e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2005


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

For the transition period from to

Commission file number: 0-18391

ASPECT COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)


California		94-2974062
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1320 Ridder Park Drive, San Jose, California 95131-2312
(Address of principal executive offices and zip code)

Registrant’s telephone number: (408) 325-2200

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 R No £

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes R No £

The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 61,688,300 at July 29, 2005.

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share amounts – unaudited)


	June 30, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	113,398		$	89,250
Short-term investments		113,630			113,381
Accounts receivable, net		46,071			49,163
Inventories		3,621			3,340
Other current assets		15,291			13,138

Total current assets		292,011			268,272
Property and equipment, net		64,906			62,494
Intangible assets, net		861			2,308
Goodwill, net		2,707			2,707
Other assets		3,918			4,723

Total assets	$	364,403		$	340,504

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	101		$	150
Accounts payable		7,378			7,491
Accrued compensation and related benefits		16,668			19,252
Other accrued liabilities		60,063			61,954
Deferred revenues		52,844			48,003

Total current liabilities		137,054			136,850
Long term borrowings		103			155
Other long-term liabilities		2,383			5,793

Total liabilities		139,540			142,798
Redeemable convertible preferred stock, $0.01 par value: 2,000,000 shares authorized, 50,000 outstanding		47,166			42,490
Shareholders’ equity:
Common stock, $0.01 par value: 200,000,000 shares authorized, shares outstanding: 61,609,494 at June 30, 2005 and 60,370,631 at December 31, 2004		616			604
Additional paid-in capital		257,495			250,391
Deferred stock compensation		(215	)		(283	)
Accumulated other comprehensive loss		(3,166	)		(1,644	)
Accumulated deficit		(77,033	)		(93,852	)

Total shareholders’ equity		177,697			155,216

Total liabilities, redeemable convertible preferred stock and shareholders’ equity	$	364,403		$	340,504

See Notes to Condensed Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data – unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net revenues:
Software license	$	14,023		$	18,961		$	33,150		$	35,566
Hardware		10,914			10,885			22,651			22,415
Services:
Software license updates and product support		51,852			52,566			103,407			106,823
Professional services and education		8,814			8,573			16,998			17,668

Services		60,666			61,139			120,405			124,491

Total net revenues		85,603			90,985			176,206			182,472

Cost of revenues:
Cost of software license revenues		2,372			3,024			5,864			5,304
Cost of hardware revenues		8,318			8,252			15,451			16,583
Cost of services revenues		25,597			25,273			51,158			50,512

Total cost of revenues		36,287			36,549			72,473			72,399

Gross margin		49,316			54,436			103,733			110,073
Operating expenses:
Research and development		10,910			11,169			22,310			22,529
Selling, general and administrative		26,094			27,261			54,577			53,800
Restructuring charges		3,931			—			4,342			—

Total operating expenses		40,935			38,430			81,229			76,329

Income from operations		8,381			16,006			22,504			33,744
Interest income		1,582			954			2,800			1,711
Interest expense		(144	)		(499	)		(309	)		(1,017	)
Other expense		(273	)		(78	)		(568	)		(371	)

Net income before income taxes		9,546			16,383			24,427			34,067
Provision for income taxes		1,147			1,955			2,933			4,065

Net income		8,399			14,428			21,494			30,002
Accrued preferred stock dividend and accretion of redemption premium		(1,980	)		(1,818	)		(3,919	)		(3,597	)
Amortization of beneficial conversion feature		(381	)		(362	)		(756	)		(719	)

Net income attributable to common shareholders	$	6,038		$	12,248		$	16,819		$	25,686

Basic and diluted earnings per share attributable to Common shareholders (See Note 8)	$	0.07		$	0.15		$	0.20		$	0.32

Weighted average shares outstanding, basic and diluted		61,337			58,756			61,047			58,248

See Notes to Condensed Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands-unaudited)


	Six months ended June 30,
	2005			2004
Cash flows from operating activities:
Net income	$	21,494		$	30,002
Reconciliation of net income to cash provided by operating activities:
Depreciation		8,102			11,846
Amortization of intangible assets		1,447			1,467
Non-cash compensation and services expense		591			523
Tax benefit from employee stock option plans		1,211			—
Loss on disposal of property		463			19
Loss on short-term investment, net		692			798
Changes in operating assets and liabilities:
Accounts receivable, net		1,580			2,087
Inventories		(398	)		174
Other current assets and other assets		(1,617	)		2,156
Accounts payable		(88	)		1,322
Accrued compensation and related benefits		(2,358	)		1,725
Other accrued liabilities		(4,056	)		(12,470	)
Deferred revenues		5,576			11,033

Cash provided by operating activities		32,639			50,682

Cash flows from investing activities:
Purchase of investments		(64,630	)		(110,501	)
Proceeds from sales and maturities of investments		63,505			65,418
Property and equipment purchases		(11,141	)		(8,618	)

Cash used in investing activities		(12,266	)		(53,701	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net		5,371			9,762
Payments on capital lease obligations		(101	)		(68	)
Proceeds from borrowings		—			40,000
Payments on borrowings		—			(40,979	)
Payments on financing costs		—			(1,096	)

Cash provided by financing activities		5,270			7,619

Effect of exchange rate changes on cash and cash equivalents		(1,495	)		560

Net increase in cash and cash equivalents		24,148			5,160

Cash and cash equivalents:
Beginning of period		89,250			75,653

End of period	$	113,398		$	80,813

Supplemental disclosure of cash flow information:
Cash paid for interest	$	310		$	1,016
Cash paid for income taxes	$	3,259		$	3,882
Supplemental schedule of non-cash investing and financing activities:
Accrued preferred stock dividend and amortization of redemption premium	$	3,919		$	3,597
Amortization of beneficial conversion feature	$	756		$	719
Issuance of restricted stock	$	—		$	408

See Notes to Condensed Consolidated Financial Statements

ASPECT COMMUNICATIONS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

Note 1: Basis of Presentation

The condensed consolidated financial statements include the accounts of Aspect Communications Corporation (“Aspect” or “the Company”) and all of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K.

Note 2: Stock Based Compensation

At June 30, 2005, the Company had three active stock option plans used as part of employee and director compensation and one active employee stock purchase plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair-value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income attributable to common shareholders as reported	$	6,038		$	12,248		$	16,819		$	25,686
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(3,759	)		(2,700	)		(7,029	)		(4,929	)
Add back: Non-cash compensation and services expense		84			523			591			523


Pro forma net income attributable to common shareholders	$	2,363		$	10,071		$	10,381		$	21,280


Basic and diluted income per share:
As reported	$	0.07		$	0.15		$	0.20		$	0.32
Pro forma	$	0.03		$	0.12		$	0.12		$	0.26

Note 3: Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of (in thousands):


	June 30,		December 31,
	2005		2004
Raw materials	$	2,155	$	2,194
Finished goods		1,466		1,146

Total inventories	$	3,621	$	3,340

Note 4: Other Current Assets

Other current assets consist of (in thousands):


	June 30,		December 31,
	2005		2004
Prepaid expenses	$	10,195	$	7,818
Other receivables		1,901		1,927
Restricted cash		3,195		3,393

Total other current assets	$	15,291	$	13,138

Note 5: Product Warranties

The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product, geographic location of its sale and other factors. The Company accrues for estimated product warranty claims for certain customers based primarily on historical experience of actual warranty claims as well as current information on repair costs. Accrued warranty costs as of June 30, 2005 were immaterial. Most customers purchase extended warranty contracts, which are accounted for under FASB Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.

The Company also indemnifies its customers against claims that its products infringe certain copyrights, patents or trademarks, or incorporate misappropriated trade secrets. The Company has not been subject to any material infringement claims by customers in the past and does not have significant claims pending as of June 30, 2005.

Note 6: Other Accrued Liabilities

Other accrued liabilities consist of (in thousands):


	June 30,		December 31,
	2005		2004
Accrued sales and use taxes	$	4,303	$	7,162
Accrued restructuring		8,836		6,322
Accrued income taxes		22,252		23,359
Other accrued liabilities		24,672		25,111

Total	$	60,063	$	61,954

Note 7: Comprehensive Income

Comprehensive income for the three months and six months ended June 30 is calculated as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2004			2004			2004			2004
Net income attributable to common shareholders	$	6,038		$	12,248		$	16,819		$	25,686
Unrealized loss on available-for-sale securities		(913	)		(1,300	)		(1,535	)		(1,027	)
Accumulated translation adjustments		438			282			13			(90	)

Total comprehensive income	$	5,563		$	11,230		$	15,297		$	24,569

Note 8: Earnings Per Share

Basic earnings per common share (EPS) is generally calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding. However, due to the Company’s issuance of redeemable convertible preferred stock on January 21, 2003, which contains certain participation rights, EITF Topic D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings, requires those securities to be included in the computation of basic EPS if the effect is dilutive. Furthermore, Topic D-95 requires that the dilutive

effect to be included in basic EPS may be calculated using either the if-converted method or the two-class method. The Company has elected to use the two-class method in calculating basic EPS.

Basic earnings per share for the three months and six months ended June 30 are calculated using the two-class method as follows (in thousands, except percentages and per share data):

Basic EPS — Two-Class Method


	Three months ended June 30,
	2005					2004
	Amount			EPS		Amount			EPS
Net income	$	8,399				$	14,428
Preferred Stock dividend accretion and amortization		(2,361	)				(2,180	)

Net income attributable to common shareholders		6,038					12,248
Amount allocable to common shareholders(1)		73.4	%				72.5	%

Rights to undistributed income	$	4,432		$	0.07	$	8,880		$	0.15

Weighted average common shares outstanding		61,362					58,781
Weighted average shares of restricted common stock		(25	)				(25	)

Basic weighted average common shares outstanding		61,337					58,756

____________
(1) Basic weighted average common shares outstanding		61,337					58,756
Weighted average additional common shares assuming conversion of Preferred Stock		22,222					22,222

Weighted average common equivalent shares assuming conversion of Preferred Stock		83,559					80,978

Amount allocable to common shareholders		73.4	%				72.5	%


	Six months ended June 30,
	2005					2004
	Amount			EPS		Amount			EPS
Net income	$	21,494				$	30,002
Preferred Stock dividend accretion and amortization		(4,675	)				(4,316	)

Net income attributable to common shareholders		16,819					25,686
Amount allocable to common shareholders(1)		73.3	%				72.4	%

Rights to undistributed income	$	12,328		$	0.20	$	18,597		$	0.32

Weighted average common shares outstanding		61,072					58,261
Weighted average shares of restricted common stock		(25	)				(13	)

Basic weighted average common shares outstanding		61,047					58,248

____________
(1) Basic weighted average common shares outstanding		61,047					58,248
Weighted average additional common shares assuming conversion of Preferred Stock		22,222					22,222

Weighted average common equivalent shares assuming conversion of Preferred Stock		83,269					80,470

Amount allocable to common shareholders		73.3	%				72.4	%

Diluted EPS


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income attributable to common shareholders	$	6,038		$	12,248		$	16,819		$	25,686
Preferred Stock dividend accretion and amortization		—			2,180			4,675			4,316

Net income	$	6,038		$	14,428		$	21,494		$	30,002

Weighted average common shares outstanding		61,337			58,756			61,047			58,248
Dilutive effect of weighted average shares of restricted common stock		25			25			25			13
Dilutive effect of stock options		2,938			4,789			3,036			5,504
Dilutive effect of Preferred Stock assuming conversion		—			22,222			22,222			22,222

Diluted weighted average shares outstanding		64,300			85,792			86,330			85,987

Diluted earnings per share attributable to common shareholders	$	0.09	*	$	0.17	*	$	0.25	*	$	0.35	*


*		Diluted earnings per share cannot be greater than basic earnings per share. Therefore, reported diluted earnings per share and basic earnings per share for the three and six months ended June 30, 2005 and 2004, were the same.

As of June 30, 2005 and 2004, approximately 3.2 million and 2.4 million weighted average common stock options outstanding, respectively, have been excluded from the diluted earnings per share calculations, as the inclusion of these common stock options would have been anti-dilutive. Additionally, the Company had Series B preferred stock convertible into 22,222,222 shares of common stock outstanding for the three months ended June 30, 2005. These shares of Series B preferred stock were excluded from the computation of diluted earnings per share because inclusion of these shares would have had an anti-dilutive effect.

Note 9: Restructuring Charge

As of June 30, 2005, the total restructuring accrual was $9.4 million of which, $8.8 million was a short-term liability recorded in other accrued liabilities, and $0.6 million was a long-term liability. Components of the restructuring accrual were as follows (in thousands):


							Other
	Severance and			Consolidation of			Restructuring
	Outplacement			Facilities Costs			Costs			Total
Balance at January 1, 2003	$	1,284		$	19,959		$	101		$	21,344
2003 adjustments		(471	)		4,284			—			3,813
2003 payments		(813	)		(7,295	)		(101	)		(8,209	)

Balance at December 31, 2003	$	—		$	16,948		$	—		$	16,948

2004 payments		—			(7,597	)		—			(7,597	)

Balance at December 31, 2004	$	—		$	9,351		$	—		$	9,351

2005 provisions		—			4,342			—			4,342
2005 adjustments		—			(347	)		—			(347	)
2005 payments		—			(3,949	)		—			(3,949	)

Balance at June 30, 2005	$	—		$	9,397		$	—		$	9,397

The remaining balance of the restructuring charge is for the consolidation of facilities accrual which includes rent of unoccupied facilities, net of expected sublease income. In the second quarter of 2005, the Company increased its future facility related obligations by approximately $3.9 million of which $3.5 million was due to the completion of the consolidation of facilities in San Jose which include $0.3 million relating to the write-off of leasehold improvements and $0.4 million was due to a change in estimate as a result of lower than expected sublease income. In the first quarter of 2005, the accrual was increased by $0.4 million due to lease termination costs for one of our facilities. The remaining accrual balance relates primarily to facilities identified in the 2001 restructurings and will be paid over the next five years.

Note 10: Lines of Credit and Borrowings

On February 13, 2004, the Company entered into a $100 million revolving credit facility with a number of financial institutions led by Comerica Bank, which is also the administrative agent, and The CIT Group/ Business Credit, Inc., which is also the collateral agent. This credit facility amended the Company’s prior $50 million credit facility with Comerica Bank entered into on August 9, 2002. It eliminated the prior facility’s borrowing base requirements and other related restrictions. The revolver has a three-year term and the amounts borrowed are secured by substantially all of the Company’s assets, including the stock of its significant subsidiaries. The Company can select interest options for advances based on the prime rate or eurocurrency rates, which include margins that are subject to quarterly adjustment. The revolver includes a $10 million sub-line for issuance of stand-by letters of credit. Mandatory prepayment and reduction of the facility is required in the amount of 100% of permitted asset sales over $1 million annually and 100% of the proceeds of future debt issuances, subject to certain exclusions. The revolver can be used for working capital, general corporate purposes and the financing of capital expenditures. The credit agreement includes customary representations and warranties and covenants. The financial covenants include minimum liquidity ratio, minimum fixed charge coverage ratio, minimum earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, maximum debt to EBITDA ratio and minimum tangible net worth tests. As of June 30, 2005, the Company had no amounts outstanding under the credit facility and was in compliance with all related covenants and restrictions.

In addition to the line of credit the Company has two outstanding bank guarantees with a European bank, which are required for daily operations such as payroll, import/export duties and facilities. As of June 30, 2005, approximately $3 million is recorded as restricted cash in other current assets on the consolidated balance sheets related to these bank guarantees.

Note 11: Convertible Preferred Stock

On January 21, 2003, the Company and Vista Equity Fund II, L.P. or Vista, closed a private placement for the sale of $50 million of the Company’s Series B convertible preferred stock with net proceeds of $44 million after expenses. The shares of Series B convertible preferred stock were sold for $1,000 per share and the holders of the 50,000 outstanding shares of Series B convertible preferred stock are entitled to vote (on an as-converted basis) on all matters subject to a stockholder vote. On most issues, the holders of Series B preferred stock and common stock vote together as a single class; however, the holders of Series B convertible preferred stock have veto rights with respect to certain Company actions. The actions which require the affirmative vote of the holders of a majority of the outstanding shares of Series B convertible preferred stock are fully described in the Company’s Certificate of Determination of Rights, Preferences and Privileges of Series B convertible preferred stock. The shares of Series B convertible preferred stock are initially convertible into 22.2 million shares of the Company’s common stock (subject to certain anti-dilution protection adjustments) and are mandatorily redeemable at 125% of the original purchase price of the stock plus accumulated unpaid dividends on January 21, 2013. Each holder of the Series B convertible preferred stock has the right, at any time, to convert all or a portion of its outstanding shares of Series B convertible preferred stock into shares of common stock. As more fully described in the Company’s Certificate of Determination of Rights, Preferences and Privileges of Series B convertible preferred stock, the Company may elect to cause all, or under certain circumstances portions, of the outstanding shares of Series B convertible preferred stock to be converted into common stock. In order for the Company to cause such a conversion to occur, all the shares issued pursuant to such conversion must be sold pursuant to an underwritten public offering of common stock pursuant to an effective registration statement under the Securities Act in which the price per share paid by the public exceeds $8.00 (subject to adjustments to reflect any stock dividends, stock splits and the like) and the Company would need to notify each holder of Series B convertible preferred stock no later than ten business days prior to the conversion date. Prior to such offering, the holder could convert all or a portion of its shares into common stock to avoid selling such shares in such offering.

The shares of Series B convertible preferred stock have a liquidation preference over the shares of common stock such that (i) upon any liquidation, dissolution or winding up of the Company, the holders of Series B convertible preferred stock receive payments equal to 100% of their investment amount, plus unpaid dividends prior to payments to the holders of common stock, or (ii) in the event of a change of control of the Company, the holders of Series B convertible preferred stock receive payments equal to 125% of their investment amount plus accumulated unpaid dividends, prior to payments to the holders of common stock (or, in each case, if greater, the amount they would have received had the Series B convertible preferred stock converted to common stock immediately prior to such liquidation or change of control). Additionally, in the event that the Company declares a dividend or distribution to the holders of

common stock, the holders of Series B convertible preferred stock shall be entitled to equivalent participation on an as if converted basis in such dividend or distribution.

During the time that the Series B convertible preferred stock is outstanding, the Company is obligated to accrue dividends on each share of the Series B convertible preferred stock, compounded on a daily basis at the rate of 10% per annum. The undeclared preferred stock dividends are forfeited in the event of conversion. Accrued dividends were $1.6 million and $1.4 million for the three months ended June 30, 2005 and 2004 respectively. For the six months ended June 30, 2005 and 2004, accrued dividends were $ 3.1 million and $2.8 million, respectively. In addition to the dividend accrual, the Company is recording accounting charges in the statements of operations associated with the accretion of the 125% redemption premium and the amortization of the beneficial conversion feature under the net interest method through January 21, 2013. The redemption premium of $17.6 million is calculated based on a redemption value of $62.5 million. Accretion of the redemption premium was $405,000 and $391,000 for the three months ended June 30, 2005 and 2004 respectively. Accretion of the redemption premium was $806,000 and $780,000 for the six months ended June 30, 2005 and 2004, respectively. The beneficial conversion feature of $17.6 million was computed based on the difference between the conversion price of the preferred equity and the fair market value of the Company’s common stock on January 21, 2003. Amortization of the beneficial conversion feature was $381,000 and $362,000 for the three months ended June 30, 2005 and 2004, respectively. Amortization of the beneficial conversion feature was $756,000 and $719,000 for the six months ended June 30, 2005 and 2004, respectively.

The sale and issuance of the Series B convertible preferred stock to Vista followed the approval of the transaction by the Company’s shareholders at the Special Meeting of Shareholders on January 21, 2003. Pursuant to Vista’s contractual rights, following the sale and issuance of the Series B convertible preferred stock, Vista elected two new members to the Company’s Board of Directors.

Note 12: Segment Information

Under SFAS 131, Disclosures about Segments of an Enterprise and Related Information, the Company’s operations are reported in two operating segments, which are product and services. All financial segment information required by SFAS 131 can be found in the consolidated financial statements. For geographical reporting, revenues are attributed to the geographic location in which customers are invoiced and revenue is recognized. Long-lived assets consist of property and equipment and are attributed to the geographic location in which they are located. No single customer accounted for 10% or more of net revenues or accounts receivable for the three months or six months ended June 30, 2005 and 2004.

The following presents net revenues for the three months and six months ended June 30, 2005 and 2004, by geographic area (in thousands):


	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Net revenues:
United States	$	54,405	$	58,263	$	111,572	$	109,707
United Kingdom		17,909		16,648		37,693		35,478
Other International (each <10% of total)		13,289		16,074		26,941		37,287

Total consolidated	$	85,603	$	90,985	$	176,206	$	182,472

The following presents property and equipment as of June 30, 2005 and December 31, 2004, by geographic area (in thousands):


	June 30,		December 30,
	2005		2004
Long-lived assets (property and equipment):
United States	$	62,184	$	59,362
United Kingdom		1,296		1,407
Other International (each <10% of total)		1,426		1,725

Total consolidated	$	64,906	$	62,494

For management reporting purposes, the Company organizes software license revenues into five groups: call center, workforce productivity, contact center integration, customer self service and other. The following presents net revenues by product group for the three months and the six months ended June 30, 2005 and 2004 (in thousands):


	Three months ended				Six months ended
	June 30,				June 30,
	2005		2004		2005		2004
Software license:
Call Center (ACD)	$	6,319	$	8,763	$	16,095	$	16,047
Workforce Productivity		4,992		5,777		11,300		10,726
Contact Center Integration		1,928		2,630		4,199		5,532
Customer Self Service (IVR)		388		912		895		1,665
Other		396		879		661		1,596

Total software license		14,023		18,961		33,150		35,566
Hardware:		10,914		10,885		22,651		22,415
Services:
Software license updates and product support		51,852		52,566		103,407		106,823
Professional services and education		8,814		8,573		16,998		17,668

Total services:		60,666		61,139		120,405		124,491

Total consolidated	$	85,603	$	90,985	$	176,206	$	182,472

Note 13: Certain Tax Matters

During the quarter, the company discovered that it had experienced an ownership change under IRC Section 382 in the first quarter of 2003, which can result in limiting the utilization of the Company’s net operating losses. The Company is still in the process of determining the amount of its annual limitation. In the event that the Company reports taxable income on its federal income tax return, the utilization of its net operating loss carryforwards may be limited.

Note 14: Recent Accounting Pronouncements

SFAS No. 154

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 154 (“SFAS 154”), Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3. APB Opinion No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

SFAS No. 123R

In December 2004, the Financial Accounting Standards Board (“FASB”) enacted Statement of Financial Accounting Standards 123 revised 2004 (“SFAS 123R”), Share-Based Payment which replaces Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees. SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission deferred the adoption date of SFAS 123R to the first annual period starting after June 15, 2005. The Company is now required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 2 for the pro forma net income and net income per share amounts, for the three months ended June 30, 2005 and 2004, and for the six months ended June 30, 2005 and 2004, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is evaluating the requirements under SFAS 123R and

expects the adoption to have a significant adverse impact on the consolidated statements of operations and net income per share.

FSP No. 109-2

FASB Staff Position (“FSP”) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP 109-2”), provides guidance under FASB Statement No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

Note 15: Subsequent Events

On July 5, 2005, the Company announced that it had entered into an Agreement and Plan of Merger dated as of July 5, 2005 (the“Merger Agreement”) by and among Concerto Software, Inc. (“Concerto”), a Delaware corporation, Ascend Merger Sub, Inc., a California corporation and a wholly-owned subsidiary of Concerto (“Merger Sub”) and the Company. Pursuant to the Merger Agreement, Merger Sub will be merged with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Concerto. The aggregate value of the transaction is approximately $1.0 billion. The purchase price of $11.60 per share of common stock and $5,155.5555 per share of Series B preferred stock, or $11.60 per share on an as-converted to common stock basis, will be paid in cash at closing. The Merger Agreement provides that immediately prior to the effective time of the merger, each option to purchase shares of common stock issued under our compensatory benefits plans, including those options held by directors and executive officers, will accelerate and become fully vested, and converted into the right to receive a lump sum cash payment (net of applicable withholding taxes) equal to the product of (i) the excess (if any) of $11.60 over the exercise price per share of such option, multiplied by (ii) the total number of shares of common stock subject to such option.

The transaction has been approved by the Company and Concerto’s board of directors and is subject to the approval of the Company’s shareholders, regulatory approvals and customary closing conditions.

On July 6, 2005, July 14, 2005, and August 5, 2005, respectively, three actions, Kevin Kane v. Aspect Communications Corporation, et al., Mary Sheridan v. Aspect Communications Corporation, et al., and Paul Robichaux v. Aspect Communications Corporation, et al., were filed in the Superior Court of the State of California for the County of Santa Clara. In these substantially identical actions, the plaintiffs named as defendants the Company, the directors of the Company and Norman A. Fogelsong, a former director of the Company. The complaints purport to assert claims on behalf of all public shareholders of the Company who are similarly situated with the plaintiffs, and allege that the Company and the members of the Company’s board of directors have breached their fiduciary duties to the Company’s public shareholders. More specifically, the complaints allege that the directors engaged in an unfair process for the sale of the Company’s shareholders’ shares in connection with their approval of the merger, that the directors failed to take steps to maximize the value of the Company’s common stock to its public shareholders, and that the directors engaged in such conduct to further their own financial interest at the expense of the Company’s shareholders. The complaints also allege generally that the directors breached their duty of candor by failing to disclose all material facts relating to the merger. The complaints seek class certification and certain forms of equitable relief, including enjoining the consummation of the merger. Should the merger be completed, the complaints seek alternative relief in the form of compensatory damages. The Company believes that the claims are without merit and intends to vigorously contest these actions. The Company cannot be certain that the Company or the other defendants will be successful in their defense of these actions.

Item 2. Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I-Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis in our 2004 Annual Report on Form 10-K.

Forward-looking Statements

The matters discussed in this report including, but not limited to, statements relating to (i) the Company’s belief that its installed base represents a recurring revenue base and expectation that services and support revenues will continue to account for a significant portion of its revenues for the foreseeable future (ii) anticipated spending levels in capital expenditures, research and development, selling, general and administrative expenses; (iii) the adequacy of the Company’s financial resources to meet currently anticipated cash flow requirements for the next twelve months; and (iv) the payment of the merger purchase price at the closing of the merger are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended; Section 21E of the Securities and Exchange Act of 1934, as amended; and the Private Securities Litigation Reform Act of 1995; and are made under the safe-harbor provisions thereof. Forward-looking statements may be identified by phrases such as “we anticipate,” “are expected to,” and “on a forward-looking basis,” and are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Specific factors that could cause actual earnings per share results to differ include the satisfaction of the conditions to consummate the merger, including the approval of the merger agreement by our shareholders; receipt of necessary approvals under applicable antitrust laws and other relevant regulatory authorities; the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement; the outcome of any legal proceeding that may be instituted against us and others following the announcement of the merger agreement; the amount of the costs, fees, expenses and charges related to the merger; the effect of the announcement of the merger on our customer relationships, operating results and business generally, including the ability to retain key employees; potentially prolonged period of generally poor economic conditions that could impact our customers’ purchasing decisions; the hiring and retention of key employees; changes in product line revenues; insufficient, excess, or obsolete inventory and variations in valuation; and foreign exchange rate fluctuations. For a discussion of these and other risks related to our business, see the section entitled “Business Environment and Risk Factors” below. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. Aspect undertakes no obligation to publicly release any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof.

Overview

We are a leading provider of enterprise communication solutions that manage and optimize the contact center by integrating the applications that drive customer communications, customer and contact center information and workforce productivity. Our software and hardware solutions allow businesses to better service their customers by connecting them to appropriate resources, functionalities or applications, regardless of user location or method of communication. We understand the importance of unifying the applications that support customer communications, collect customer information and enhance workforce productivity, and we have focused exclusively on contact center solutions since our inception in 1985. We have a well established customer base, including more than two-thirds of the Fortune 50.

The Current Economic Environment

We believe the economic climate in the second quarter of 2005 was comparable to the economic environment we experienced in 2003 and 2004, signified by a difficult environment which resulted in dramatically decreased capital spending. This climate had a pronounced effect on our ability to generate new license fees, as IT budgets were frozen and large capital expenditures like those required to purchase some of our products were quite limited. We continue to see senior executive approval required in many cases and strong competition for sales opportunities as well as intense price competition both for new licenses and for support services. While we believe our installed base continues to represent a solid recurring revenue opportunity and a significant cash flow generator, and while our pricing has remained relatively consistent, we cannot provide any assurance that these pressures on IT spending will ease, or that

the general economic climate will improve. Continued competitive pressure and a weak economy could have a continuing pronounced effect on our operating results.

Significant Financial Events in the First Six Months of 2005

In the first six months of 2005, we generated $31.9 million in cash flow from operations and increased our cash, cash equivalents and short term investments to $227 million.

Subsequent Developments

On July 5, 2005, we announced that we had entered into an Agreement and Plan of Merger dated as of July 5, 2005 by and among Concerto, Ascend Merger Sub, Inc., a California corporation and a wholly-owned subsidiary of Concerto and us. Pursuant to the merger agreement, Ascend Merger Sub will be merged into us, with us surviving the merger as a wholly-owned subsidiary of Concerto. The aggregate value of the transaction is approximately $1.0 billion. The purchase price of $11.60 per share of common stock and $5,155.5555 per share of Series B preferred stock, or $11.60 per share on an as-converted to common stock basis, will be paid in cash at closing. The merger agreement provides that immediately prior to the effective time of the merger, each option to purchase shares of our common stock issued under our compensatory benefits plans, including those options held by our directors and executive officers, will accelerate and become fully vested, and converted into the right to receive a lump sum cash payment (net of applicable withholding taxes) equal to the product of (i) the excess (if any) of $11.60 over the exercise price per share of such option, multiplied by (ii) the total number of shares of common stock subject to such option.

The transaction has been approved by the companies’ boards of directors and is subject to the approval of our shareholders, regulatory approvals and customary closing conditions.

In connection with the execution of the Merger Agreement, Concerto has entered into a Voting Agreement, dated as of July 5, 2005, with Vista Equity Fund II, L.P., the sole Series B Preferred shareholder, in which such shareholder has agreed, among other things, to vote its shares of our Series B Preferred stock in favor of the merger and has granted Concerto a proxy to vote its shares at any meeting of our shareholders convened to consider the merger. On July 6, 2005, July 14, 2005, and August 5, 2005, respectively, three actions, Kevin Kane v. Aspect Communications Corporation, et al., Mary Sheridan v. Aspect Communications Corporation, et al., and Paul Robichaux v. Aspect Communications Corporation, et al., were filed in the Superior Court of the State of California for the County of Santa Clara. In these substantially identical actions, the plaintiffs named as defendants us, the directors of our company and Norman A. Fogelsong, a former director of our company. The complaints purport to assert claims on behalf of all of our public shareholders who are similarly situated with the plaintiffs, and allege that we and the members of our board of directors have breached their fiduciary duties to our public shareholders. More specifically, the complaints allege that the directors engaged in an unfair process for the sale of our shareholders’ shares in connection with their approval of the merger, that the directors failed to take steps to maximize the value of our common stock to our public shareholders, and that our directors engaged in such conduct to further their own financial interest at the expense of our shareholders. The complaints also allege generally that our directors breached their duty of candor by failing to disclose all material facts relating to the merger. The complaints seek class certification and certain forms of equitable relief, including enjoining the consummation of the merger. Should the merger be completed, the complaints seek alternative relief in the form of compensatory damages. We believe that the claims are without merit and intend to vigorously contest these action. We cannot be certain that we or the other defendants will be successful in the defense of these actions.

Sources of Revenue

Our product revenues are derived from license fees for software products and, to a lesser extent, sales of hardware products. With respect to our product revenues, a limited number of product lines, including call center hardware and software, workforce productivity, customer self service and contact center integration products, have accounted for substantially all our product revenues. We also generate a substantial portion of our revenues from fees for services complementing such products, including software license updates, product support (maintenance), and professional services. We typically license our products on a per user basis with the price per user varying based on the selection of products licensed. Our software license updates and support fees are generally based on the level of support selected and the number of users licensed to use our products. Our professional services fees are generally based on a fixed price or time and materials basis. Our education services are generally billed on a per person basis.

We currently expect that services and support revenues will continue to account for a significant portion of our revenues for the foreseeable future.

To date, revenues from license fees have been derived from direct sales of software products to end users through our direct sales force and to a lesser extent from our channel and other alliance partners. Our ability to achieve revenue growth and improved operating margins in the future will depend in large part upon our success in expanding and maintaining these indirect sales channels worldwide.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimates and assumptions relate to the allowance for doubtful accounts, revenue reserves, excess and obsolete inventory, valuation allowance and realization of deferred income taxes, restructuring and self-insurance reserves. Actual amounts could differ significantly from these estimates. We are not currently aware of any material changes in our business that would cause these estimates to differ significantly. Our critical accounting polices and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

Results of Operations

The following table sets forth statements of operations data for the three months and six months ended June 30, 2005 and 2004, expressed as a percentage of total revenues:


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net revenues:
Software license		16	%		21	%		19	%		19	%
Hardware		13			12			13			12
Services:
Software license updates and product support		61			58			58			59
Professional services and education		10			9			10			10

Services		71			67			68			69

Total net revenues		100			100			100			100

Cost of revenues:
Cost of software license revenues		2			3			3			3
Cost of hardware revenues		10			9			9			9
Cost of services revenues		30			28			29			28

Total cost of revenues		42			40			41			40

Gross margin		58			60			59			60

Operating expenses:
Research and development		13			12			13			12
Selling, general and administrative		30			30			31			30
Restructuring charges		5			—			2			—

Total operating expenses		48			42			46			42

Net income from operations		10			18			13			18
Interest income		2			1			2			1
Interest expense		—			(1	)		—			(1	)
Other expense		—			—			—			—

Net income before income taxes		12			18			15			18
Provision for income taxes		2			2			2			2

Net income		10			16			13			16
Less preferred stock dividend, accretion and amortization		(3	)		(2	)		(3	)		(2	)

Net income attributable to common shareholders		7	%		14	%		10	%		14	%

Revenues
($ in thousands)


	Three months ended							Six months ended
	June 30,							June 30,
	2005		2004		% Change			2005		2004		% Change
Software license	$	14,023	$	18,961		(26	)%	$	33,150	$	35,566		(7	)%
Hardware		10,914		10,885		—			22,651		22,415		1
Services:
Software license updates and product support		51,852		52,566		(1	)		103,407		106,823		(3	)
Professional services and Education		8,814		8,573		3			16,998		17,668		(4	)

Services		60,666		61,139		(1	)		120,405		124,491		(3	)

Total net revenues	$	85,603	$	90,985		(6	)%	$	176,206	$	182,472		(3	)%

Net revenues decreased 6% and 3%, respectively, in the second quarter and in the first six months of 2005 compared to the comparable periods in 2004 primarily as a result of several large sales that did not close as expected by quarter end.

Net revenues derived from the Americas and from Europe and Asia constituted 67% and 33%, respectively of total revenues for the second quarter in both 2005 and 2004. Net revenues derived from the Americas constituted 66% and

63% of total revenues for the first six months ended 2005 and 2004, respectively. Net revenues derived from Europe and Asia Pacific constituted 34% and 37% of total revenues for the first six months ended 2005 and 2004, respectively.

Software license and hardware revenues. Software license revenues decreased in the second quarter of 2005 compared to 2004 and in the first six months of 2005 compared to 2004, primarily due to several large sales to our customers for software products that were delayed to subsequent quarters. Hardware revenues remained relatively stable in the second quarter and in the first six months of 2005 compared to the comparable period in 2004.

Software license updates and product support revenues decreased in the second quarter of 2005 compared to 2004 primarily due to a decline in sales of software updates and support contracts to customers who have reduced certain support contract renewals. The decrease in software license updates and product support revenues for the first six months of 2005 compared to 2004 was primarily the result of a decline in renewals for customers who have consolidated or outsourced several contact centers and pricing discounts on certain support contract renewals.

Professional services and education revenues consist primarily of installation of product, consulting services, and education fees. For the second quarter of 2005, professional services and education revenues increased due to slightly higher installation revenues of hardware compared to the second quarter of 2004. For the first six months of 2005, the decline in professional services was the result of a decline in demand for consulting services and educational classes compared to the similar period in 2004.

Gross Margin


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Gross software license margin		83	%		84	%		82	%		85	%
Gross hardware margin		24			24			32			26
Gross services margin		58			59			58			59

Total gross margin		58	%		60	%		59	%		60	%

Gross margin on total revenues decreased for the second quarter of 2005 and for the first six months of 2005 compared to the comparable periods in 2004 due to decreased total net revenues and relatively fixed cost of revenues.

Gross software license margin. Cost of software license revenues includes fees paid to various third parties and amortization of intangible assets. Gross software license margin for the second quarter of 2005 and for the first six months of 2005 decreased primarily due to increased license fees paid to third-party licensors compared to the corresponding period in 2004. Included in 2004 were refunds from a reduction in license fees paid to third-party licensors resulting from renegotiated license arrangements.

Gross hardware margin. Cost of hardware revenues includes labor, materials, overhead, and other directly allocated costs involved in the manufacture and delivery of our products. Gross hardware margin for the second quarter of 2005 compared to the second quarter of 2004 remained relatively consistent at 24%. The gross hardware margin improvement from 26% to 32% for the first six months of 2005 compared to 2004 was primarily attributable to products mix sold and increased hardware pricing.

Gross services margin. Cost of services revenues consists primarily of employee salaries and benefits, facilities, systems costs to support maintenance, consulting and education. Gross services margin for the second quarter of 2005 and the first six months of 2005 compared to corresponding periods in 2004 decreased due to lower services revenue and higher costs for third-party software support.

Operating Expenses

($ in thousands)


	Three months ended							Six months ended
	June 30,							June 30,
	2005		2004		% Change			2005		2004		% Change
Research and development	$	10,910	$	11,169		(2	)%	$	22,310	$	22,529		(1	)%
Selling, general and administrative		26,094		27,261		(4	)		54,577		53,800		1
Restructuring charges		3,931		—		100			4,342		—		100

Total operating expenses	$	40,935	$	38,430		7	%	$	81,229	$	76,329		6	%

Research and development, or R&D, expenses relate to the development of new products, enhancements of existing products and quality assurance activities. These costs consist primarily of employee salaries and benefits, facilities, IT and consulting expenses. The decrease in R&D expenses in the second quarter of 2005 from 2004 was mainly due to decreased IT and facilities expenses of $0.3 million. The decrease in R&D expenses in the first six months of 2005 compared to 2004 was due to decreased IT and facilities expenses of $0.5 million due to decreased depreciation expense and reduced expenses of $0.3 million for contract labor and consulting fees offset by an increase of $0.7 million in equipment and product localization costs. We anticipate that R&D expenses in each of the remaining quarters of 2005 will be relatively constant to slightly higher compared to the second quarter of 2005.

Selling, general and administrative, or SG&A, expenses consist primarily of employee salaries and benefits, commissions, professional and consulting fees, facilities and IT costs. The decrease in the second quarter of 2005 was primarily due to a foreign currency gain of $0.7 million compared to a foreign currency loss of $0.3 million in the comparable period of 2004, as well as decreases in stock based compensation expense of $0.4 million and reduced facilities and IT expense of $0.6 million partially offset by increased expense in professional and consulting fees of $0.6 million and travel cost of $0.3 million. The increase in SG&A expenses for the first six months ended 2005 compared to the comparable period in 2004 was primarily due to an increase in bad debt expense of $0.9 million. In the first six months of 2004 a reversal of accounts receivable reserve of $0.4 million was recorded for the collection of receivables previously reserved for whereas a $0.5 million bad debt reserve was recorded in the first six months of 2005. Additional cost increases for the first six months ended 2005 compared to 2004 include increased professional and consulting fees of $0.5 million and travel cost of $0.5 million. Cost increases were offset by reduced salaries and benefits of $0.5 million as a result of lower headcount and reduced facilities and IT expense of $0.9 million due to decreased depreciation expense. We anticipate that SG&A expenses in each of the remaining quarters of 2005 will be relatively constant to slightly higher compared to the second quarter of 2005.

Restructuring charges consist of costs related to the consolidation of facilities and acceleration of lease obligations on vacated facilities. In the second quarter of 2005, a restructuring charge of $3.9 million was recorded in association with the consolidation of our San Jose facilities and a change in the estimate of future facility related obligations. For the first six months ended 2005, a restructuring charge of $4.3 million was recorded which includes restructuring charges of $0.4 million recorded in the first quarter of 2005 due to lease termination obligations.

Interest and Other Income (Expense):
($ in thousands)


	Three months ended									Six months ended
	June 30,									June 30,
	2005			2004			% Change			2005			2004			% Change
Interest income	$	1,582		$	954			66	%	$	2,800		$	1,711			64	%
Interest expense		(144	)		(499	)		(71	)		(309	)		(1,017	)		(70	)
Other expense		(273	)		(78	)		250			(568	)		(371	)		53

Total other income (expense)	$	1,165		$	377			209	%	$	1,923		$	323			495	%

Interest income represents, primarily, earnings on short-term investments. Interest income increased for the second quarter of 2005 and for the first six months of 2005 due to higher rates on investments as compared to the comparable period in 2004.

Interest expense decreased for the second quarter of 2005 and for the first six months of 2005 as compared to the similar period in 2004 primarily due to a reduction in our in debt obligations under the $100 million revolving credit facility. In September 2004, we repaid the $40 million outstanding under the $100 million revolving credit facility.

Other expense, net includes fees charged for bank services, gains or losses recognized on the sale of investments and other non-operating income and expenses. Other expense for the second quarter of 2005 and for the six months ended 2005 increased primarily due to a non-recurring other income benefit of $0.3 million and $0.6 million, respectively, that was recorded in the second quarter and first six months of 2004 and no comparable other income benefit was recorded for 2005.

Provision for Income Taxes


	Three months ended						Six months ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income before income taxes	$	9,546		$	16,383		$	24,427		$	34,067
Effective tax rate		12.0	%		11.9	%		12.0	%		11.9	%

The tax rates for the second quarter and the first six months of 2005 and 2004 varied from the statutory rate primarily due to the realization of previously reserved deferred tax assets. As a result, the tax provision is primarily based on current tax calculations in foreign and state jurisdictions. Our tax rates for the second quarter of 2005 and 2004 further varied from the statutory rate as a result of the effect of tax rates in foreign jurisdictions primarily being lower than the U.S. statutory rate. We evaluate the appropriateness of our valuation allowance on a quarterly basis.

During the quarter, the company discovered that it had experienced an ownership change under the IRC Section 382 in the first quarter of 2003, which can result in limiting the utilization of the Company’s net operating losses. The Company is still in the process of determining the amount of its annual limitation. In the event that the Company reports taxable income on its federal income tax return, the utilization of its net operating loss carryforwards may be limited.

On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA introduced an 85% dividends received deduction on the repatriation of certain foreign earnings which will be available throughout 2005. This deduction would result in an approximate 5.25% federal tax rate on the repatriated earnings. To qualify for the deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by a company’s chief executive officer and approved by the company’s board of directors. Additionally, certain other criteria, as outlined in the AJCA, must also be met.

We may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. We are in the process of analyzing the Company’s options provided by the repatriation opportunity and expect to complete our evaluation by the end of the third quarter of 2005. The range of possible amounts that we are considering for repatriation under this provision is between zero and $30 million and the corresponding range of additional income tax as a direct result of this repatriation is between zero and $3 million.

Liquidity and Capital Resources


	Six months ended June 30,
	2005			% Change			2004
Cash provided by operating activities	$	31,887			(37	)%	$	50,682
Cash used in investing activities		(11,514	)		(78	)		(53,701	)
Cash provided by financing activities		5,270			(31	)		7,619
Net increase in cash and cash equivalents		24,148			368			5,160

As of June 30, 2005, cash, cash equivalents, and short-term investments totaled $227 million, which represented 62% of total assets and our principal source of liquidity. In addition, we had restricted cash of $3.2 million related to various letter of credit agreements.

The net cash provided by operating activities was $32.6 million for the first six months of 2005, as compared to $50.7 million in the corresponding period of 2004. Cash collections from customers during the first six months of 2005 were $192.4 million compared to $207.5 million collected during the comparable period in 2004. In addition, days sales outstanding increased during the period as compared to the same period in 2004 by 12 days to a days sales outstanding

of 42 days as of June 30, 2005. Days sales outstanding is calculated by using the average accounts receivable balance for the period ended divided by the estimated daily revenue for the period.

The net cash used in investing activities was $12.3 million in the first six months of 2005 compared to $53.7 million in the corresponding period of 2004. Net cash used in investing activities for the first six months ended June 30, 2005, related to the net purchase of short-term investments of $1.1 million and property and equipment purchases of $11.1 million compared to the net purchase of short-term investments of $45.1 million and purchases of property and equipment of $8.6 million in the similar period in 2004.

The net cash provided by financing activities was $5.3 million in the first six months of 2005 compared to $7.6 million in the corresponding period of 2004. Net cash provided by financing activities for the six months ended June 30, 2005 was primarily the result of $5.4 million in proceeds from the issuance of common stock relating to the exercise of employee stock options. For the similar period in 2004, net cash provided by financing activities was the result of net proceeds of $9.8 million from the issuance of common stock relating to the exercise of employee stock options less payments for financing costs of $1.1 million and net payments on borrowings of $1.0 million.

On February 13, 2004, we entered into a $100 million revolving credit facility with a number of financial institutions led by Comerica Bank, which is also administrative agent, and The CIT Group/Business Credit, Inc., which is also collateral agent. This credit facility amended and restated our prior $50 million credit facility with Comerica Bank entered into on August 9, 2002. It eliminated the prior facility’s borrowing base requirements and other related restrictions. The revolver has a three-year term and is secured by substantially all of our assets. We can select interest options for advances based on the prime rate or eurocurrency rates, which include margins that are subject to quarterly adjustment. The revolver includes a $10 million sub-line for issuance of stand-by letters of credit. Mandatory prepayment and reduction of the facility is required in the amount of 100% of permitted asset sales over $1 million annually and 100% of the proceeds of future debt issuances, subject to certain exclusions. The revolver can be used for working capital, general corporate purposes and the financing of capital expenditures. The credit agreement includes customary representations and warranties and covenants. The financial covenants include minimum EBITDA, minimum liquidity ratio, minimum fixed charge coverage ratio, maximum total debt to EBITDA ratio and minimum tangible effective net worth tests, tested on a quarterly basis, defined as follows:

	•		EBITDA of no less than $10 million each quarter.

	•		Liquidity Ratio of not less than 1.5 to 1.0 for the period from December 31, 2003 to September 29, 2004; 1.75 to 1.0 for the period from September 30, 2004 through June 30, 2005; and 2.0 to 1.0 thereafter.

	•		Fixed Charge Coverage Ratio of not less than 1.5 to 1.0 as of the last day of each quarter.

	•		Total Debt to EBITDA Ratio of no more than 1.25 to 1.0 as of the end of each quarter.

	•		Tangible Effective Net Worth balance greater than the Base Tangible Effective Net Worth.

The preceding financial covenants are applicable to the quarter ended March 31, 2004 and all quarters thereafter. The definitions of the terms for these financial covenants can be found in the Amended and Restated Credit Agreement filed as Exhibit 99.1 to our Current Report on Form 8-K filed April 20, 2004. In September 2004, we repaid the $40 million outstanding under the $100 million revolving credit facility and may presently borrow against the revolving credit facility. We were in compliance with all related covenants and restrictions for the revolving credit facility as of June 30, 2005.

In addition to the above revolving credit facility, we had outstanding bank guarantees with a European bank that are required for daily operations such as payroll, import/export duties and facilities. As of June 30, 2005, approximately $3 million is recorded as restricted cash on the balance sheet related to these bank guarantees.

We believe that cash, cash equivalents, and short-term investments will be sufficient to meet our operating cash needs for at least the next twelve months. However, we continually evaluate opportunities to improve our cash position by selling additional equity, debt securities, obtaining and re-negotiating credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders. In addition, we will, from time to time, consider the acquisition of or investment in complementary businesses, products, services and technologies which

might affect our liquidity requirements or cause us to issue additional equity or debt securities. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.

Contractual Obligations

The following table reflects a summary of our contractual obligations as of June 30, 2005 (in thousands):


	Payments Due by Period
			Less
			Than
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		After 5 Years
	(In thousands)
Capital lease obligations	$	204	$	101	$	103	$	—	$	—
Operating leases (a)		46,963		8,646		15,002		7,692		15,623
Purchase obligations(b)		36,319		10,000		24,000		2,319		—
Contract manufacturer(c)		4,316		4,316		—		—		—

Total contractual obligations	$	87,802	$	23,063	$	39,105	$	10,011	$	15,623


(a)		Included in operating leases is a restructuring accrual liability of $9.4 million discussed in Note 9.

(b)		Purchase obligations include agreements to purchase services and licenses that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty.

(c)		We use several contract manufacturers to provide manufacturing services for our products. We issue purchase orders with estimates of our requirements several months ahead of the delivery date which are non-cancelable. In addition to the above, we record a liability for purchase commitments for quantities in excess of our future demand forecasts. As of June 30, 2005, the liability for excess quantities was $0.3 million.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements other than operating leases that are discussed in Note 10 to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K.

Business Environment and Risk Factors

Risks Related to the Proposed Merger with Concerto

Our business and results of operations are likely to be affected by our announced merger with Concerto.

On July 5, 2005, we entered into a merger agreement with Concerto. The announcement of the merger could have an adverse effect on our revenue in the near term if customers delay, defer or cancel purchases pending consummation of the planned merger. While we are attempting to mitigate this risk through communications with our customers, current and prospective customers could be reluctant to purchase our products or services due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. To the extent that our announcement of the merger creates uncertainty among customers such that one large customer, or a significant group of small customers, delays purchase decisions pending consummation of the planned merger, our results of operations and ability to operate profitably could be negatively affected. Decreased revenue and a failure to be profitable could have a variety of adverse effects, including negative consequences to our relationships with customers, suppliers, resellers and others. In addition, our quarterly operating results could be substantially below the expectations of market analysts, which could cause a decline in our stock price. Finally, activities relating to the merger and related uncertainties could divert our management’s and our employees’ attention from our day-to-day business, cause disruptions among our relationships with customers and business partners, and cause employees to seek alternative employment, all of which could detract from our ability to grow revenue and minimize costs.

If the conditions to the proposed merger with Concerto set forth in the merger agreement are not met, the merger with Concerto may not occur.

Several conditions must be satisfied to complete the proposed merger with Concerto. These conditions are set forth in detail in the merger agreement, which we previously filed with the Securities and Exchange Commission. We can not assure you that each of the conditions will be satisfied. If the conditions are not satisfied or waived, the proposed merger will not occur or will be delayed, and we and our shareholders may lose some or all of the benefits of the proposed merger. For example, if either Concerto’s or our representations and warranties are not true and correct and, with some exceptions, the failure to be true and correct has a material adverse effect at the closing, the other party may not be required to close.

Failure to complete the proposed merger with Concerto would negatively impact our future business and operations.

If the planned merger with Concerto were not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

	•		We would not realize the benefits we expect from becoming a part of a combined company with Concerto, including the potentially enhanced financial and competitive position;

	•		Activities relating to the merger and related uncertainties may lead to a loss of revenue and market position that we may not be able to regain if the merger does not occur;

	•		The market price of our common stock could decline following an announcement that the merger has been abandoned, to the extent that the current market price reflects a market assumption that the merger will be completed;

	•		We could be required to pay Concerto a termination fee and provide reimbursement to Concerto for certain costs incurred;

	•		We would remain liable for our costs related to the merger, such as legal and accounting fees and a portion of our investment banking fees; and

	•		We may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

In connection with the proposed merger, we have filed a proxy statement with the SEC. The proxy statement will be mailed to all holders of our outstanding stock and will contain important information about us, Concerto and the proposed merger, and related matters. We urge all of our shareholders to read the proxy statement when it becomes available.

In addition to the above risks, our recent announcement of the proposed merger between us and Concerto may intensify the risks set forth below.

Risks Related to our Business Operations

We may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations in any particular quarter, which could materially and adversely affect our business and the market price of our common stock.

Our revenues and operating results may fluctuate significantly because of a number of factors, many of which are outside of our control. Some of these factors include:

	•		changes in demand for our products and services;

	•		a shift in the timing or shipment of a customer order from one quarter to another;

	•		product and price competition;

	•		our ability to develop and market new products and services and control costs;

	•		timing of new product introductions and product enhancements;

	•		failure by our customers to renew existing support or maintenance agreements in a timely manner, if at all;

	•		mix of products and services sold;

	•		delay or deferral of customer implementations of our products;

	•		size and timing of individual license transactions;

	•		length of our sales cycle;

	•		changes in domestic and foreign markets;

	•		success in growing our distribution channels;

	•		acquisitions by competitors; and

	•		performance by outsourced service providers, and the costs of the underlying contracts of these providers, that are critical to our operations.

One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our revenues and operating results to fluctuate significantly. Based upon the preceding factors, we may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could materially and adversely affect our business, financial condition, results of operations and the market price of our common stock.

There could be reductions in information technology spending which could decrease demand for our products and harm our business.

Our products typically represent substantial capital commitments by customers. As a result, customer purchase decisions may be significantly affected by a variety of factors, including trends in capital spending for telecommunications and enterprise software, competition and the availability or announcement of alternative technologies. Weakness in global economic conditions earlier in the decade and related reductions in information technology, or IT, spending resulted in many of our customers delaying or substantially reducing their spending on contact center hardware, software and services. If the global economy were to weaken, demand for our products and services would likely continue to decrease and our business would be harmed.

Our failure to timely develop and market products and services that meet customer requirements could cause us to lose customers and could harm our business.

Demand for our products and services could be adversely affected by any of our products and services not meeting customer specifications or by problems with system performance, system availability, installation or service delivery commitments, or market acceptance. We need to continue to develop new products and services and manage product transitions in order to succeed. If we fail to introduce enhanced versions and releases of products, or enhancements to our service offerings, in a timely manner, customers may license competing products or purchase competing services, we may suffer lost sales and we could fail to achieve anticipated results. Our future operating results will depend on the demand for our product suite, including new and enhanced releases that are subsequently introduced. If our competitors release new products and services that are superior to our products and services in performance or price, demand for our products and services may decline. Our products may not be released on schedule or may contain defects when released which could result in the rejection of our products, damage to our reputation, lost revenues, diverted development

resources and increased customer service and support costs and warranty claims. Any of the foregoing results could harm our business.

Because we rely on our installed customer base for support contract renewals and much of our future revenues, those revenues could be significantly impaired if our existing customers do not continue to purchase and use our products and services.

We derive a significant portion of our revenues from support contracts. As a result, if we lose a major customer or if a support contract is delayed, reduced or cancelled, our revenues could be adversely affected. In addition, customers who have accounted for significant revenues in the past may not generate the same amounts of revenues in future periods. We also depend on our existing customers to purchase new products that we introduce to the market. We may not be able to obtain new customers to replace any existing customers that we lose.

Our failure to successfully address industry changes resulting from the convergence of voice and data networks could cause us to lose customers and harm our business.

Historically, we have supplied the hardware, software and associated support services for implementing contact center solutions. Contact center technology is undergoing a change in which voice and data networks are converging into a single integrated network. Our approach to this convergence has been to provide migration software permitting the integration of existing telephony environments with networks in which voice traffic is routed through data networks. This integration is provided by a software infrastructure that requires enterprise-level selling and deployment of enterprise-wide solutions, rather than selling and deployment efforts focused solely on telephone communication. This industry transition has caused us to change many aspects of our business and as a result we have had to:

	•		make changes in our management and technical personnel;

	•		change our sales and distribution models;

	•		expand relationships with our customers as sales are now often made throughout the organization;

	•		modify the pricing and positioning of our products and services;

	•		address new competitors; and

	•		increasingly rely on systems integrators to deploy our solutions.

If we fail to successfully address the changed conditions in which we operate, our business could be harmed.

If we are unable to successfully compete with the companies in our market, including against those that have greater financial, technical and marketing resources than we do, we might lose customers which would hurt sales and harm our business.

The market for our products is intensely competitive, and competition is likely to intensify as companies in our industry consolidate to offer integrated solutions. Our principal competitors currently include companies in the contact center market and companies that market traditional telephony products and services. As the market develops for converged voice and data networks and products and the demand for traditional, telephony-based call centers diminishes, companies in these markets are merging, creating potentially larger and more significant competitors. Many current and potential competitors, including Avaya, Cisco Systems, Genesys, a subsidiary of Alcatel, Intervoice, Nortel Networks and Siemens may have considerably greater resources, larger customer bases and broader international presence than us. If we are unable to improve and expand the functionality of our products and services, we might lose customers, which would hurt our sales and harm our business.

If we are not be able to adapt our products and services quickly or efficiently enough to respond to technological change, our customers might choose products and services of our competitors which would hurt our sales and harm our business.

The market for our products and services is subject to rapid technological change and new product introductions. Current competitors or new market entrants have in the past developed, and may in the future develop new, proprietary products with features that have adversely affected or could in the future adversely affect the competitive position of our products. We may not successfully anticipate market demand for new products or services or introduce them in a timely manner.

The convergence of voice and data networks, and of wired and wireless communications could require substantial modification and customization of our current products and sales and distribution model, as well as the introduction of new products. Further, customer acceptance of these new technologies may be slower than we anticipate. We may not be able to compete effectively in these markets. In addition, our products must readily integrate with major third-party security, telephony, front-office and back-office systems. Any changes to these third-party systems could require us to redesign our products, and any such redesign might not be possible on a timely basis or achieve market acceptance.

If we are not able to properly anticipate demand for our products and services, our operating results could suffer.

The demand for and sales mix of our products and services depends on many factors and is difficult to forecast. If forecasted demand does not develop, we could have excess production resulting in higher inventories of finished products and components, which would use cash and could lead to write-offs of some or all of the excess inventories or returns, which could result in lower gross margins. In addition, we may also incur certain costs, such as fees for excess manufacturing capacity and cancellation of orders and charges associated with excess and obsolete materials and goods in our inventory, which could result in lower margins. If demand increases beyond what we forecast, we may have to increase production at our contract manufacturers or increase our capacity to deliver products and services. We depend on our suppliers to provide additional volumes of components and those suppliers might not be able to increase production rapidly enough to meet unexpected demand or may choose to allocate capacity to other customers. Even if we are able to procure enough components, our contract manufacturers might not be able to produce enough of our products to meet market demand. The inability of either our manufacturers or our suppliers to increase production rapidly enough or our inability to obtain qualified services personnel could cause us to fail to meet customer demand. Rapid increases or decreases in production levels could result in higher costs for manufacturing, supply of components and other expenses. These higher costs could reduce our margins. Furthermore, if production is increased rapidly, manufacturing yields could decline, which may also reduce our margins.

We are involved in litigation which could be expensive and divert our resources.

We have in the past and continue to be involved in litigation for a variety of matters. For example, we have been sued by three shareholders in connection with our agreement to merge with Concerto. Any claims brought against us will likely have a financial impact, potentially affecting the market performance of our common stock, generating costs associated with the disruption of business and diverting management’s attention. There has been extensive litigation regarding patents and other intellectual property rights in our industry, and we are periodically notified of such claims by third parties. We have been sued in the past for alleged patent infringement. We expect that software product developers and providers of software in markets similar to ours will increasingly be subject to infringement claims or demands for infringement indemnification as the number of products and competitors in our industry grows and the functionality of products overlap. Any claims, with or without merit, could be costly and time-consuming to defend, divert our management’s attention, cause product delays and have an adverse effect on our revenues and operating results. If any of our products were found to infringe a third party’s proprietary rights, we could be required to enter into royalty or licensing agreements to be able to sell our products, which may not be available on terms acceptable to us or at all. Moreover, even if we negotiate license agreements with a third party, future disputes with such parties are possible. If we are unable to resolve an intellectual property dispute through a license, settlement or successful litigation, we would be subject to pay damages and be prevented from making, using or selling certain products or services. In the future, we could become involved in other types of litigation, such as shareholder lawsuits for alleged violations of securities laws, claims by employees, and product liability claims.

We are subject to risks inherent in doing business internationally which could negatively impact our business and competitive position.

We market our products and services worldwide and may enter additional foreign markets in the future. If we fail to enter certain major markets successfully, our competitive position could be impaired and we may be unable to compete

Our failure to grow and maintain our relationships with systems integrators or VARs could impact our ability to market and implement our products and reduce future revenues.

Failure to establish or maintain relationships with systems integrators or VARs would significantly harm our ability to sell our products. Systems integrators sell and promote our products and perform custom integration of systems and applications. VARs market,sell, service, install and deploy our products. If these relationships fail, we will have to devote substantially more resources to the sales and marketing, implementation and support of our products than we would have had to otherwise. In addition, there could be channel conflict among our varied sales channels, which could harm our business, financial condition and results of operations.

If we are unable to expand our distribution channels, we may not be able to increase sales and our operating results could be hurt.

We have historically sold our products and services through our direct sales force and a limited number of distributors. Changes in customer preferences, the markets we target, the competitive environment or other factors may require us to expand our third-party distributor, VARs, systems integrator, technology alliances, electronic and other alternative distribution channels, and we have continued to work on such expansion in recent periods. We may not be successful in expanding these distribution channels, and such failure could hurt our operating results by limiting our ability to increase or maintain our sales through these channels or by increasing our sales expenses faster than our revenues.

We are dependent on third-party suppliers for certain services and components and underperformance by these suppliers could cause us to lose customers and could harm our business.

We have outsourced our manufacturing capabilities to third parties and rely on those suppliers to order components; build, configure and test systems and subassemblies; and ship products to meet our customers’ delivery requirements in a timely manner. Failure to ship product on time or failure to meet our quality standards would result in delays to customers, customer dissatisfaction or cancellation of customer orders.

Should we have performance issues with our manufacturing sub-contractors, the process to move from one sub-contractor to another or manufacture products ourselves is a lengthy and costly process that could affect our ability to execute customer shipment requirements and might negatively affect revenues and costs. We depend on certain critical components in the production of our products. Some of these components such as certain server computers, integrated circuits, power supplies, connectors and plastic housings are obtained only from a single supplier and only in limited quantities. In addition, some of our major suppliers use proprietary technology and software code that could require significant redesign of our products in the case of a change in vendor. Further, suppliers could discontinue their products, or modify them in a manner incompatible with our current use, or use manufacturing processes and tools that

could not be easily migrated to other vendors. Our inability to obtain these components from our current suppliers or quickly identify and qualify alternative suppliers could harm our ability to timely and cost-effectively produce and deliver our products.

We also outsource certain of our information technology activities to third parties. We rely heavily on these vendors to provide day-to-day support. We may experience disruption in our business if these vendors or we have difficulty meeting our requirements, or if we need to transition the activities to other vendors or ourselves, which could negatively affect our revenues and costs.

If we fail to attract, motivate and retain highly qualified key personnel, our ability to operate our business could be impaired.

Our future success will depend to a significant extent on our ability to attract, retain and motivate highly qualified technical, marketing, sales and management personnel. Competition for these employees is intense and the process of recruiting personnel with the combination of skills and attributes required to operate our business can be time consuming and expensive. We have recently undergone significant changes in senior management and other personnel. For example, our Chief Financial Officer was appointed in December 2004. Our failure to recruit, retain and motivate qualified personnel could be disruptive to our operations, and could have a material adverse effect on our operating results.

We have replaced and intend to upgrade or replace certain parts of our information systems and may not be successful in implementing the changes.

We have upgraded certain of our information systems to Oracle 11i, including systems to manage order processing, shipping, support entitlement, accounting and internal computing operations and intend to upgrade or replace certain other information systems that support our operations. Many of these systems are proprietary to us and are very complex. Any failure or significant downtime in our information systems could prevent us from taking customer orders, shipping products, providing services or billing customers and could harm our business. We may not be successful in implementing these new systems and transitioning data from our old systems to the new systems.

In addition, our information systems require the services of personnel with extensive knowledge of these information systems and the business environment in which we operate. In order to successfully implement and operate our systems, we must continue to attract and retain a significant number of highly skilled employees. If we fail to attract and retain the highly skilled personnel required to implement, maintain and operate our information systems, our business could suffer.

If our intellectual property is copied, obtained or developed by third parties, competition against us could increase, which could reduce our revenues and harm our business.

Our success depends in part upon our internally developed technology. Despite the precautions we take to protect our intellectual property, unauthorized third parties may copy or otherwise obtain and use our technology. In addition, third parties may develop similar technology independently. Unauthorized copying, use or reverse engineering of our products or independent development of technology similar to ours by competitors could materially adversely affect our business, financial condition and results of operations.

We depend on licenses from third parties for rights to the technology used in several of our products. If we are unable to continue these relationships and maintain our rights to this technology, our product offerings could suffer.

We depend on licenses for some of the technology used in our products from a number of third-party vendors. If we were unable to continue using the technology made available to us under these licenses on commercially reasonable terms or at all, we may have to discontinue, delay or reduce product shipments until we obtain equivalent replacement technology, which could hurt our business. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we may not be able to modify or adapt our own products.

Regulatory changes affecting our industry and future changes to generally accepted accounting principles may negatively impact our operating results or ability to operate our business.

The electronic communications industry is subject to a wide range of regulations in the markets and countries in which we currently operate or may wish to operate in the future. For example, the electronics industry is increasingly becoming subject to various regulations regarding the recycling and disposal of electronics equipment and the reduction of the use of hazardous substances in the manufacturing of such equipment. In addition, new products and services may involve entering different or newly regulated areas. Changes in these environments may impact our business and could affect our ability to operate in certain markets or certain regions from time to time.

Revisions to generally accepted accounting principles or related rules of the Securities and Exchange Commission will require us to review our accounting and financial reporting procedures in order to ensure continued compliance. From time to time, such changes have an impact on our accounting and financial reporting, and these changes may impact market perception of our financial condition.

In addition, recently adopted or new legislation or regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002, has, and may continue to lead to an increase in our costs related to audits in particular and regulatory compliance generally. A failure to comply with these new laws and regulations could materially harm our business.

During the course of our implementation of Oracle 11i to enable our Section 404 compliance efforts in the third quarter of 2004, as well as during our normal financial operations and quarterly close process in the fourth quarter of 2004, we identified five significant deficiencies in the design and operation of our internal controls, of which three were outstanding as of December 31, 2004. As of June 30, 2005, we were able to remediate two of the remaining three outstanding significant deficiencies and during the course of our testing of compliance efforts and internal controls for fiscal 2005 have identified four new significant deficiencies that we are in the process of remediating. It is possible that in the future we will identify additional significant deficiencies or material weaknesses in the design and operation of our internal controls. We may be unable to remediate such matters in a timely fashion, and/or our independent auditors may not agree with our remediation efforts in connection with their Section 404 attestation. Such failures could impact our ability to record, process, summarize and report financial information, and could impact market perception of the quality of our financial reporting, which could adversely affect our business and our stock price.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

We may engage in future acquisitions or investments that could prove difficult to integrate with our business and which may impair our operations.

We have made a number of acquisitions in the past. Acquisitions or investments we make may experience significant fluctuations in market value or may result in significant write-offs or the issuance of additional equity or debt securities to finance or fund them. Acquisitions and investments can be costly and disruptive, and we may be unable to successfully integrate a new business or technology into our business. There are a number of risks that future transactions could entail, including:

	•		inability to successfully integrate or commercialize acquired technologies or otherwise realize anticipated synergies or economies of scale on a timely basis;

	•		diversion of management attention;

	•		disruption of our ongoing business;

	•		inability to assimilate or retain key technical and managerial personnel for both companies;

	•		inability to establish and maintain uniform standards, controls, procedures and processes;

	•		governmental, regulatory or competitive responses to the proposed transactions;

	•		impairment of relationships with employees, vendors or customers including, in particular, acquired distribution and VAR relationships;

	•		permanent impairment of our equity investments;

	•		adverse impact on our annual effective tax rate; and

	•		dilution of existing equity holders.

Our operations are geographically concentrated and we are subject to business interruption risks.

Significant elements of our product development, manufacturing, information technology systems, corporate offices and support functions are concentrated in San Jose, California, Nashville, Tennessee and Chelmsford, Massachusetts. Significant sales, administrative and support functions and related infrastructure to support our international operations are also concentrated at our U.K. offices. In the event of a natural disaster, such as an earthquake or flood, or localized extended outages of critical utilities or transportation systems that affects us, our customers or our suppliers, we could experience a significant business interruption.

Fluctuations in the value of foreign currencies could result in currency transaction losses.

As we expand our international operations, we expect that our international business will increasingly be conducted in foreign currencies. Fluctuations in the value of foreign currencies relative to the United States dollar have caused, and we expect such fluctuations to continue to increasingly cause, currency transaction gains and losses. We cannot predict the effect of exchange rate fluctuations upon future quarterly and annual operating results. We may experience currency losses in the future.

Risks Related to Our Common Stock

The market price for our common stock may be particularly volatile, and our shareholders may be unable to resell their shares at a profit.

The market price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline. From January 1, 2004 to June 30, 2005, the closing price per share of our common stock has ranged from a low of $7.37 to a high of $19.45. The stock markets have experienced significant price and trading volume fluctuations. The market for technology has been extremely volatile and frequently reaches levels that bear no relationship to the past or present operating performance of those companies. General economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, could negatively affect the market price of our common stock. In addition, our operating results may be below the expectations of securities analysts and investors. If this were to occur, the market price of our common stock would likely significantly decrease. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of management’s attention and resources.

The market price of our common stock may fluctuate in response to various factors, some of which are beyond our control. These factors include, but are not limited to, the following:

	•		changes in market valuations or earnings of our competitors or other technology companies;

	•		actual or anticipated fluctuations in our operating results;

	•		changes in financial estimates or investment recommendations by securities analysts who follow our business;

	•		technological advances or introduction of new products by us or our competitors;

	•		the loss of key personnel;

	•		our sale of common stock or other securities in the future;

	•		intellectual property or litigation developments;

	•		changes in business or regulatory conditions;

	•		the trading volume of our common stock; and

	•		disruptions in the geopolitical environment, including war in the Middle East or elsewhere or acts of terrorism in the United States or elsewhere.

Vista has been granted certain approval rights as to particular corporate actions and owns Series B convertible preferred stock representing, on an as converted basis, approximately 26.5% of our common stock.

Vista’s ownership of our Series B Convertible Preferred Stock together with its right to nominate two of our six directors provides Vista with a substantial degree of control over our operations. Additionally, Vista’s consent is required for the issuance of additional capital stock, a sale of all or substantially all of our assets, the consummation of any transaction the result of which is that any person becomes the beneficial owner of more than fifty percent of our voting securities, the incurrence of certain indebtedness, a voluntary liquidation or dissolution, acquisitions by us of any material interest in any company, business or joint venture, the consummation of certain related party transactions by us, the execution by us of any agreement which restricts our right to comply with certain of our obligations to Vista, the approval of our annual budget or any material deviations from our annual budget, the declaration or payment of any dividends or distributions on our common stock, or a change in the compensation paid to, the termination of the employment of, or the replacement of, certain of our executive officers including our Chief Executive Officer. If Vista viewed these matters differently from us, we might not be able to accomplish specific corporate actions, and this failure could harm our business.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Reference is made to the information appearing under the caption “Quantitative and Qualitative Disclosures About Market Risk” of the Registrant’s 2004 Annual Report on Form 10-K, which information is hereby incorporated by reference. The Company believes there were no material changes in the Company’s exposure to financial market risk during the second quarter of 2005.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e)) as of the end of the period covered by this interim report (the “Evaluation Date”), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to us and our consolidated subsidiaries would be made known to them by others within those entities.

In 2004, we completed a major phase of our implementation of Oracle 11i, an upgrade to our information systems that supports our operations, including systems to manage order processing, shipping, support entitlement, accounting and internal computing operations. This application had been hosted on third-party computer servers. In the first quarter of 2005, we moved the application and associated infrastructure in-house. As of December 31, 2004 we had three significant deficiencies of which two have been remediated as of June 30, 2005. During the course of our testing of compliance efforts and internal controls for fiscal 2005 we have identified four new significant deficiencies that we are in the process of remediating. See “Risk Factors — Regulatory changes affecting our industry and future changes to generally accepted accounting principles may negatively impact our operating results or ability to operate our business.”

Our management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). There were no significant changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Part II: Other Information

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

At the Annual Meeting of Shareholders held on May 19, 2005, our shareholders voted on the following proposals:

1.) An election of directors was held with the following individuals being elected to the Board of Directors of the Company:


	FOR		WITHHELD
Barry M. Ariko		74,052,505		5,927,094
Gary E. Barnett		75,571,112		4,408,487
Thomas Weatherford		75,578,211		4,401,388
David B. Wright		75,576,036		4,403,563

Messrs. A. Barry Rand and Robert F. Smith were also elected by unanimous vote of the 50,000 shares of Series B convertible preferred stock.

2.) Ratification of the appointment of independent auditors:


For			79,728,412
Against			225,738
Abstain			25,449

Item 6. Exhibits

A. Exhibits


31.1		Gary E. Barnett’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.

31.2		James C. Reagan’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.

32.1		Gary E. Barnett’s and James C. Reagan’s Certification pursuant to 18. U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.


		Page Number
Part I:	Financial Information
Item 1:	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004		4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3:	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4:	Controls and Procedures		32
Part II:	Other Information		33
Item 4:	Submission of Matters to a Vote of Security Holders		33
Item 6:	Exhibits		33
Signature			34
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1


		ASPECT COMMUNICATIONS
		CORPORATION
		(Registrant)

		By: /s/ JAMES C. REAGAN

		James C. Reagan

		Executive Vice President and
		Chief Financial Officer

1.		I have reviewed this Form 10-Q of Aspect Communications Corporation;

2.		Based on my knowledge, this 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 report;

3.		Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


/s/ Gary E. Barnett
Gary E. Barnett
President and Chief Executive Officer

August 9, 2005

1.		I have reviewed this report on Form 10-Q of Aspect Communications Corporation;

2.		Based on my knowledge, this 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 report;

3.		Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4		The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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	•		the cost and timing of the multiple governmental approvals and product modifications required by many countries;

	•		fluctuations in the value of foreign currencies;

	•		less effective protection of intellectual property;

	•		difficulties in staffing and managing foreign operations;

	•		difficulties in identifying and securing appropriate partners;

	•		global economic climate considerations including potentially negative tax and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas and other restrictions;

	•		longer payment cycles; and

	•		seasonal reductions in business activity in international locales, such as during the summer months in Europe.

	(a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	(c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(d)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ James C. Reagan
James C. Reagan
Executive Vice President an
Chief Financial Officer

August 9, 2005

	(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.