Natural MicroSystems Corporation

9—INCOME TAXES

The components of income tax expense (benefit) consist of the following:

For U.S. federal income tax purposes, the Company has net operating loss carryforwards of approximately $16.4 million. These carryforwards expire beginning in 2004 and $2.9 million of such carryforwards are subject to an annual limitation of approximately $772,000 under Internal Revenue Code Section 382. There may be further Section 382 limitations as a result of changes in ownership. The net operating loss amount of $7.2 million includes approximately $1.1 million which if realized through future income will be credited directly to stockholders’ equity. The Company also has a foreign net operating loss carryforward of approximately $845,000. The Company has $1.5 million of tax credits which is composed of federal research and development credits and state and local credits. These credits expire beginning in 2004. At December 31, 1999, under applicable accounting standards, management believes that the realization of the net deferred tax asset is more unlikely than not and, accordingly, a full valuation was established in the fourth quarter of 1999. This resulted in a charge of $4.8 million in 1999 for the beginning of the year net deferred tax asset. The Company also reduced its tax reserves for probable loss exposures in the fourth quarter of 1999, which is included in the change in valuation allowance in the tax rate reconciliation schedule.