UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the quarterly period ended March 31, 2005

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
	For the transition period from            to

Commission file number: 0-18391

ASPECT COMMUNICATIONS CORPORATION

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

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

Yes þ       No o

     The number of shares outstanding of the Registrant’s Common Stock, $.01 par value, was 61,280,434 at April 29, 2005.

ASPECT COMMUNICATIONS CORPORATION

TABLE OF CONTENTS

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ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements

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ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See Notes to Condensed Consolidated Financial Statements

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ASPECT COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Condensed Consolidated Financial Statements

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ASPECT COMMUNICATIONS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED

Note 1: Basis of Presentation

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

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

Note 2: Stock Based Compensation

     At March 31, 2005, the Company had three active stock option plans used as part of employee compensation and one active employee stock purchase plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion 25, Accounting for Stock Issued to Employees, and related Interpretations. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair-value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Note 3: Inventories

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

Note 4: Other Current Assets

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     Other current assets consist of (in thousands):

Note 5: Product Warranties and Indemnification

     The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product, geographic location of its sale and other factors. The Company accrues for estimated product warranty claims for certain customers based primarily on historical experience of actual warranty claims as well as current information on repair costs. Accrued warranty costs as of March 31, 2005 were immaterial. Most customers purchase extended warranty contracts, which are accounted for under FASB Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts.

     The Company also indemnifies its customers against claims that its products infringe certain copyrights, patents or trademarks, or incorporate misappropriated trade secrets. The Company has not been subject to any material infringement claims by customers in the past and does not have significant claims pending as of March 31, 2005.

Note 6: Other Accrued Liabilities

     Other accrued liabilities consist of (in thousands):

Note 7: Comprehensive Income

     Comprehensive income for the three months ended March 31 is calculated as follows (in thousands):

Note 8: Earnings Per Share

     Basic earnings per common share (EPS) is generally calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding. However, due to the Company’s issuance of redeemable convertible preferred stock on January 21, 2003, which contains certain participation rights, EITF Topic

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D-95, Effect of Participating Convertible Securities on the Computation of Basic Earnings, requires those securities to be included in the computation of basic EPS if the effect is dilutive. Furthermore, Topic D-95 requires that the dilutive effect to be included in basic EPS may be calculated using either the if-converted method or the two-class method. The Company has elected to use the two-class method in calculating basic EPS.

     Basic earnings per share for the three months ended March 31, are calculated using the two-class method as follows (in thousands, except percentages and per share data):

     Basic EPS — Two-Class Method

Diluted EPS

     As of March 31, 2005 and 2004, approximately 3.2 million and 1.3 million weighted average common stock options outstanding, respectively, have been excluded from the diluted earnings per share calculations, as the inclusion of these common stock options would have been anti-dilutive.

Note 9: Restructuring Charge

     In fiscal years 2002 and 2001, the Company reduced its workforce by 22% and 28%, respectively, and consolidated selected facilities in its continuing effort to better optimize operations. As of March 31, 2005, the total restructuring

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accrual was $8.1 million, of which, $5.9 million was a short-term liability recorded in other accrued liabilities, and $2.2 million was a long-term liability. Components of the restructuring accrual were as follows (in thousands):

     Severance and outplacement costs are related to the termination of employees in 2001 and 2002. Employee separation costs include severance and other related benefits. Functions impacted by the restructuring included sales infrastructure, support services, manufacturing, marketing, research and development, and corporate functions. In 2003, the Company reduced its estimate of remaining severance and outplacement costs.

     The consolidation of facilities costs component of the restructuring accrual includes rent of unoccupied facilities, net of expected sublease income, and write-offs of abandoned internal use software assets. The Company revised its estimate of future facility related obligations and increased the accrual by approximately $0.4 million in the first quarter of 2005 due to an increase in the estimate of costs as a result of the termination of a lease obligation for one of our facilities and $4 million in 2003 due to an increase in the estimate of the period of time necessary to sublet abandoned facilities as a result of the then-current real estate market conditions. The remaining accrual balance relates primarily to facilities identified in the 2001 restructurings and will be paid over the next five years.

Note 10: Lines of Credit and Borrowings

     On February 13, 2004, the Company entered into a $100 million revolving credit facility with a number of financial institutions led by Comerica Bank, which is also the administrative agent, and The CIT Group/ Business Credit, Inc., which is also the collateral agent. This credit facility amended the Company’s prior $50 million credit facility with Comerica Bank entered into on August 9, 2002. It eliminated the prior facility’s borrowing base requirements and other related restrictions. The revolver has a three-year term and the amounts borrowed are secured by substantially all of the Company’s assets, including the stock of its significant subsidiaries. The Company can select interest options for advances based on the prime rate or eurocurrency rates, which include margins that are subject to quarterly adjustment. The revolver includes a $10 million sub-line for issuance of stand-by letters of credit. Mandatory prepayment and reduction of the facility is required in the amount of 100% of permitted asset sales over $1 million annually and 100% of the proceeds of future debt issuances, subject to certain exclusions. The revolver can be used for working capital, general corporate purposes and the financing of capital expenditures. The credit agreement includes customary representations and warranties and covenants. The financial covenants include minimum liquidity ratio, minimum fixed charge coverage ratio, minimum earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, maximum debt to EBITDA ratio and minimum tangible net worth tests. As of March 31, 2005, the Company had no amounts outstanding under the credit facility and was in compliance with all related covenants and restrictions.

     In addition to the line of credit the Company has two outstanding bank guarantees with a European bank, which are required for daily operations such as payroll, import/export duties and facilities. As of March 31, 2005, approximately $3 million is recorded as restricted cash in other current assets on the consolidated balance sheets related to these bank guarantees.

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Note 11: Convertible Preferred Stock

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

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

     During the time that the Series B convertible preferred stock is outstanding, the Company is obligated to accrue dividends on each share of the Series B convertible preferred stock, compounded on a daily basis at the rate of 10% per annum. The undeclared preferred stock dividends are forfeited in the event of conversion. Accrued dividends were $1.5 million and $1.4 million for the three months ended March 31, 2005 and 2004 respectively. In addition to the dividend accrual, the Company is recording accounting charges associated with the accretion of the 125% redemption premium and the amortization of the beneficial conversion feature under the net interest method through January 21, 2013. The redemption premium of $17.6 million is calculated based on a redemption value of $62.5 million. Accretion of the redemption premium was $401,000 and $388,000 for the three months ended March 31, 2005 and 2004 respectively. The beneficial conversion feature of $17.6 million is computed based on the difference between the conversion price of the preferred equity and the fair market value of the Company’s common stock on January 21, 2003. Amortization of the beneficial conversion feature was $375,000 and $357,000 for the three months ended March 31, 2005 and 2004, respectively.

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

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Note 12: Segment Information

     Under SFAS 131, Disclosures about Segments of an Enterprise and Related Information, the Company’s operations are reported in two operating segments, which are product and services. All financial segment information required by SFAS 131 can be found in the consolidated financial statements. For geographical reporting, revenues are attributed to the geographic location in which customers are invoiced and revenue is recognized. Long-lived assets consist of property and equipment and are attributed to the geographic location in which they are located. No single customer accounted for 10% or more of net revenues or accounts receivable for the three months ended March 31, 2005 and 2004.

     The following presents net revenues for the three months ended March 31, by geographic area (in thousands):

     The following presents property and equipment by geographic area (in thousands):

     For management reporting purposes, the Company organizes software license revenues into five groups: call center, workforce productivity, contact center integration, customer self service and other. The following presents net revenues by product group for the three months ended March 31, 2005 and 2004 (in thousands):

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Note 13: Recent Accounting Pronouncements

     SFAS No. 123R

     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 share-based payments to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission deferred the adoption date of SFAS 123R to the first annual period starting after June 15, 2005. The Company is now required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See Note 2 for the pro forma net income and net income per share amounts, for the first quarter of 2005 and 2004, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, the Company is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on the consolidated statements of income and net income per share.

FSP No. 109-2

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

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

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

Forward-looking Statements

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

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Overview

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

     The Current Economic Environment

     We believe the economic climate in the first quarter of 2005 was comparable to the economic environment we experienced in 2003 and 2004, especially when compared to the difficult environment in prior periods which had resulted in dramatically decreased capital spending. This prior 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. While we believe our installed base continues to represent a solid recurring revenue opportunity and a significant cash flow generator, and while our pricing has remained relatively consistent, we cannot provide any assurance that these pressures on IT spending will ease, or that the general economic climate will continue to improve. Continued competitive pressure and a weak economy could have a continuing pronounced effect on our operating results.

     Significant Financial Events in the First Quarter of 2005

     In the first quarter of 2005, we generated $18.3 million in cash flow from operations and increased our cash, cash equivalents and short term investments to $219 million.

     Sources of Revenue

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

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

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

Critical Accounting Policies and Estimates

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the

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

Results of Operations

     The following table sets forth statements of operations data for the three months ended March 31, 2005 and 2004 expressed as a percentage of total revenues:

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Revenues

     Net revenues decreased by 1% in the first quarter of 2005 as compared to the first quarter of 2004. The decrease in revenues was the result of lower revenues in software license updates and product support partially offset by increased sales to new and existing customers of our call center and workforce productivity product lines.

     Net revenues derived from the Americas constituted 66% and 59% of total revenues for the first quarter ended in 2005 and 2004, respectively. Net revenues derived from Europe and Asia Pacific constituted 34% and 41% of total revenues for the first quarter ended in 2005 and 2004, respectively.

     Software license and hardware revenues. Software license revenue increased by 15% to $19.1 million for the first quarter of 2005 as compared to $16.6 million in the comparable period for 2004. Hardware revenues increased by 2% to $11.7 million for the first quarter of 2005 compared to $11.5 million for the first quarter of 2004. The increase in sales was primarily attributable to increased demand for software products and related hardware products to increase contact center workforce efficiencies by new and current customers. A substantial portion of our revenues for the first quarter of 2005 was derived from our call center and workforce productivity product lines.

     Software license updates and product support revenues for the first quarter of 2005 resulted in a decrease of 5% to $51.6 million from $54.3 million in the first quarter of 2004. The decrease in revenue for the first quarter of 2005 compared to the first quarter of 2004 was primarily the result of a decline in renewals for certain customers who have consolidated or outsourced several contact centers and pricing discounts on certain support contract renewals.

     Professional services and education revenues for the first quarter of 2005 decreased by 10% as compared to the same period in 2004. Professional services and education revenues consist primarily of installation of product, consulting services, and education fees. The decrease in professional services was the result of a decline in demand for educational classes compared to the similar period in 2004.

Gross Margin

     Gross margin on total revenues decreased to 60% in the first quarter of 2005 from 61% in the corresponding period of 2004.

     Gross software license margin. Cost of software license revenues includes fees paid to various third parties and amortization of intangible assets. Gross software license margin decreased in the first quarter of 2005 compared to the first quarter of 2004 due to increased license fees of $1.1 million paid to third-party licensors.

     Gross hardware margin. Cost of hardware revenues includes labor, materials, overhead, and other directly allocated costs involved in the manufacture and delivery of our products. The increase in gross hardware margin in the first quarter of 2005 as compared to the first quarter of 2004 was primarily attributable to product mix sold and increased hardware pricing.

     Gross services margin. Cost of service revenues consists primarily of employee salaries and benefits, facilities, systems costs to support maintenance, consulting and education. Gross services margin declined from the first quarter

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of 2004 compared to the first quarter of 2005 due to lower services revenue and higher costs for third-party software support.

Operating Expenses

     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 increased for the first quarter of 2005 as compared to the first quarter of 2004 due to an increase of $0.5 million in equipment and product localization costs offset by a reduction of $0.4 million in consulting costs. We anticipate that R&D expenses will increase in absolute dollars for the second quarter of 2005 as compared to the first quarter of 2005.

     Selling, general and administrative, or SG&A, expenses consist primarily of employee salaries and benefits, commissions, professional and consulting fees, facilities and IT costs. SG&A increased by 7% to $28.5 million in the first quarter of 2005 from $26.5 million in the first quarter of 2004. The increase was primarily due to a foreign currency loss of $0.9 million in the first quarter of 2005 compared to a foreign currency gain of $0.4 million in the comparable period of 2004, as well as increases of $1.0 million in bad debt expense, $0.5 million in marketing expenses for seminars and tradeshows and $0.5 million in stock-based compensation, offset by decreases of $0.3 million in facilities and IT costs, $0.6 million in salaries, benefits and employee related costs and $0.4 million in professional services. We anticipate that SG&A expenses will decrease in absolute dollars in the second quarter of 2005 as compared to the first quarter of 2005.

     Restructuring charges, consist of costs related to severance, outplacement and consolidation of facilities related to workforce adjustments. A $0.4 million restructuring charge was recorded for the first quarter of 2005 due to lease termination costs related to one of our facilities. We expect to complete consolidation of our San Jose facilities in the second quarter of 2005 and that acceleration of the lease obligation on the vacated facilities will result in a second quarter restructuring charge of approximately $4 million.

Interest and Other Income (Expense):

     Interest income represents, primarily, earnings on short-term investments. Interest income increased to $1.2 million for the first quarter of 2005 compared $0.8 million for the comparable period in 2004 due to higher levels of cash and short-term investments and higher rates on investments as compared to the comparable period in 2004.

     Interest expense decreased to $0.2 million for the first quarter of 2005 compared to $1.1 million for the comparable period in 2004 primarily due to reduced debt obligations.

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     Other income (expense) includes fees charged for bank services, gains or losses recognized on sale of investments and other non-operating income and expenses. Other expense increased $0.6 million due to a non recurring other income benefit of $0.3 million recorded in the first quarter of 2004. In addition, short-term investments losses of $0.1 million were recorded in the first quarter of 2005 while a gain of $0.1 million was recorded in the first quarter of 2004.

Provision for Income Taxes

     The tax rates for the first quarter of 2005 and 2004 varied from the statutory rate primarily due the realization of previously reserved deferred tax assets. As a result, the tax provision is based on current tax calculations in foreign jurisdictions and nominal amounts in federal and state jurisdictions due to our substantial U.S. net operating loss carryforwards. Our tax rates for the first quarter of 2005 and 2004 further varied from the statutory rate as a result of nondeductible expenses and the effect of tax rates in foreign jurisdictions differing from the U.S. statutory rate. We evaluate the appropriateness of our valuation allowance on a quarterly basis.

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

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

Liquidity and Capital Resources

     As of March 31, 2005 cash, cash equivalents, and short-term investments totaled $219 million, which represented 61% of total assets and our principal source of liquidity. In addition, we had restricted cash of $3.3 million related to various letter of credit agreements.

     The net cash provided by operating activities was $18.3 million for the quarter ended March 31, 2005, as compared to $29.0 million in the corresponding period of 2004. The decrease in net cash provided by operating activities in the first quarter of 2005 was the result of lower net income, reduction in accounts payable and a decrease in deferred revenues collected. Cash collections from customers during the first quarter 2005 were $103 million compared to $113 million collected during the comparable period in 2004. In addition, days sales outstanding increased during the period as compared to the same period in 2004 by 6 days to a days sales outstanding of 39 days as of March 31, 2005. Days sales outstanding is calculated by using the average accounts receivable balance for the period ended divided by the estimated daily revenue for the period.

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     The net cash used in investing activities was $5.3 million in the first quarter of 2005 compared to $31.6 million in the corresponding period of 2004. Net cash used in investing activities for the three month ended March 31, 2005 related to the net purchase of short-term investments of $1.4 million and property and equipment purchases of $3.9 million compared to the similar period in 2004 in which the net purchase of short-term investments amounted to $27.7 million and purchase of property and equipment amounted to $3.8 million.

     The net cash provided by financing activities was $3.6 million in the first quarter of 2005 compared to $5.6 million in the corresponding period of 2004. Net cash provided by financing activities for the period ended March 31, 2005 was primarily the result of $3.6 million in proceeds from the issuance of common stock relating to the exercise of employee stock options. For the similar period in 2004, net cash provided by financing activities was the result of net proceeds of $7.6 million from the issuance of common stock relating to the exercise of employee stock options less payments for financing costs of $1.1 million and net payments on borrowings of $1.0 million.

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

	•	EBITDA of no less than $10 million each quarter.
	•	Liquidity Ratio of not less than 1.5 to 1.0 for the period from December 31, 2003 to September 29, 2004; 1.75 to 1.0 for the period from September 30, 2004 through March 30, 2005; and 2.0 to 1.0 thereafter.
	•	Fixed Charge Coverage Ratio of not less than 1.5 to 1.0 as of the last day of each quarter.
	•	Total Debt to EBITDA Ratio of no more than 1.25 to 1.0 as of the end of each quarter.
	•	Tangible Effective Net Worth balance greater than the Base Tangible Effective Net Worth.

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

     In addition to the above revolving credit facility, we had outstanding bank guarantees with a European bank that are required for daily operations such as payroll, import/export duties and facilities. As of March 31, 2005, approximately $3 million is recorded as restricted cash on the balance sheet related to these bank guarantees.

     We believe that cash, cash equivalents, and short-term investments will be sufficient to meet our operating cash needs for at least the next twelve months. However, we continually evaluate opportunities to improve our cash position by selling additional equity, debt securities, obtaining and re-negotiating credit facilities. The sale of additional equity or convertible debt securities could result in additional dilution to our 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.

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Contractual Obligations

     The following table reflects a summary of our contractual obligations as of March 31, 2005 (in thousands):

Off-Balance Sheet Arrangements

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

Business Environment and Risk Factors

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

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

	•	changes in demand for our products and services;
	•	a shift in the timing or shipment of a customer order from one quarter to another;
	•	product and price competition;
	•	our ability to develop and market new products and services and control costs;
	•	timing of new product introductions and product enhancements;
	•	failure by our customers to renew existing support or maintenance agreements in a timely manner, if at all;
	•	mix of products and services sold;
	•	delay or deferral of customer implementations of our products;
	•	size and timing of individual license transactions;

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	•	length of our sales cycle;
	•	changes in domestic and foreign markets;
	•	success in growing our distribution channels;
	•	acquisitions by competitors; and
	•	performance by outsourced service providers, and the costs of the underlying contracts of these providers, that are critical to our operations.

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

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

     Our products typically represent substantial capital commitments by customers. As a result, customer purchase decisions may be significantly affected by a variety of factors, including trends in capital spending for telecommunications and enterprise software, competition and the availability or announcement of alternative technologies. Weakness in global economic conditions 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.

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

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

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

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

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

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

	•	make changes in our management and technical personnel;
	•	change our sales and distribution models;
	•	expand relationships with our customers as sales are now often made throughout the organization;
	•	modify the pricing and positioning of our products and services;
	•	address new competitors; and
	•	increasingly rely on systems integrators to deploy our solutions.

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

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

     The market for our products is intensely competitive, and competition is likely to intensify as companies in our industry consolidate to offer integrated solutions. Our principal competitors currently include companies in the contact center market and companies that market traditional telephony products and services. As the market develops for converged voice and data networks and products and the demand for traditional, telephony-based call centers diminishes, companies in these markets are merging, creating potentially larger and more significant competitors. Many current and potential competitors, including Avaya 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.

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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:

	•	the cost and timing of the multiple governmental approvals and product modifications required by many countries;
	•	fluctuations in the value of foreign currencies;
	•	less effective protection of intellectual property;
	•	difficulties in staffing and managing foreign operations;
	•	difficulties in identifying and securing appropriate partners;

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	•	global economic climate considerations including potentially negative tax and foreign and domestic trade legislation, which could result in the creation of trade barriers such as tariffs, duties, quotas and other restrictions;
	•	longer payment cycles; and
	•	seasonal reductions in business activity in international locales, such as during the summer months in Europe.

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.

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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.

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From time to time, such changes have an impact on our accounting and financial reporting, and these changes may impact market perception of our financial condition.

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

     During the course of our implementation of Oracle 11i to enable our Section 404 compliance efforts in the third quarter of 2004, as well as during our normal financial operations and quarterly close process in the fourth quarter of 2004, we identified five significant deficiencies in the design and operation of our internal controls, of which three were outstanding as of December 31, 2004. While three of the identified deficiencies have been remediated, we are in the process of remediating the other two 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:

	•	inability to successfully integrate or commercialize acquired technologies or otherwise realize anticipated synergies or economies of scale on a timely basis;
	•	diversion of management attention;
	•	disruption of our ongoing business;
	•	inability to assimilate or retain key technical and managerial personnel for both companies;
	•	inability to establish and maintain uniform standards, controls, procedures and processes;
	•	governmental, regulatory or competitive responses to the proposed transactions;
	•	impairment of relationships with employees, vendors or customers including, in particular, acquired distribution and VAR relationships;
	•	permanent impairment of our equity investments;
	•	adverse impact on our annual effective tax rate; and

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dilution of existing equity holders.

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

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

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

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

Risks Related to Our Common Stock

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

     The market price of our common stock has been subject to significant fluctuations and may continue to fluctuate or decline. From January 1, 2004 to March 31, 2005, the closing price per share of our common stock has ranged from a low of $7.37 to a high of $19.45. The stock markets have experienced significant price and trading volume fluctuations. The market for technology has been extremely volatile and frequently reaches levels that bear no relationship to the past or present operating performance of those companies. General economic conditions, such as recession or interest rate or currency rate fluctuations in the United States or abroad, could negatively affect the market price of our common stock. In addition, our operating results may be below the expectations of securities analysts and investors. If this were to occur, the market price of our common stock would likely significantly decrease. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against that company. Such litigation could result in substantial cost and a diversion of management’s attention and resources.

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

	•	changes in market valuations or earnings of our competitors or other technology companies;
	•	actual or anticipated fluctuations in our operating results;
	•	changes in financial estimates or investment recommendations by securities analysts who follow our business;
	•	technological advances or introduction of new products by us or our competitors;
	•	the loss of key personnel;
	•	our sale of common stock or other securities in the future;
	•	intellectual property or litigation developments;
	•	changes in business or regulatory conditions;
	•	the trading volume of our common stock; and

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

Vista has been granted certain approval rights as to particular corporate actions and owns Series B convertible preferred stock representing, on an as converted basis, approximately 26.8% of our common stock.

     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.

We have implemented anti-takeover provisions that could make it more difficult to acquire us.

     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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

     Our management is responsible for establishing and maintaining adequate internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). There were no significant

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changes in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

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

Part II: Other Information

Item 5. Other Information

     (a)  The Compensation Committee of the Company’s Board of Directors met on May 4, 2005 and approved the grant under the 1999 Equity Incentive Plan of options to purchase an aggregate of 512,000 shares of common stock to certain officers of the Company, including an option to Mr. Barnett, the Company’s President and Chief Executive Officer, to purchase 300,000 shares. These options have an exercise price of $8.94 per share, the closing price of the Company’s stock on the Nasdaq National Market on May 4th. Mr. Barnett’s option vests and becomes exercisable in two tranches. The first tranche vests as to 200,000 shares in accordance with the Company’s standard time-based vesting schedule (25% of such shares on the first anniversary of the date of grant and 1/48 of such shares each month thereafter so that, assuming Mr. Barnett’s continued service through such date, he will be fully vested in these 200,000 option shares on May 4, 2009). The second tranche of Mr. Barnett’s option vests as to 100,000 shares on May 4, 2010, but the vesting will accelerate to commence vesting on the standard time-based vesting schedule (so that he would be fully vested in the option by May 4, 2009) if he satisfies by October 31, 2005 performance objectives established by the Committee and the Board which relate to the execution of certain strategic business plans for the Company and its business. All option grants made to the Company’s officers who are party to the Company’s Change of Control Agreement (including Mr. Barnett) will accelerate if the officer is involuntary terminated without cause or experiences a constructive termination of employment within three months prior to or thirteen months following a change of control of Aspect.

     In addition to the option grants made to the Company’s officers, options to purchase an aggregate of approximately 1.2 million shares of common stock were granted on May 4, 2005 to other employees of Aspect under the Company’s 1999 Equity Incentive Plan.

Item 6. Exhibits

A. Exhibits

10.105	Amended and Restated 1999 Equity Incentive Plan.
10.106	Form Nonstatutory Stock Option Agreement for 1999 Equity Incentive Plan.
10.107	Form Incentive Stock Option Agreement for 1999 Equity Incentive Plan.
10.108	Form Stock Award Agreement for 1999 Equity Incentive Plan.
10.109	Change of Control Agreement, effective as of February 2005.
31.1	Gary E. Barnett’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.
31.2	James C. Reagan’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.
32.1	Gary E. Barnett’s Certification pursuant to 18. U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.
32.1	James C. Reagan’s Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURE

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

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EXHIBIT INDEX

10.105	Amended and Restated 1999 Equity Incentive Plan.
10.106	Form Nonstatutory Stock Option Agreement for 1999 Equity Incentive Plan.
10.107	Form Incentive Stock Option Agreement for 1999 Equity Incentive Plan.
10.108	Form Stock Award Agreement for 1999 Equity Incentive Plan.
10.109	Change of Control Agreement, effective as of February 2005.
31.2	Gary E. Barnett’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.
31.2	James C. Reagan’s Certification pursuant to 13a-14(a) as adopted pursuant to 302 of the Sarbanes-Oxley Act of 2002.
32.1	Gary E. Barnett’s Certification pursuant to 18. U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.
32.1	James C. Reagan’s Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002.

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