Natural MicroSystems Corporation

Notes To Consolidated Financial Statements

1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description
Natural MicroSystems Corporation (the “Company”) provides enabling technologies to the world’s leading suppliers of networking and communications equipment. Our customers incorporate our software and hardware products and technologies into their solutions in order to enable service providers and enterprises to rapidly and cost-effectively deploy data, voice and fax applications and enhanced services in converged networks.

Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercom-pany balances and transactions have been eliminated.

Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Foreign Currency Translation
Assets and liabilities of the Company’s Hong Kong and Latin American subsidiaries, which are denominated in currencies other than the U.S. dollar, are remeasured into U.S. dollars at rates of exchange in effect at the end of the fiscal year, except nonmonetary assets and liabilities which are measured using historical exchange rates. Realized and unrealized gains and losses resulting from currency remeasurement are included in operating expenses. Such gains and losses were not material for any period presented. The Company’s other foreign subsidiaries’ operations are measured in their local currency. Adjustments resulting from translating these subsidiaries’ financial statements to the U.S. dollar are recorded in accumulated other comprehensive loss in total stockholders’ equity. Gains and losses resulting from foreign currency transactions are included in other income (expense), net, and were immaterial for all years presented.