of alternative fax solutions, including operating systems containing fax and document transmission features, low-end fax modem products, desktop fax software, single-platform fax software products, outsource fax players and customized proprietary software solutions. In the market for production fax systems, our principal competitors are Biscom, Inc., Esker, Inc. S.A. and TOPCALL International AG. The direct competitors of our business process automation products include K2.net (SourceCode Technology Holdings, Ltd.), Metastorm, Ultimus, Inc. and Skelta Software, Pvt. Ltd.

We may not be able to compete successfully against current and future competitors and the competitive pressures we face could harm our business and prospects. We expect the competition in our markets to increase over time. There can be no assurance that our current or future competitors will not develop products comparable or superior – in terms of price and performance features – to those developed by us or be able to adapt more quickly than we can to new or emerging technologies and changes in market opportunities. Increased competition may result in changes in market share or pressure for price reductions and related reductions in gross margins, any of which could materially affect our ability to achieve our financial and business goals. There can be no assurance that in the future that we will be able to successfully compete against current and future competitors.

Technology and customer demands change rapidly in our industry.

In our industry, technology and customer demands change rapidly, and our competitors frequently introduce new products and features. To succeed, we must identify, develop and market new products, features and services that achieve broad market acceptance by satisfying those changing customer needs and keeping pace with those technological developments. To do this, we must spend substantial funds on product development. We regularly devote significant resources to technologies that we anticipate will be widely adopted. To be successful, we must, among other things, develop and market products and services that achieve broad market acceptance. We may not be able to develop new products or product enhancements on a timely basis. Even if we do, the market may not accept the new products or product enhancements that we develop, and accordingly, the results of our operations may be adversely affected.

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We face risks from expansion of our international operations.

Maintaining or growing our revenue depends, in part, on continued expansion of our international product sales. We have focused significant management attention and financial resources to our international operations. Significant portions of our revenue are subject to the risks associated with international operations, which include:

In addition, the laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as the U.S. Moreover, we could be sued for patent infringement or other intellectual property violations in a foreign country where it could be very costly to defend such a lawsuit.

Currently, substantially all of our revenue is denominated in U.S. dollars. We price our international sales to the United Kingdom in U.K. pounds sterling, to Canada in Canadian dollars, to Australia in Australian dollars, and to participating European Community countries in Euros. Increases in the value of the dollar against any local currencies could cause our products to become relatively more expensive to customers in a particular country or region, leading to reduced revenue or profitability in that country or region. As we continue to expand our international operations, we expect our non-U.S.-dollar-denominated revenue and our exposure to gains and losses on international currency transactions to increase. We do not currently engage in transactions to hedge against the risk of currency fluctuations, but we may do so in the future.

Our investment in the business process automation market, which is an unproven market, may not be successful.

In September 2003, with the acquisition of Teamplate, we announced that we are expanding our business strategy to focus on the business process automation market. Our business strategy is to become a leading provider of business information delivery solutions. In the future, in order to implement our strategy, we must continue to design, develop and introduce competitive new products. Execution of this strategy may involve a substantial increase in costs and, as a result, our expenses could increase disproportionately to revenue in the future. We cannot guarantee that demand for business information delivery solutions will grow in the future, that new technologies will not cause the market to evolve in a manner different from what we expect or that we will be able to obtain a leadership position in this market opportunity or that our investment in this unproven market will be successful.

Our investment in the mobile business solutions market, whose technology offerings and customers buying behaviors have undergone significant changes, may not be successful.

In March 2001, we announced that we were expanding our business strategy to focus on the mobile business solutions market, which we believed to be a potential higher-growth opportunity. We continue to believe that this market is likely to develop over time, but it has been slower to develop than we anticipated. Certain early entrants to this market have not achieved their publicly forecasted financial results. To date, a significant share of market revenue has been in mobile services rather than in deployed software licenses for mobile solutions.

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While we will continue to embed our mobility technology to address the mobile workforce as part of our business information delivery solutions, we have reduced our development resources applied to this technology. There can be no assurance that we will realize a return on our past or future costs incurred in this unproven, stand-alone mobile business solutions market. In 2002, we determined that most of the goodwill and intangible assets of our mobile business solutions group were impaired, resulting in a non-cash charge of $2.7 million that was recorded as a cumulative effect of change in accounting principle effective January 1, 2002, and an impairment charge of $5.5 million that was recorded in the second quarter of 2002.

In the future, if the market for mobile business solutions develops, competing in this market would likely require an increase in our development and marketing efforts disproportionate to potential revenue streams. Accordingly, the results of our operations may be negatively impacted. Moreover, future focus on this strategy could disrupt our other operations and distract management, which could have a material adverse effect on our operating results. We cannot guarantee that the demand for mobile business solutions will develop in the future, that new technologies will not cause the market to evolve in a manner different from what we expect or that we will be able to obtain a leadership position if this market opportunity develops.

The integration of recent and any future acquisitions may be difficult and disruptive.

We frequently evaluate potential acquisitions of products, technologies and businesses. The acquisition of Teamplate in September 2003, as well as any future acquisitions we may undertake, may direct management’s attention away from the day-to-day operations of our business and may pose numerous other risks. For instance, we may not be able to successfully integrate technologies, products, personnel or operations of companies that we may acquire.

In making acquisitions, we may need to make significant cash payments and dilutive issuances of our equity securities, incur debt, write-off purchased in-process research and development, amortize expenses related to other intangible assets and incur restructuring charges as well as costs of integrating personnel and operations.

Our average sales prices may decline for some of our products.

If the average sales prices of our more significant products decline, our overall gross margins will likely decline. To offset and forestall potential declines in average sales prices, we must continue to develop product enhancements and new products with advanced features that are likely to generate higher-margin incremental revenue. If we are unable to do so in a timely manner, or if our products do not achieve significant customer acceptance, our business, results of operations and financial condition may suffer.

Subsequent activities related to the sale of our CallXpress product line and MediaLinq division, and activities surrounding liabilities retained by us in these dispositions, may continue to be disruptive to our ongoing operations.

In September 2003, we sold our CallXpress product line and MediaLinq division. Such dispositions were intended to allow us to focus our resources on products and services we have determined to be critical to our long-term success. The impact of these dispositions, the associated change in our business focus and the retained liabilities related to certain legal proceedings (See Item 3 of this Part 1) and indemnifications provided by us to the buyers for certain representations and warranties, may continue to be disruptive to our ongoing business, may negatively impact our operations in the near term and may be distracting to management or our workforce in general. Moreover, although the dispositions are intended to improve our long-term results of operations, there can be no assurance that we will realize the benefits we expect from these dispositions.

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Security breach of confidential data may expose us to additional costs and to litigation, which could harm our business.

Our business information delivery solutions may involve the transmission of business-critical, proprietary or confidential information. If the security measures that we implement are breached or if there is an inappropriate disclosure of confidential information, we could be exposed to litigation and possible liability. Even if we were not held liable, a security breach or inappropriate disclosure of confidential information could harm our reputation, and even the perception of a security risk could inhibit market acceptance of our products and services. In addition, we may be required to invest additional resources to protect us against damages caused by these actual or perceived disruptions of security breaches in the future.

Further, our applications may be vulnerable to unauthorized and illegal access, sabotage, computer viruses and other disruptive problems, including natural disasters. Eliminating computer viruses and addressing other security problems may cause either loss or compromise of data or interruptions, delay or cessation of service to users accessing our business information delivery applications, which could harm our business, expose us to risks of loss or litigation and possible