UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

Commission file number 0-18391

Aspect Communications Corporation

(Exact name of registrant as specified in its charter)

1320 Ridder Park Drive, San Jose, California 95131-2312

(Address of principal executive offices and zip code)

(408) 325-2200

(Registrant’s telephone number)

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

NONE

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

Common Stock, $0.01 par value

(Title of class)

Preferred Share Purchase Rights

(Title of class)

     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 þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12-b-2 of the Act)     Yes þ          No o

      The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2004, was $838,424,317 based upon the last sale price reported for such date on the Nasdaq Stock Market. For purposes of this disclosure, shares of Common Stock held by persons known to the Registrant (based on information provided by such persons and/or the most recent schedule 13G’s filed by such persons) to beneficially own more than 5% of the Registrant’s Common Stock and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily a conclusive determination for other purposes.

      The number of shares of the Registrant’s Common Stock outstanding as of February 28, 2005, was 60,984,371.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement for the 2005 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

ASPECT COMMUNICATIONS CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

FORWARD-LOOKING STATEMENTS

      The matters discussed in this report including, but not limited to, statements relating to anticipated capital budget and spending levels for research and development, and selling, general and administrative expenses, adequacy of our financial resources to meet currently anticipated cash flow requirements for the next twelve months, lack of significant changes in financial market risk exposures to the Company, and general economic conditions 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. Such forward-looking statements, which may be identified by phrases such as “we anticipate”, “we expect”, and “on a forward-looking basis”, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Specific factors that may cause results to differ include 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 additional risks, see “Risk Factors”, appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date hereof. We undertake 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.

PART I

Company Overview

      We are a leading provider of contact center solutions and services that enable businesses to manage and optimize customer communications. We develop, market and license products that enable our customers to manage their customer-care related communications, workforce and information in ways best suited for their businesses. Our products and services help businesses to manage their customer interactions in ways that drive greater customer intimacy, while increasing the effectiveness and productivity of the workforce. Our products can be used by businesses to connect their customers to live and self-service resources regardless of the user’s location and communication channel. We have focused on contact center solutions since our inception in 1985. We have a global customer base that includes more than two-thirds of the Fortune 50, in a broad range of industries including transportation, financial services, insurance, telecommunications and outsourcing. We are headquartered in San Jose, California, with offices around the world.

Industry Overview

      The contact center is becoming an increasingly important component of business strategy, evolving from being perceived as a cost center used to process customer interactions into a commerce center that can provide greater strategic value. Historically, call centers were viewed as a necessary expense for providing customer support, primarily utilizing telephone communications. Today, enterprises manage customer communications across a wide variety of technologies, including email, Web, and short messaging communications. Therefore, traditional voice-based call centers are evolving to serve customers via a variety of communications channels and transport technologies including both traditional Public Switched Telephone Network or PSTN, as well as the newer Internet Protocol, or IP. Also, the strategic value of contact centers is increasing because detailed customer information generated by contact centers can be used more frequently and more easily than in the past to help drive business decisions. This is because the technologies necessary to integrate data and turn them into meaningful information have increased in sophistication, are easier to use and are cost-effective to acquire and integrate. Therefore, it is becoming easier for enterprises to use contact center information to understand customer buying trends, target markets more effectively, and increase revenue. This confluence of factors is helping businesses consider new ways to use their contact centers to drive commerce instead of viewing them as just cost centers.

      Evolution of Contact Center Technology. In the mid-1980s, call center technology was limited to the distribution of voice calls to customer service representatives using automatic call distributors, or ACDs. This technology grew to encompass inbound and outbound calls and the coordinated management of multiple call centers. As large numbers of enterprises implemented customer relationship management, or CRM, software systems to record and track front-office customer interactions, it became necessary to integrate contact center solutions with these systems. Computer telephony integration, or CTI, routed customer information along with voice calls to customer service representatives, enabling them to more efficiently service customers. The development of text-to-speech and speech recognition technologies allowed interactive voice response technology, or IVR, to service customers without employing live customer service representatives. The development of workforce management software helped companies automate the complex task of scheduling large workforces with varied skills and responsibilities. Quality monitoring and recording technology also became a critical call center component that enabled companies to constantly evaluate their interactions and processes. The widespread adoption of the Internet in the late 1990s required companies to manage a broader variety of customer contact channels, including e-mail and the Web. Contact center applications are also converging as key contact center functionalities such as those of ACDs, CTI, and IVR are integrated.

      Increased Demand for Open, Standards-Based Solutions. As call center infrastructure technology was developing, call center hardware and software solutions were typically purchased from a single vendor which had its own proprietary architecture and offered limited support for and interoperability with third-party applications and systems. While such systems may have initially provided a complete contact center solution,

technological advances and the increasing heterogeneity of technology infrastructures have outpaced the ability of individual proprietary platform vendors to offer a comprehensive end-to-end solution. As a result, there is an increasing demand for open standards-based solutions that can address the full range of contact center needs.

      The Trend Towards Remote Contact Center Solutions. Advances in contact center technology and the reduction of international communications costs have been driving a significant industry trend towards remote call center solutions. Companies save substantial labor costs and are able to more cost-effectively provide around the clock customer support by off-shoring, or moving contact centers to international or other off-site locations, or by outsourcing contact center services to third parties. For example, companies have been moving or outsourcing their contact centers to countries such as India and the Philippines that have large, educated workforces but lower labor costs. The outsourcing and off-shoring of contact center operations and the globalization of customer bases will increase the demand for contact center solutions that can function seamlessly across global data networks and manage the related security and quality control challenges. Many companies are exploring options to centralize the management of contact centers while geographically dispersing agents with the aim of reducing costs while simplifying administration, reporting and analysis.

      Workforce Management and Optimization Challenge. The most significant cost in operating a contact center is personnel and related expenses. The complexity of contact center operations and the related demands being placed on contact center managers create the need for effective tools for forecasting, scheduling, staffing, managing and optimizing contact center operations. Workforce management software allows supervisors to efficiently and effectively manage the challenges of contact center labor. An optimal workforce management solution helps forecast customer demand based on changing business and customer requirements, schedules staff according to agent skill level and customer demand, and plans employee schedules. Also, it accommodates new communication media as they are added and integrates with training applications so agent training on new products or skills is part of the agent’s work schedule. By matching the contact center operational needs with individual agent schedule preferences and skill sets, contact center managers can improve employee retention and job satisfaction and increase productivity in a cost-effective manner.

      Analytics and Consolidated Reporting. Multiple communications media, geographically dispersed sites and increasing pressures to increase operational efficiency are generating demand for applications that enable users to capture and view data in dynamic and timely ways. These applications must gather data from a variety of media and contact center applications into an open standards based repository against which standard tools can be applied for analysis and reporting. They must be dynamic enough to allow users to view high-level operational metrics as well as to allow them to view details specific to particular agents. This enables users to make informed decisions and rapid changes to how customer interactions are being handled based on the depth and breadth of information they can access.

      The Emergence of VoIP. Voice over Internet Protocol, or VoIP, together with other Internet technologies is anticipated to be the next major trend in communications. VoIP permits the movement of voice traffic over an Internet Protocol based network, lowering transmission costs relative to the PSTN, both by enabling the consolidation of networks and by bypassing the toll charges for long distance voice transmissions. Instead of two separate networks for voice and data, voice calls flow over the data network like other communications such as e-mail. Therefore, in order to optimize VoIP, contact centers must employ software-based applications that blend voice, e-mail and Web communications into a single queue and route them intelligently over a data network to the optimal destination. Convergence of voice and data networks in the contact center has been and will continue to be evolutionary due to its mission critical role in business. This will drive the need for a migration strategy which is not disruptive to businesses and which offers support for legacy and converged networks.

Products

      We develop, market and support software and hardware products designed to enable organizations to provide a high level of service to their customers. Our solutions are based on our Uniphi architecture, which connects the contact center to the enterprise by integrating the applications that drive customer communications,

customer and contact center information, and workforce productivity. We offer our software products as integrated suites or separate modules, depending on customer requirements. Aspect offers three product lines for managing contact center communications, workforces and information:

      Classic The Classic product line encompasses Aspect’s products for managing contact centers based mostly on the traditional PSTN network. The Classic product line offers a full set of products for receiving, managing and routing live- and self-service interactions (both phone and Web-based email and chat), and computer-telephony integration: the Aspect Call Center, Aspect Contact Server, Aspect Enterprise Contact Server, and Aspect Customer Self-Service. The Classic product line also includes Aspect Uniphi Connect, which was introduced in 2004 and allows customers to bridge from traditional solutions to next-generation Voice-over-IP solutions.

      Aspect Uniphi Suite The Uniphi Suite product line includes Aspect’s next-generation products that are designed to harness the power, flexibility and intelligence of an IP environment. The product line takes its name from the primary product in this category, Aspect Uniphi Suite, which is an integrated set of advanced contact center applications that deliver a full range of contact center functionality. Further, Uniphi Suite is built using open standards-based software, with a consistent single point of control for viewing and managing contact center operations. Uniphi Suite’s functionality includes call center capabilities; computer-telephony integration as well as integration support for various data sources; the handling and routing of voice calls, internet-based mail and chat, and other sophisticated integration with Aspect’s eWorkforce Management product.

      Workforce Productivity The Workforce Productivity product line encompasses Aspect’s products for managing contact center workforces for optimal productivity. Products in this category offer a range of functionality including, for example, modules for scheduling, forecasting and notification. Customers can customize a workforce productivity solution for their contact centers and use the functionalities most appropriate for their business. Included in this product line are Aspect eWorkforce Management, Aspect Customer DataMart, and Aspect Agent Performance Optimization and AIMCall which is a sophisticated analytic tool for building applications to report on and analyze a wide-range of contact center data.

Technology and Architecture

      Our Uniphi business communications architecture extends the contact center across the enterprise by integrating the complex applications that drive customer communications, customer and contact center information, and workforce productivity.

      Our open architecture is modular, flexible and interoperable within multi-vendor environments. We make use of open standards in the design of our products to optimize the integration and interoperability with third-party technologies and applications such as quality monitoring and recording, outbound dialing and analytics. In addition, we offer integration modules that make connecting to a wide range of applications in the contact center and the enterprise less costly than developing customized interfaces to proprietary systems. We offer connectivity to key customer relationship management applications from leading vendors such as SAP and Siebel Systems. By integrating with these applications, our solutions deliver valuable customer information to any live or self-service resource serving any given customer.

      Standards-based products are a critical part of our Uniphi solutions. As such, we ensure compliance with a range of communications, workforce management and information exchange standards. In addition, we also support common operating systems, languages, hardware, networking protocols, database and data storage mediums and front office applications.

      We continuously evaluate and invest in emerging standards. We developed our open architecture to easily accommodate the integration of emerging technologies such as Web services and Voice eXtensible Markup Language or VXML, and support our customer’s choice of standards. In addition, we enable our customers to create and quickly modify business rules to drive live and self-service communications between them and their customers. Our open architecture provides a flexible and low-cost solution that scales to address the evolving communication and infrastructure demands of our customers.

Customer Service and Support

      We believe that superior customer service and support is critical to retaining and expanding our customer base. Our customer service group provides technical support and maintenance, consulting, installation and education services to help our customers successfully implement, upgrade and use our products.

      Our technical support and maintenance services are provided primarily by support centers located around the world and include telephone support and remote field support. In addition, our eServices online support enables our customers to download software updates and technical information and open and track support cases on the Web. We offer various levels of support, ranging from basic support to 24 by 7 mission critical support. Pricing of support services is generally based on the level of support selected and the number of users authorized to access our products. Our contracts generally include update rights for licensed products.

      Our Global Professional Services group provides services that include the installation and implementation of our products. Our end-to-end consulting services include project design, requirements analysis, implementation, and closure. These services are generally billed on a fixed price or time and materials basis. We also partner with third-party systems integrators, or SIs, to provide additional coverage and complementary technical skills.

      Our education services include training courses that are provided in our training centers or at customer sites around the world. These services are generally billed on a per person, per class basis.

Customers

      We have a well established global customer base including more than two-thirds of the Fortune 50, with customer deployments worldwide across a broad range of industries and markets including transportation, financial services, insurance, telecommunications and outsourcing. No customer accounted for 10 percent or more of revenue in 2004.

Sales and Marketing

      We sell and market our products and services in the U.S. primarily through our direct sales force and internationally through our direct sales force and VARs. Our direct sales force is comprised of inside sales and field sales personnel. Our sales people are located in more than 20 major cities worldwide. Our sales efforts target companies of varying sizes across diverse industries. A key aspect of our sales strategy is to increase sales through indirect channels including VARs and SIs. In addition, we plan to continue to develop alliances with key technology partners who integrate their products or services with our products or services to offer customers a complete solution.

      We have a variety of marketing programs designed to create global brand recognition and market awareness for our product and service offerings. We market our products and services through our Web site, direct mail and online and print advertising. In addition, our marketing initiatives include hosting user conferences and active participation in tradeshows and industry events, cooperative marketing efforts with our customers and partners, publication of technical and educational articles in industry journals, sales training, product and strategy updates with industry analysts and speaking engagements. Our marketing organization also produces materials in support of sales to prospective customers that include programs and materials, brochures, data sheets, white papers, presentations, demonstrations and other marketing tools.

Research and Development

      Our product development efforts are focused on improving and enhancing our existing products as well as developing new products to broaden our offerings in the market we serve. These efforts are largely driven by current and anticipated customer and strategic partner needs. Our research and development expenditures for 2004, 2003 and 2002 were $44.5 million, $49.3 million and $56.8 million, respectively, which represented 12%, 14% and 14% of total revenues, respectively.

Manufacturing

      We outsource our manufacturing operations to contract manufacturers. Our products include materials with varying lead times, generally 30 to 90 days ahead of the required date of delivery. Because this is a longer time frame than the average customer order to shipment cycle, our contracts with our contract manufacturers generally authorize them and commit us to acquire materials and build standard sub-assemblies based on forecasted production requirements. Upon receipt of firm orders from our customers, we instruct our contract manufacturers to assemble, configure, test and ship systems to meet our customers’ request dates. We have established manufacturing procedures with our contract manufacturers that are designed to achieve rapid response to customer orders.

      We depend on certain critical components such as certain server computers, integrated circuits, power supplies, cables and plastic housings in the production of our products. Some of these components are obtained only from single suppliers and only in limited quantities, although we have taken steps to mitigate the risk presented by our dependence on limited suppliers and quantities, including purchasing quantities of these components that we believe will meet anticipated needs and by designing our products in a way that will allow us to modify our products if necessary to accommodate alternate supplier components.

Product Backlog

      Our backlog as of December 31, 2004, was approximately $6.0 million compared with a backlog of approximately $7.4 million as of December 31, 2003. Our backlog includes only orders confirmed with a purchase order to be shipped within 90 days to customers with approved credit status. While we believe that all of the orders included in our backlog are firm we may determine that it is in our best interest to allow orders to be cancelled without penalty.

Competition

      The contact center market in which we operate, which includes ACD, IVR, CTI, workforce management and reporting and analytics vendors, is intensely competitive and rapidly changing.

      Product lines with which we compete in the ACD, IVR and CTI portion of the market include those offered by diversified communications equipment companies such as Avaya; Cisco Systems; Genesys, a subsidiary of Alcatel; Intervoice; Nortel Networks and Siemens.

      Product lines with which we compete in the workforce management software and reporting and analytics portion of the market include those of Blue Pumpkin (acquired by Witness Systems in 2005) and IEX, a subsidiary of Tekelec, and those of diversified communications equipment companies like Genesys. Other communications equipment companies such as Avaya also compete against us in these markets through vendor alliances they have established.

      The principal competitive factors in our industry include functionality, quality, reliability, performance, price, level of customer support, reputation, timely introduction of new products, investment protection, and market presence. We believe we have competed effectively to date with respect to these factors.

      Our future anticipated growth and success will depend on our ability to compete favorably on the basis of the above factors, as well as by developing superior, cost-effective products, continuing to develop alliances with key technology partners, providing superior customer service and support, and expanding our market reach relative to our competitors. Many of our competitors have greater name recognition, larger installed customer bases, longer operating histories and significantly greater financial, technical, sales, marketing and other resources than we do. Our competitors could therefore devote substantial resources to developing and marketing products with superior features, scalability and functionality at lower prices than our products, and could also bundle existing or new products with other more established products in order to compete with us. Our competitors could also gain market share by acquiring or forming strategic alliances with our other competitors.

Intellectual Property

      We rely on a combination of patent, trademark, copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We file patent applications to protect inventions and improvements that are significant to the development of our business. As of January 31, 2005, we held 114 issued United States patents and a lesser number of issued foreign patents and have pending 35 United States patent applications and a lesser number of corresponding foreign patent applications that cover various components of our technology. Our United States issued patents expire on dates ranging from 2005 through 2022. There can be no assurance that any of the claims in the pending applications will be allowed, that any issued patents will be upheld, that competitors will not circumvent our patents, or that any patents or licenses will provide competitive advantages for us or our products. Historically, the revenues we have generated from the licensing of our patent portfolio have not been material, although the portfolio continues to support our hardware and software revenue generation efforts.

      We believe that customer perception of our brand and trademarks is important to our success. We have eight trademarks registered in various jurisdictions globally.

      We generally enter into non-disclosure agreements with our employees, consultants, customers and vendors, and generally control access to and distribution of our software, documentation and other proprietary information. We provide our proprietary software to customers under license agreements. Despite these precautions, unauthorized third parties may copy or otherwise obtain and use our technology. In addition, third parties may develop similar technology independently.

      We hold licenses from various third parties regarding rights to certain technology that we incorporate in our products. We have also entered into standard commercial agreements with several suppliers of operating systems, databases and other software used for development and implementation of our products. We believe that the licensing of complementary technologies and software from parties with specific expertise is an effective means of expanding the features and functionality of our products. These licenses are ongoing and generally involve the payment of a fixed license fee or royalties based on the volume of systems we ship over periods of time.

      Despite our efforts to protect our intellectual property, there is no assurance that the steps we take will be adequate to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. The laws of many countries do not protect proprietary technology to as great an extent as do the laws of the United States. Moreover, the market for our products is subject to rapid technological change and therefore we also believe that factors such as the technological and creative skills of our personnel and new product developments and enhancements are essential to establishing and maintaining a technology leadership position. Accordingly, although we believe our patent portfolio is valuable to our business generally, we do not view any particular patent or patents we possess as particularly significant to our business.

Employees

      As of December 31, 2004, we had 1,254 full-time employees. None of our employees are represented by a labor union. We have never experienced a work stoppage and believe that our relationship with our employees is good.

Website Posting of SEC Filings

      Our website provides a link to our SEC filings, which are available on the same day such filings are made. The specific location on the website where these reports can be found is http://www.aspect.com/ir/financials/index.cfm. Our website also provides a link to Section 16 filings which are available on the same day such filings are made.

      As of December 31, 2004, our headquarters occupied three office buildings, totaling approximately 285,000 square feet, in San Jose, California. Two of the buildings are owned and the third building is leased. The owned buildings total approximately 209,000 square feet. We occupy approximately 90,000 square feet in facilities located in Tennessee that are leased through 2006. We also occupy 105,000 square feet in facilities located in Massachusetts that are leased through 2009. Other North American sales and support functions operate from various leased multi-tenant offices nationwide covering a total of 61,000 square feet with leases expiring as late as 2010. Additionally, we lease approximately 244,000 square feet of space in North America that is currently unoccupied, of which we sublease approximately 39,000 square feet as of December 31, 2004.

      We have several leased facilities to support our European operations. Our principal U.K. operations are located near London in facilities totaling approximately 30,000 square feet and are leased through 2023. Other significant European facilities are located in Germany and the Netherlands. In Asia, we occupy sales and support offices in Japan, Singapore, Hong Kong and Australia.

      We are subject to various legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, we do not believe that the outcome of any of these legal matters will have a material adverse effect on our business, operating results or financial condition. However, litigation in general, and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict.

      On May 20, 2003, Electronic Data Systems Corporation, or EDS, made a demand for arbitration with the American Arbitration Association in connection with the Master Services Agreement entered into with us and EDS in December 2000 in which we outsourced certain IT needs to EDS. A dispute arose between us and EDS over the services and charges to be performed and paid under the Master Services Agreement and we terminated the Master Services Agreement for EDS’s breach of the agreement. EDS alleged that we breached the Master Services Agreement and implied warranties associated with the Master Services Agreement, and committed fraud and engaged in negligent misrepresentation in inducing EDS to enter into the Master Services Agreement. On June 11, 2003, we filed our answer and counterclaims in which we denied every allegation made by EDS, denied that EDS was owed any amount in damages, and counterclaimed that EDS breached the Master Services Agreement, committed fraud in inducing us to not terminate for cause the Master Services Agreement earlier, and engaged in fraudulent and unfair business practices. On May 4, 2004, we received the interim award of the arbitrator. The arbitrator ruled that EDS breached the Master Services Agreement and ordered EDS to pay $1.4 million in damages to us. The arbitrator rejected the parties’ claims of fraud, negligent misrepresentation, fraudulent misrepresentation and fraudulent and unfair business practices. The arbitrator also allowed further briefing, if desired by EDS, to consider whether we performed services that should have been transferred to EDS, and if so whether EDS should be entitled to any lost profits associated with those services. In the parties’ respective briefs, EDS claimed it was entitled to between $1 million to $2.1 million in lost profits. We claimed EDS was entitled to nothing. On July 7, 2004, the arbitrator ruled that EDS is not entitled to any damages and affirmed the interim award of damages payable to us. Judgment has been entered by the California Superior Court for Santa Clara County and EDS paid the amounts owed to us in December 2004.

      No matters were submitted to a vote of security holders during the quarter ended December 31, 2004.

PART II

      Aspect Communications Corporation’s common stock is traded on The Nasdaq National Market under the symbol “ASPT”. As of December 31, 2004, there were approximately 1,001 shareholders of record of Aspect’s common stock.

      We have never paid cash dividends on our common stock and the terms of our credit arrangement prohibit our declaration of cash dividends without bank consent. Pursuant to the terms of the Series B convertible preferred stock set forth in our Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Preferred Stock, we may not declare or pay dividends on any class of stock junior to that of the Series B convertible preferred stock without the prior written consent of the holders of a majority of the shares of the Series B convertible preferred stock then outstanding. Additionally, we are now obligated to accrue dividends on each share of 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. We are permitted to pay up to 50% of accrued dividends in the form of Common Stock. If there has been no conversion or no cash dividend payments upon the tenth anniversary of the date of issuance of the Series B convertible preferred stock, we are required to pay a redemption amount equal to 125% of the original purchase price of the stock plus accumulated unpaid dividends to the Series B convertible preferred shareholders. Subject to the foregoing, we currently anticipate that we will retain all available funds for use in our business.

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 economic climate in 2004 continued its slight improvement that began in 2003 as compared to the difficult environment in 2002 and 2001 which had resulted in dramatically decreased capital spending. We believe that the rate of decline in our revenues from 2002 to 2003 was generally comparable to that of the market in which we operate. 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. Even now 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.

      Many companies had increased their capital spending on communications and computing products such as ours from the late 1990s to 2000 partially as a result of their preparation for the highly publicized “Year 2000 bug.” The Year 2000 concern resulted in a technology product upgrade cycle to replace products that were either deemed not to be Year 2000 compliant or would not be cost-effective to upgrade to Year 2000 compliant. We believe that demand for our products returned to “pre-Year 2000 levels”, like products of many other technology companies, once this upgrade cycle was completed in 2000.

      We believe the general downturn in the economy since 2001 caused many of our customers’ revenues to decline and therefore caused them to defer, reduce or cut entirely their capital spending on contact centers. Moreover, some customers have combined or closed their contact centers in order to reduce expenses, which further contributed to the decline in our revenues. As with many competing products, some customers are price sensitive due to the negative economic conditions they are experiencing and therefore demand more contact center capabilities and feature at a lower price as the technology evolves, which may lead to downward pricing pressures across our industry.

      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 over the past three years, we cannot provide any assurance that these pressures on IT spending will ease, or that general economic climate will improve. Continued competitive pressure and a weak economy could have a continuing pronounced effect on our operating results. We have undertaken a variety of cost reduction measures designed

to bring our operating expenses in line with our perceptions of the business climate. Some of these measures included:

      Workforce adjustments: We reduced our workforce substantially in 2001 and 2002 and made further minor reductions in 2003; our full-time headcount at December 31, 2002 was 1,391, at December 31, 2003 was 1,291 and at December 31, 2004 was 1,254. As a result of our workforce adjustments, direct employee costs declined from $219 million in 2001, to $160 million in 2002, to $140 million in 2003 and $134 million in 2004.

      Outsourcing of manufacturing: While historically we engaged in some of our manufacturing efforts internally, we made the strategic decision to outsource substantially all of our manufacturing operations in late 2001. By outsourcing our manufacturing operations, we shifted our manufacturing to a more variable cost structure that leveraged our outsourced manufacturers’ economies of scale from purchasing volumes while substantially reducing our fixed costs associated with manufacturing. Our manufacturing fixed costs declined from $11.5 million in 2002 to $7.9 million in 2003 to $7.7 million in 2004, primarily due to headcount reductions from 32 manufacturing employees in 2002 to 17 manufacturing employees in 2004.

      Renegotiation of contracts: We renegotiated a variety of supply contracts and license arrangements to reduce the aggregate payments or to extend the period of time for payments we would be required to make. As a result of renegotiating supply contracts in IT and telecommunications, we reduced spending by $3 million in 2002, $13 million in 2003 and $7 million in 2004.

      During 2004, we strengthened our financial position by increasing revenues and net income as compared to 2003. Our cash and short-term investments balance at December 31, 2004 was $202.6 million after repaying $40 million outstanding under the revolving credit facility.

      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), professional and education 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 service fees are generally based on a fixed price or time and materials basis. Our education services are generally based 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 indirect sales channels. Our ability to achieve revenue growth and improved operating margins, as well as increased worldwide sales, in the future will depend in part upon our success in expanding and maintaining these indirect sales channels worldwide.

Critical Accounting Policies and Estimates

      Note 1 of the Notes to the Consolidated Financial Statements in this report includes a summary of the significant accounting policies and methods used in the preparation of Company’s Consolidated Financial Statements.

      Our critical accounting policies include revenue recognition, revenue reserves, allowance for doubtful accounts, accounting for income taxes, excess and obsolete inventory, restructuring and self insurance reserves.

      The preparation of financial statements in conformity with accounting standards generally accepted in the United States of America 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, and 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 except by application of the methodologies described below. The following is a brief discussion of the critical accounting policies and methods that we use.

      Revenue Recognition: We recognize revenue from the sale of software licenses and hardware when persuasive evidence of an arrangement exists, the product has been delivered, title and risk of loss have transferred to the customer, the fee is fixed or determinable and collection of the resulting receivable is probable. Delivery generally occurs when the product is delivered to a common carrier unless title and risk of loss transfers upon delivery to the customer. In any sales transaction through a distributor or reseller, we recognize revenues when the distributor or reseller sells to an identified end user.

      For multiple element arrangements, we defer the fair value of revenue associated with each undelivered element until such time as delivery occurs. Deferred revenue is allocated to each element using vendor specific objective evidence of fair value. Fair value is established through separate sales of each element to third parties.

      Revenue reserves: An estimate of the revenue reserve from customer returns is recorded as a reduction in revenues. In determining our revenue reserve estimate, and in accordance with internal policy, we rely on historical data, known returned goods in transit and direct feedback from our internal business units. Our revenue reserve can vary from what actually occurs in that more or less product may be returned from what was originally estimated. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual results. Charges to the reserve were consistent with the original estimates. The revenue reserve was $1.2 million as of December 31, 2004. Our revenue reserves as a percentage of total net revenues were 0.3%, 0.3% and 2.0% in 2004, 2003 and 2002, respectively. Based on our results for 2004, a one-percentage point deviation in our revenue reserve as a percentage of quarter ended December 31, 2004 net revenues would have resulted in an increase or decrease in revenue of $1 million.

      Allowance for doubtful accounts: We must make estimates of the collectibility of accounts receivable at the end of each accounting period. We specifically analyze historical bad debts, customer concentrations, customer payment history, customer credit worthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. The key factors we use in assessing this allowance are the individual judgments on specific customer balances and the overall aging of the total receivables. Assumptions and judgments regarding collectibility of accounts could differ from actual events. Our allowances for doubtful accounts as a percentage of total net revenues were 0.9%, 1.3% and 3.0% in 2004, 2003 and 2002, respectively. Our allowances for doubtful accounts as a percentage of net accounts receivable were 6.5%, 12.1% and 23.0% in 2004, 2003 and 2002, respectively. Based on our results for 2004, a one-percentage point deviation in our allowance for doubtful accounts as a percentage of total net accounts receivable would have resulted in an increase or decrease in expense of $0.5 million. In the 2003 and 2004 timeframe, charges to the reserve were less than the original estimates. At this time, we are not aware of any internal process or product issues that might lead to a significant future increase in our allowance for doubtful accounts as a percentage of net sales or as a percentage of net receivables.

      Our allowance for doubtful accounts was $3.2 million as of December 31, 2004, $4.8 million in 2003 and $11.8 million in 2002. In 2002, we added additional controls to our support billing and collections process, including more proactive customer correspondence to reduce billing disputes, greater customization of billing

practices to suit customer preferences, improvements to our maintenance renewal billing process, and additional internal control procedures relating to customer purchase orders and credit evaluations. As a result of these process improvements and success in our dispute resolution efforts, we collected previously reserved receivables that contributed to a $12.2 million year-over-year reduction in bad debt expense in 2003. We will continue to monitor our allowance for doubtful accounts balances in relation to the subsequent actual cash collections from customers to identify any increases or decreases that are necessary to accurately reflect our net accounts receivable balances.

      Accounting for income taxes: As part of the process of preparing consolidated financial statements, we are required to estimate our income taxes in each of the tax jurisdictions in which we operate. This process involves management’s estimation of our actual current tax exposure together with an assessment of temporary differences resulting from different treatments in tax and accounting of certain items. These differences result in net deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or adjust this allowance in a period, we must include a tax expense or benefit within the tax provision in the consolidated statement of operations.

      Significant judgment is required in determination of the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We had a valuation allowance of $70.4 million as of December 31, 2004, due to uncertainties related to our ability to utilize all of our deferred tax assets, primarily consisting of certain net operating losses carried forward and research tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which the deferred tax assets are likely to be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could favorably impact our results of operations. If we were to fully release our valuation allowance, we estimate that approximately $50.2 million of the change would result in an income tax benefit and approximately $20.2 million relating to stock option exercises and related tax credits would be credited directly to additional paid-in capital. The following analysis demonstrates the potential effect the full release of our valuation allowance would have upon our consolidated financial statements in 2004 and is not intended to provide a range of exposure or expected deviation (in thousands):

      Excess and obsolete inventory: We value inventory at the lower of the actual cost or the current estimated net realizable value of the inventory. We regularly review inventory quantities on hand and record a write-down for excess and obsolete inventory based primarily on production and supply requirements. Due to variability in future market conditions and product mix, inventory estimates may be underestimated or overstated. In the future, if the carrying value of the inventory were not realizable, we would be required to recognize write-downs to net realizable value as additional cost of revenues at the time of such determination. Although we make every effort to ensure the accuracy of our forecast of future production requirements and supply, any unanticipated changes in technological developments could have a significant impact on the value

of our inventory and our reported operating results. Our estimates have generally been adequate to cover our actual write-downs but we cannot reliably predict future changes and cannot guarantee that our estimates will continue to be adequate. However, charges to our reserve have been consistent with the original estimates. In 2004, we recognized a net benefit of $1.2 million which related to the consumption of excess and obsolete inventory previously written off and in 2003 total write-downs related to excess and obsolete inventory were $1.3 million.

      Restructuring reserve: In 2002 and 2001 we reduced our workforce by 22% and 28%, respectively, and consolidated selected facilities in our continuing effort to better optimize operations. In connection with the workforce adjustments, a restructuring reserve was established based on estimated costs for severance and outplacement, consolidation of facilities and legal and other costs. Due to the decline in the commercial real estate market, it was expected that abandoned leased facilities would be vacant for several quarters or through the end of the lease term. If the facilities were subleased, it would be at rates below current contractual requirements. We recorded a charge related to the facilities abandonment, based on the difference between the expected cash outflows and the expected cash inflows related to these vacated properties. We periodically review factors such as further declines in the commercial real estate markets and our ability to terminate leases, and based on these reviews we adjust our restructuring reserve as necessary. The remaining restructuring reserve as of December 31, 2004 relates to consolidation of facilities costs and will be reduced going forward by lease payments offset by sublease income of $1.1 million. The restructuring reserve balance was $9.4 million as of December 31, 2004. Charges to this reserve for abandoned facilities have increased from the original estimates due to the extended weakness in the real estate market and subleasing potential. Although we do not believe it is likely at this time, if we are able to obtain additional subleases, we will reverse the restructuring reserve in an amount equal to such sublease and reduce restructuring expense.

      Self insurance reserve: We are self-insured for a portion of our current and prior years’ losses related to medical, dental and vision insurance. In estimating our self insurance reserves, we utilize independent estimates of expected losses, which are based on analyses of historical data and industry estimates. These assumptions are closely monitored and adjusted when warranted by changing circumstances. Should a greater amount of claims occur compared to what was estimated, or medical costs increase beyond what was expected, reserves might not be sufficient and additional expense may be recorded. As of December 31, 2004 we had an estimated liability of $1.4 million. A one-percentage point deviation in our estimate of self-insurance as a percentage of cost of salaries would have resulted in an increase or decrease in expense of approximately $1 million.

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board (“FASB”) recently 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 employee 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. We are required to adopt SFAS 123R in the fourth quarter of fiscal 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 1 in our Notes to Consolidated Financial Statements for the pro forma net income and net income per share amounts, for fiscal 2002 through fiscal 2004, as if we 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 we have 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, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statements of income and net income per share.

      In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 (“FAS 109-2), Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creations

Act of 2004 (“AJCA”). See Note 1 in our Notes to Consolidated Financial Statements for information regarding FAS 109-2.

Results of Operations

      The following table sets forth statements of operations data for the three years ended December 31, expressed as a percentage of total revenues:

Comparison of Years Ended December 31, 2004, 2003 and 2002

      Net revenues increased by 2% in 2004 as compared to 2003 due to improving global economic conditions, increased capital spending by our customers on information technology, and a positive impact from strengthening foreign currencies. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency rates. Net revenues declined 8% in 2003 as compared to 2002 due to unfavorable global economic conditions which led to decreased growth in contact center operations and decreased capital spending by our customers, resulting in reduced sales opportunities and lower actual sales.

      Net revenues derived from the Americas constituted 63%, 67% and 67% of total revenues in 2004, 2003 and 2002, respectively. Net revenues derived from Europe and Asia Pacific constituted 37%, 33% and 33% of total revenues in 2004, 2003 and 2002, respectively.

      Software license and hardware revenues. Software license revenues increased by 4% to $74.0 million in 2004 as compared to $71.5 million in 2003. Hardware revenues increased by 13% to $48.5 million in 2004 as compared to $43.0 million in 2003. The increase in software license revenues and hardware revenues in 2004 from 2003 was attributable to an improving economic environment in addition to increases in hardware pricing. Software license revenues declined by 14% to $71.5 million in 2003 compared to $82.8 million in 2002 and hardware revenues declined by 35% to $43.0 million in 2003 as compared to $65.8 million in 2002. The decrease in software license and hardware revenues in 2003 from 2002 was attributable to the worldwide economic downturn where customers remained reluctant to increase capital spending on information technology.

      Software license updates and product support revenues for 2004 resulted in a decrease of 2% to $211.0 million as compared to $216.3 million in 2003. The decrease in software license updates and product support revenues in 2004 was primarily attributable to a decline in renewals for software license updates and support contract renewals with certain customers who consolidated several contact centers and pricing discounts on certain support contract renewals. Software license updates and product support revenues increased 5% in 2003 as compared to 2002. The slight increase was attributable to growth in our installed base.

      Professional services and education revenues consist primarily of installation of product, consulting services, and education fees. Professional services and education revenues for 2004 increased by 12% to $36.9 million as compared to $33.1 million reported in 2003 primarily due to higher installation and consulting services revenues as a result of increased license and hardware sales. Professional services and education revenues declined 21% in 2003 as compared to 2002 due to decreased hardware sales in 2003 resulting in lower installation revenues.

      Software license gross margin. Cost of software license revenues includes fees paid to various third parties and amortization of intangible assets and intangible asset impairment charges of zero, $2.0 million and $38.6 million in 2004, 2003 and 2002, respectively. During the third quarter of 2003 and third quarter of 2002, we identified indicators of impairment of acquired intangible assets relating to previous acquisitions and licensing arrangements. These indicators included the deterioration in the business outlook, changes in strategic plans and revised future anticipated net cash flows for certain acquired intangible assets. We then compared these future net cash flows to the respective carrying amounts attributable to the acquired assets and determined that an impairment existed in the amount of $2.0 million and $38.6 million for 2003 and 2002, respectively and no comparable charge was recorded in 2004. The increased gross software license margin is also attributable to declining amortization expense associated with intangible assets and, to a lesser extent, mix of products sold. Amortization expense for intangible assets was $2.9 million, $4.4 million and $10.6 million for 2004, 2003 and 2002, respectively.

      Hardware gross 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 improved in 2004 due to increases in hardware pricing, lower materials cost, freight cost and reduced excess and obsolete inventory write-downs. Included in the gross margin for 2004 was a net benefit of $1.2 million related to the sale of excess and obsolete inventory previously written off while the comparable period for 2003 and 2002 included a net charge to excess and obsolete inventory of $2.0 million and $4.8 million, respectively.

      Services gross margin. Cost of service revenues consists primarily of expenses for employee salaries and benefits, facilities and systems costs to support maintenance, consulting and education. Gross services margin for 2004 decreased 1% from 2003 due to slightly decreased revenue and slightly higher expenses. The increase in gross services margin for 2003 compared to 2002 was due to lower expenses associated with headcount reductions and a reduction of overhead costs.

      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. R&D expenses decreased by 9% in 2004 due to decreased facilities and depreciation expense of $2.4 million and reduced salaries and benefits expense of $2.1 million. R&D expenses decreased by 13% in 2003, as a result of reduced facilities costs due to restructuring of leased facilities of $3.5 million, reduced contractor and consulting expense of $1.2 million and decreased depreciation and amortization of $2.8 million due to reduced capital spending. We anticipate that R&D expenses in 2005 will be higher compared to 2004.

      Selling, general and administrative, or SG&A, expenses consist primarily of employee salaries and benefits, commissions, professional and consulting fees, facilities and IT costs. SG&A expenses in 2004 increased 3% compared to the comparable period in 2003 primarily due to increased professional fees of $2.2 million which includes legal and accounting fees associated with the preparation and subsequent withdrawal of our public offering and costs associated with our compliance with Sarbanes-Oxley, increased IT training related to systems implementation of $1.8 million and stock-based compensation expense of $2.4 million, which was primarily attributable to accelerated vesting of certain outstanding options of two departing executives which resulted in stock compensation expense of $2.2 million. Increases were offset by decreases in salaries and benefits expense of $2.8 million and reduced IT consulting fees of $3.4 million. During 2003, a reversal of accounts receivable reserve of $3.7 million was recorded for the collection of previously reserved receivables as compared to a reversal of accounts receivable reserve of $0.7 million for 2004. We anticipate that SG&A expenses in 2005 will be slightly higher compared to 2004.

      SG&A decreased 29% in 2003 mainly due to continued workforce reductions representing a cost savings of $11.0 million, reduced facilities costs of $5.7 million due to restructuring of leased facilities, reductions in other spending costs such as savings in travel of $2.6 million, recruiting costs of $2.5 million, marketing of $3.3 million and office and maintenance expense of $3.2 million. The decrease in travel, recruiting, marketing and office and maintenance expense for 2003 was related to our ongoing efforts to control costs, and reduce our discretionary spending in light of reduced revenues and our reduced workforce. In addition, depreciation and amortization expense decreased by $3.6 million in 2003. Bad debt expense decreased by $12.2 million in 2003 which was the result of the collection of previously reserved receivables and improvement of receivables aging.

      Restructuring charges consist of costs related to severance, outplacement and consolidation of facilities related to workforce adjustments. In 2003, there was a net restructuring charge of $3.8 million as a result of the revision of our estimate upward for future facility related obligations by $4.3 million and reducing our estimate of remaining severance and outplacement costs by $0.5 million.

      In 2002, we reduced our workforce by 22% and consolidated selected facilities in our continuing effort to optimize operations. The workforce adjustment resulted in the termination of 407 employees. These activities resulted in a restructuring charge of $22.4 million, which consisted of consolidation of facilities costs of $14.1 million, severance and outplacement costs of $6.6 million and other restructuring costs of $1.7 million

      Interest income represents, primarily, earnings on short-term investments. Interest income increased in 2004 due to an increase in short-term investment holdings compared to 2003. Interest income decreased $0.7 million in 2003 as compared to 2002 due to lower rates of return on short-term investments and to lower levels of cash and short-term investments.

      Interest expense decreased by $5.6 million in 2004 and $4.7 million in 2003 primarily due to the reduction in debt obligations associated with our convertible subordinated debentures which we repaid in full in December 2003.

      Other expense includes fees charged for bank services, gains or losses recognized on sale of investments and other non-operating income and expenses. For 2004, other expenses includes fees charged for bank services of $0.4 million, debt issuance cost amortization of $1 million and losses on investments of $0.1 million offset by $0.6 million in other non-operating income. In 2003, other income and expenses includes fees

charged by bank services of $0.7 million and debt issuance cost amortization of $0.7 million offset by $0.8 million in net gains recognized on the sale of investments. Other expense for 2002 includes a $8.9 million charge for the write-down of long-term investments, for which we determined a decline in value that was other than temporary. The write-down was mainly offset by a $7.2 million gain on extinguishment of debt resulting from the repurchase of convertible subordinated debentures.

      In 2004 and 2003, we recorded income tax provisions at effective rates of 10.9% and 15.9%, respectively. The 2004 and 2003 tax rates vary from the statutory rate primarily due to our having a full valuation allowance against our U.S. based deferred tax assets. This results in a tax provision based on current tax calculations in foreign jurisdictions and only nominal amounts in federal and state jurisdictions due to our substantial U.S. net operating losses. Our 2004 and 2003 tax rate further varies from the statutory rate as a result of nondeductible expenses and the effect of different tax rates in foreign jurisdictions. We reassess the necessity of our valuation allowance on a quarterly basis.

      In the loss year of 2002, we recorded an income tax benefit at an effective tax rate of 32.5%. During the first quarter of 2002, there was a change in the tax law that increased the years to which we could carry back our 2001 tax loss from two to five years, resulting in a tax refund and tax benefit of $27 million. In addition, our 2002 tax rate varies from the statutory rate due to a valuation allowance being imposed on current year net losses and the write-off of nondeductible intangible assets during the year.

      On October 22, 2004, the American Jobs Creation Act of 2004 or AJCA was signed into law. The AJCA introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings. 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 have started an evaluation of the effects of the repatriation provision. However, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. In January 2005, the Treasury Department began to issue the first series of clarifying guidance documents related to this provision. We expect to complete our evaluation of the effects of the repatriation provision within the first two fiscal quarters of 2005.

      The range of possible amounts that we are considering for repatriation under this provision is between zero and $50 million. While we estimate that the related potential range of additional income tax is between zero and $5 million, this estimation is subject to change following technical correction legislation that we believe is forthcoming from Congress.

      Due to the issuance of $50 million of our convertible Series B redeemable preferred stock in the first quarter of 2003 we accrue dividends at 10% compounded daily per annum, accrete the 125% redemption premium and amortize the beneficial conversion feature.

      The Series B redeemable convertible preferred stock that we issued contains certain participation rights. EITF Topic D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings Per Share, requires those securities to be included in the computation of basic earnings per share using the two-class method. The two-class method results in a lower per share calculation and since diluted earnings per

share can not be greater than basic earnings per share, the reported diluted earnings per share and basic earnings per share for 2004 and 2003 were the same.

Liquidity and Capital Resources

      As of December 31, 2004, cash, cash equivalents, and short-term investments totaled $203 million, representing 60% of total assets and our principal source of liquidity. In addition, we had restricted cash of $3.4 million related to various letter of credit agreements.

      Net cash provided by operating activities was $82.2 million in 2004, as compared to $99.1 million in 2003. Although our cash position benefited from higher earnings, cash provided by operating activities declined 17% in 2004 as compared to 2003 due to an increase in accounts receivable and higher repayments of liabilities during 2004. Our days sales outstanding increased from 34 days in 2003 to 38 days in 2004 which is within our historical range and is not a result of any significant increase in the aged receivables greater than 90 days. 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. Cash collections from customers during 2004 were $384 million compared to $432 million collected during 2003.

      Net cash used in investing activities was $44.3 million in 2004 compared to $14.6 million in 2003. Net cash used in investing activities in 2004 related to the net purchase of short-term investments of $27.5 million and property and equipment of $16.7 million compared to 2003 in which net purchase of short-term investments amounted to $8.8 million and property and equipment purchases were $5.7 million. We anticipate an increase in our 2005 capital budget for facilities improvements.

      Net cash used in financing activities was $27.2 million in 2004 compared to $76.3 million in 2003. Net cash used in financing activities in 2004 was primarily the result of net payments on borrowings of $40.9 million and payments for financing cost of $1.1 million offset by $15 million in proceeds from the issuance of common stock relating to the exercise of employee stock options.

      Net cash provided by operating activities improved to $99.1 million in 2003 as compared to $74.0 million in 2002. The main contributor to the increase in net cash provided by operating activities was our significantly improved profitability. Cash collections from customers during 2003 was $432 million. In 2003 we reduced our days sales outstanding to 34 days.

      Net cash used in investing activities was $14.6 million in 2003 compared to $28.4 million in 2002. Net cash used in investing activities in 2003 related to the net purchase of short-term investments of $8.8 million as well as property and equipment purchases of $5.7 million.

      Net cash used in financing activities was $76.3 million in 2003 compared to $52.6 million in 2002. Net cash used in financing activities in 2003 resulted from net repurchases of convertible debentures of $129.4 million, preferred stock proceeds of $43.6 million, common stock issuances relating to various stock purchase and option plans of $16.8 million and net payments on borrowings of $6.9 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:

      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 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 December 31, 2004.

      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 December 31, 2004, approximately $3.0 million is recorded as restricted cash under other current assets on the balance sheet related to these bank guarantees.

      In January 2003, we consummated a Preferred Stock financing with Vista Equity Fund II, L.P or Vista, pursuant to which Vista purchased $50 million of our Series B redeemable convertible preferred stock, which, assuming conversion at the initial conversion price, represented at that time approximately 30% of our outstanding shares on a fully diluted basis. We received $44 million in net proceeds from this transaction. This equity entitled the holders to receive cumulative dividends, which accrues daily at 10% per annum. On or after the tenth anniversary of the closing, January 21, 2013, we have an obligation to redeem each share of unconverted Series B redeemable convertible preferred stock for cash at a redemption price equal to 125% of the original purchase price plus accrued and unpaid dividends. Additionally, in the event that we declare a dividend or distribution to the holders of common stock, the holders of Series B redeemable convertible preferred stock would have been entitled to equivalent participation on an as-if-converted basis in such dividend or distribution.

      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, and obtaining and re-negotiating credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. 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

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.

RISK FACTORS

      Before you invest in any of our securities, you should be aware of various risks to which we may be subject, including those described below. The following risks and uncertainties may have a material and adverse effect on our business, financial condition or results of operations. You should carefully consider these risks and uncertainties, together with all of the other information included or incorporated by reference in this 10-K before you decide whether to purchase any of our common stock. If any of the material risks or uncertainties we face were to occur, the trading price of our securities could decline, and you may lose all or part of your investments.

Business Environment and Risk Factors

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:

      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 in recent periods and related reductions in information technology, or IT, spending have resulted in many of our customers delaying or substantially reducing their spending on contact center hardware, software and services. If the weakness in the global economy were to continue or worsen, demand for our products and services would likely continue to decrease and our business would be harmed.

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:

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

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 Inc., 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. 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 on a global scale. The financial resources required to enter, establish and grow new and

existing foreign markets may be substantial, and foreign operations are subject to additional risks which may negatively impact our business including:

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. For example, we experienced delays in invoicing in the quarter ended September 30, 2004 which delayed collections, increased DSOs relative to the prior quarter, and increased accounts receivable for the quarter.

      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 and shortly following the fourth quarter of 2004, we identified five significant deficiencies in the design and operation of our internal controls. While two of the identified deficiencies have been remediated, we are in the process of remediating the other three identified deficiencies. It is possible that in the future we will identify further 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, within Aspect 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:

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 December 31, 2004, 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:

      Vista’s ownership of our Series B Convertible Preferred Stock together with its right to nominate two of our seven 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.

      Our articles of incorporation, our bylaws and our shareholder rights plan contain provisions that may inhibit potential acquisition bids for us and prevent changes in our management. Certain provisions of our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transactions. These provisions of our charter documents could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also prevent changes in our management.

      We are exposed to financial market risk from fluctuations in foreign currency exchange rates and interest rates. We manage our exposure to these and other risks through our regular operating and financing activities and, when appropriate, through our hedging activities. Our policy is not to use hedges or other derivative financial instruments for speculative purposes. We deal with a diversified group of major financial institutions

to limit the risk of non-performance by any one institution on any financial instrument. Separate from our financial hedging activities discussed below, material changes in foreign exchange rates, interest rates, and, to a lesser extent, commodity prices could cause significant changes. These changes could affect costs to manufacture and deliver our products and in our customers’ buying practices. We have not substantially changed our risk management practices during 2004 and do not currently anticipate significant changes in financial market risk exposures in the near future that would require us to change our risk management practices.

      Debt and Interest expense: Our credit line covered under the Credit Agreement with Comerica Bank — California and CIT Business Credit is sensitive to changes in interest rates. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to our line of credit which was repaid in September 2004 indicated that such market movement would not have a material effect on our operating results.

      Foreign Currency Exchange: Revenues generated from international operations are generally denominated in foreign currencies. We enter into outright forward foreign exchange contracts to hedge against fluctuations of significant intercompany account balances and monetary assets and liabilities denominated in a non-functional currency. In general, these contracts have maturities of one month or less. Market value gains and losses on these hedge contracts are substantially offset by fluctuations in the underlying balances being hedged, and the net financial impact has not been material in any of the three years presented. As of December 31, 2004, our primary net foreign currency market exposures included Euros, British pounds, Australian dollars, Canadian dollars and Japanese yen.

      A sensitivity analysis assuming a hypothetical 10% movement in foreign exchange rates applied to our hedging contracts as of December 31, 2004, indicated that these market movements would not have a material effect on our business, operating results, or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending on actual changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual balances and hedges. Foreign currency rate fluctuations can impact the U.S. dollar translation of our foreign operations in our consolidated financial statements. In 2004, these fluctuations have not been material to our operating results.

      Interest and Investment Income: Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. Our investments are in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers and, by policy, limit the amount of credit exposure to any one issuer. These investments are subject to interest rate risk, and could decline in value if interest rates increase. The average duration of our investment portfolio as of December 31, 2004 was 1.3 years. Due to the short duration and conservative nature of these instruments, we believe an immediate 10% change in interest rates would be immaterial to our operating results.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors of

Aspect Communications Corporation:

      We have audited management’s assessment, included in the Management Report on Internal Control, that Aspect Communications Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Aspect Communications Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that Aspect Communications Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by COSO. Also, in our opinion, Aspect Communications Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by COSO.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aspect Communications Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity and cash flows for the three years ended December 31, 2004, and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Mountain View, California

March 11, 2005

REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM

The Shareholders and Board of Directors of

Aspect Communications Corporation:

      We have audited the accompanying consolidated balance sheets of Aspect Communications Corporation and its subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the three years ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

      We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aspect Communications Corporation and its subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flow for the three years ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 1, the Company adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Mountain View, California

March 11, 2005

ASPECT COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

See Notes to Consolidated Financial Statements

ASPECT COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS