NATURAL MICROSYSTEMS CORP, S-3/A, 2000-02-04

NATURAL MICROSYSTEMS CORP
S-3/A, 2000-02-04
TELEPHONE & TELEGRAPH APPARATUS

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As filed with the Securities and Exchange Commission on February 4, 2000

Registration No. 333-95431
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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PRE-EFFECTIVE

AMENDMENT NO. 1

TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NATURAL MICROSYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 04-2814586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Crossing Boulevard
Framingham, Massachusetts 01702-5406
(508) 620-9300
(Address and telephone number of Registrant's principal executive offices)

---------------

Robert E. Hult
Senior Vice President of Finance and Operations
Natural MicroSystems Corporation
100 Crossing Boulevard
Framingham, Massachusetts 01702-5406
(508) 620-9300
(Name, address and telephone number of agent for service)
Copies to:
Richard N. Hoehn, Esq. Daniel S. Evans, Esq.
Choate, Hall & Stewart Ropes & Gray
Exchange Place One International Place
53 State Street Boston, Massachusetts 02110
Boston, Massachusetts 02109
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plan, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to a Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
If any class of securities is to be concurrently registered on this Form
pursuant to Section 12(b) of the Securities Exchange Act of 1934 pursuant to
General Instruction V, please check the following box. [_]

---------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion, dated February 4, 2000

Natural MicroSystems Logo Appears Here

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3,000,000 Shares

Common Stock

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This is a public offering of common stock of Natural MicroSystems
Corporation. We are offering 3,000,000 shares of common stock.

Our common stock trades on the Nasdaq National Market under the symbol
"NMSS." On February 3, 2000, the reported last sale price of our common stock
on the Nasdaq National Market was $35.88 per share.

Investing in our common stock involves risks. See "Risk Factors" beginning on
page 5.

Neither the Securities and Exchange Commission nor any state securities
regulators has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.

<TABLE>
<CAPTION>
Per
Share Total
<S> <C> <C>
Public offering price $ $
Underwriting discounts $ $
Proceeds, before expenses, to Natural MicroSystems
Corporation $ $
</TABLE>

We have granted the underwriters the right to purchase up to 450,000
additional shares of common stock at the public offering price to cover any
overallotments.

The underwriters expect to deliver the shares to purchasers on
, 2000.

Deutsche Banc Alex. Brown

Dain Rauscher Wessels

U.S. Bancorp Piper Jaffray

FAC/Equities

The date of this Prospectus is , 2000.

<PAGE>

Outside Front Gate

The Natural MicroSystems Logo

<PAGE>

The diagram entitled "Natural MicroSystems in the Converged Network" includes a
diagram of a converged network, comprised of enterprises the PSTN and the IP
network. The chart depicts network elements which incorporate Natural
MicroSystems components.

<PAGE>

Gatefold Description

<PAGE>

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and may not contain all the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including the "Risk Factors" section and the
financial statements and the notes to those statements, before making an
investment decision. Unless otherwise indicated, this prospectus assumes that
the underwriters have not exercised their option to purchase additional shares.
References in this prospectus to "we," "our" and "us" refer to Natural
MicroSystems Corporation and its subsidiaries.

Natural MicroSystems

Over the past two years, we have been strategically repositioning our
business to address new, high growth markets resulting from the growth in the
converged network build out. To support this repositioning, we made significant
investments in our sales force, built a service organization, expanded our
research and development and strengthened our management team. As a result,
during 1999, we achieved sequential increases in revenue over the prior quarter
of 6% in the second quarter, 15% in the third quarter and 23% in the fourth
quarter. In the quarter ended December 31, 1999, we achieved record revenues of
$25.0 million representing a 43% increase over the same period in the prior
year.

Our products, which use technologies including digital signal processing,
media processing, signal protocol processing, switching and packet
classification, are essential components in networking and communications
equipment deployed in the wireline and wireless Internet and PSTN. We also
provide our customers with software development tools and systems architecture
and engineering design services. These products, tools and services facilitate
the rapid creation and deployment of enhanced services and applications while
conforming to the high quality, availability, scalability and manageability
required in service provider networks. Our products and technologies are
compliant with open industry standards to insure interoperability and
compatibility, and leverage mass-market components, such as general purpose
microprocessors, digital signal processors and operating system software. We
use the term Open Telecommunications to describe products that share these
characteristics.

Several factors are driving increased demand for our products and services.
The explosive growth in data traffic, heightened competition, the need for
network interoperability and the emergence of converged network infrastructures
are causing service providers and enterprises to deploy new enhanced services
and applications in order to compete more effectively. In addition, the
increasing use of packet networks, which must interoperate with existing
networks, requires network equipment and applications that can operate in both
packet and circuit networks. Service providers require that their packet
networks have the high levels of quality, availability, scalability and
manageability traditionally associated with circuit networks. Finally, the
emerging packet networks can support

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<PAGE>

completely new enhanced services and applications, but only with new
technologies such as traffic classification and bandwidth management.

These market changes have increasingly led system vendors to purchase
subsystems and enabling technologies from outside suppliers, such as Natural
MicroSystems. Our products and enabling technologies help our customers achieve
a reduced time to market and allow them to focus their development efforts on
new service creation and next generation infrastructure.

Our products and solutions target applications in five market segments:
Internet protocol (IP) telephony, differentiated IP service provisioning,
enhanced services, wireless network infrastructure and enterprise applications.
We target original equipment manufacturers, system suppliers and other
strategic customers in these market segments and seek to provide them with
essential enabling components for their system offerings. To date, our
solutions have been deployed in over 40 countries and our customers include
leading vendors such as Alcatel, Clarent, Comverse, Ericsson, Lucent, Motorola,
Nortel, Siemens and Teradyne.

Our growth strategy includes the following key elements:

. Focus on high growth market segments;

. Extend our technology leadership;

. Strengthen and expand relationships with strategic customers;

. Broaden our product offering;

. Support open architecture and drive evolving standards; and

. Strengthen customer relationships through consulting and support
services.

We were incorporated in Delaware in 1983. As of December 31, 1999, we
employed 399 employees. Our stock has been publicly traded since our initial
public offering in 1994. Our principal executive offices are located at 100
Crossing Boulevard, Framingham, Massachusetts 01702 and our main telephone
number is (508) 620-9300. We also have sales, service and engineering
facilities in the United States and in other countries. Our corporate website
is www.nmss.com. Information contained on our website does not constitute a
part of this prospectus.

Natural MicroSystems Corporation, Natural MicroSystems, CT Access, Natural
Access, NaturalFax, Natural Call Control, Fusion, NaturalEdge, Convergence
Generation, Open Telecommunications, QWES, QWES.com and PolicyPoint are
trademarks of Natural MicroSystems. Alliance Generation is a registered
trademark of Natural MicroSystems. All other brand names or trademarks
appearing in this prospectus are the property of their respective holders.

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The Offering

<TABLE>
<S> <C>
Common stock offered by
us..................... 3,000,000 shares
Common stock to be
outstanding after this
offering............... 15,759,807 shares
Use of proceeds......... For general corporate purposes, including working
capital, capital expenditures and potential acquisitions
Nasdaq National Market
symbol................. NMSS
Preferred share purchase One preferred share purchase right will be attached to
rights................. each share of common stock sold in the offering and thus
the preferred share purchase rights are also being
offered by this prospectus. These rights would cause
substantial dilution to any person or group who attempts
to acquire a significant interest in our company without
advance approval from our board of directors and thus
could make an acquisition of control of our company more
difficult.
</TABLE>

The above information is based on 12,759,807 shares outstanding as of
December 31, 1999. This information does not take into account:

. 2,748,350 shares of common stock issuable at a weighted average exercise
price of $11.47 per share on exercise of stock options outstanding as of
December 31, 1999 under our 1989 Stock Option and Stock Purchase Plan,
1993 Stock Option Plan, 1993 Non-Employee Directors Stock Option Plan
and 1995 Non-Statutory Stock Option Plan; and

. 19,901 shares of common stock issuable at a weighted average exercise
price of $5.67 per share on exercise of warrants outstanding as of
December 31, 1999.

Summary Consolidated Financial Data

The following summary consolidated financial data should be read in
conjunction with our financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. All figures set out in the
table are in thousands, except per share amounts.

Consolidated Statements of Operations Data:

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues.......................... $32,835 $51,464 $75,363 $ 76,529 $ 79,476
Gross profit...................... 21,350 33,070 50,065 48,411 47,956
Operating income (loss)........... 4,200 3,065 7,319 (10,057) (16,634)
------- ------- ------- -------- --------
Net income (loss)................. 1,275 1,630 3,759 (6,125) (18,688)
------- ------- ------- -------- --------
Net income (loss) per share:
Basic........................... $ 0.18 $ 0.17 $ 0.36 $ (0.56) $ (1.63)
======= ======= ======= ======== ========
Diluted......................... $ 0.18 $ 0.17 $ 0.34 $ (0.56) $ (1.63)
======= ======= ======= ======== ========
Weighted average shares
outstanding:
Basic........................... 7,002 9,370 10,481 10,923 11,482
Diluted......................... 7,005 9,675 11,179 10,923 11,482
</TABLE>

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The "as adjusted" column in the summary consolidated balance sheet data
below gives effect to the sale of the 3,000,000 shares of common stock in this
offering, at an assumed offering price of $35.88 per share, after deducting
underwriting discounts and commissions and our estimated offering expenses.

Consolidated Balance Sheet Data:

<TABLE>
<CAPTION>
As of December 31,
1999
-------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Cash, cash equivalents and marketable securities............ $23,454 $125,112
Working capital............................................. 25,605 127,263
Total assets................................................ 70,709 172,367
Long-term debt, less current portion........................ 306 306
Stockholders' equity........................................ 50,513 152,171
</TABLE>

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RISK FACTORS

This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in shares of our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks and
uncertainties not known to us or that we now believe to be unimportant could
also impair our business. If any of the following risks actually were to occur,
our business, results of operations and financial condition could be materially
adversely affected, the trading price of our common stock could decline, and
you might lose all or part of your investment. Please also see "Forward-Looking
Information" on page 11.

We have experienced recent operating losses and may not return to
profitability.

We experienced operating losses in the last three quarters of 1998 and all
four quarters of 1999. As a result, for the years ended December 31, 1998 and
1999, we reported operating losses of approximately $10.0 million and $16.6
million, respectively. We expect to continue to increase our levels of research
and development and sales and marketing expenditures, and therefore we will
achieve profitability only if we can significantly increase our revenues. We
currently anticipate that our results will be no better than approximately
break-even until at the earliest the second half of 2000. If our revenues do
not meet the levels that we anticipate, or if our costs and expenses exceed our
expectations, we will continue to sustain losses and the price of our common
stock may decline substantially. Even if we do achieve profitability, we may
not be able to sustain it on a quarterly or annual basis.

Our operating results fluctuate and are difficult to predict, which could cause
our stock price to decline.

Our revenues and net income, if any, in any particular period may be lower
than revenues and net income, if any, in a preceding or comparable period.
Factors contributing to these fluctuations, some of which are beyond our
control, include:

. fluctuations in our customers' businesses;

. demands for our customers' products incorporating our products;

. timing and market acceptance of new products or enhancements introduced
by us or our competitors;

. availability of components from our suppliers and the manufacturing
capacity of our subcontractors;

. timing and level of expenditures for sales, marketing and product
development; and

. changes in the prices of our products or of our competitors' products.

In addition, we have historically operated with less than one quarter's
worth of backlog and a customer order pattern that is skewed toward the later
weeks of the quarter. In recent quarters, we have received orders more evenly
throughout the quarter, but we cannot be sure that this will continue in the
future. Any significant deferral of orders for our products would cause a
shortfall in revenue for the quarter. If our quarterly revenue or operating
results fall below the expectations of investors or public market analysts, our
common stock price may decline substantially.

Internal development efforts by our customers may adversely affect demand for
our products.

Many of our customers, including the large equipment manufacturers on which
we focus a significant portion of our sales and marketing efforts, have the
technical and financial ability to

5
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design and produce components replicating or improving on the functionality of
most of our products. These organizations often consider in-house development
of technologies and products as an alternative to doing business with us. We
cannot be certain that these customers will resolve these "make-buy" decisions
in favor of working with us, rather than attempting to develop similar
technology and products internally or obtaining them through acquisition.

The markets we serve are highly competitive, and we may be unable to compete
effectively.

Competition in the high growth markets that we target for our products is
intense, and we expect it to intensify as current competitors expand their
product offerings and new competitors enter the market. Although competition in
many of our markets is highly fragmented, our current competitors include
Dialogic Corp., a wholly owned subsidiary of Intel Corporation, AudioCodes
Ltd., Radisys Corporation and Brooktrout Technology, Inc. Other companies,
including original equipment manufacturers that are current or targeted
customers, may enter our markets in the future. Our competitors and customers
may be able to develop products and services that are superior to our products
and services, that achieve greater customer acceptance or that have
significantly improved functionality as compared to our existing and future
products and services. In particular, by focusing all of their efforts on a
specific niche of the market, some of our competitors may succeed in
introducing products that change the competitive dynamic in that market niche
and adversely affect demand for our products. Certain of our competitors may be
able to negotiate alliances with strategic partners on more favorable terms
than we are able to negotiate. Many of our competitors have well-established
relationships with our existing and prospective customers, including those on
which we have focused significant sales and marketing efforts.

We rely on third parties to assemble our products.

We do not have in-house manufacturing capabilities and currently rely on
three different third-party contract manufacturers to assemble our printed
circuit boards and other product offerings. Each of these manufacturers is our
sole source for the products it manufactures for us. This reliance could
subject us to product shortages or quality assurance problems, which, in turn,
could lead to an increase in the cost of manufacturing or assembling our
products. Any problems that occur and persist in connection with the delivery,
quality or cost of the assembly of our products could affect our ability to
ship product and recognize revenue, harm our relationship with our customers
and harm our business.

We depend on sole source suppliers for certain components used in our products.

We rely on vendors to supply components for our products, and we rely on
sole source suppliers for certain custom integrated circuits and other devices
that are components of one or more of our products. In particular, Texas
Instruments is our sole source for the digital signal processors used in many
of our products and customarily requires order lead times of 20 to 22 weeks or
more to insure delivery in desired quantities. In addition, Lucent is our sole
source supplier for integrated circuit components used in many of our products
and customarily requires order lead times of 16 weeks or more. An interruption
in supply from either Texas Instruments or Lucent would disrupt production,
thereby adversely affecting our ability to deliver products to our customers.
Converting to an alternative source for key components could require a large
investment in capital and manpower resources and might cause significant delays
in introducing replacement products. Although we believe we could identify
alternative sources for all of our components, that process could take several
months, and any interruption in our supplies could harm our business.

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We do not obtain binding purchase commitments from our customers and rely on
projections prepared by our customers in assessing future demand for our
products.

Our "design wins" are solely an expression of interest by customers and are
not supported by purchase obligations. Therefore, there can be no assurance
that any "design win" will result in purchase orders for our products. After we
begin receiving initial orders for a product from a customer, we rely heavily
on the customer's projections as to future needs for our product, without
having any binding commitment from the customer as to future orders. Because
our expenses are based on forecasting of future orders, a substantial reduction
or delay in orders for our products from our customers could harm our business.

Our products typically have long sales cycles, causing us to expend significant
resources before achieving "design wins" and recognizing revenue.

The length of our sales cycle typically ranges from six to eighteen months
and varies substantially from customer to customer. Prospective customers
generally must commit significant resources to test and evaluate our products
and integrate them into larger systems. This evaluation period is often
prolonged due to delays associated with approval processes that typically
accompany the design and testing of new communications equipment by our
customers. In addition, the rapidly emerging and evolving nature of the markets
in which we and our customers compete may cause prospective customers to delay
their purchase decisions as they evaluate new technologies and develop and
implement new systems. During the period in which our customers are evaluating
whether to place an order with us, we often incur substantial sales and
marketing expenses, without any assurance of future orders or their timing.
Even after we achieve a "design win" and our product is expected to be utilized
in a product or service offering being developed by our customer, the timing of
the development, introduction and implementation of those products is
controlled by, and can vary significantly with the needs of, our customers and
may exceed several months. This complicates our planning processes and reduces
the predictability of our earnings. If sales forecasted from a specific
customer for a particular quarter are not realized in that quarter, we may fail
to achieve our revenue goals.

The average selling prices of our products may decrease, which could adversely
affect gross margins and revenues.

Competitive pressures and rapid technological change may cause erosion of
the average selling prices of our products and services. For example, the toll
bypass segment of the Internet telephony market in which we compete has
experienced a rapid and substantial decline in average product selling prices
during the last year. In addition, as many of our target customers are large
original equipment manufacturers with significant market power, we may face
pressure from them for steep discounts in our pricing. Any significant erosion
in our average selling prices could impact our gross margins and harm our
business.

Our revenue growth depends significantly on the timely development and launch
of new products and product enhancements, and we cannot be sure that our new
products will gain wide market acceptance.

The communications equipment and services market is characterized by rapid
technological change, which requires continual development and introduction of
new products and product enhancements that respond to evolving market needs and
industry standards on a timely and cost-effective basis. Successfully
developing new products requires us to accurately anticipate technological
evolution in the communications industry as well as the technical and design
needs of our customers. In addition, new product development and launch require
significant commitments of capital and personnel. Failure to successfully
update and enhance current products and to develop and launch new products
would harm our business.

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We have experienced, and may in the future experience, delays in developing
and releasing new products and product enhancements. These delays have led to,
and may in the future lead to, delayed sales, increased expenses and lower
quarterly revenue than anticipated. During the development of our products, we
have also experienced delays in the prototyping of our digital signal
processing chips, which in turn have led to delays in product introductions.
Our failure to timely introduce a new product or product enhancement could harm
our reputation with our customers or reduce demand for that product, which
could harm our business.

We may acquire other businesses or technologies; if we do, we may be unable to
integrate them with our business or our financial performance may suffer.

If appropriate opportunities present themselves, we may acquire businesses,
technologies, services or products that we believe are strategic. We do not
currently have any understandings, commitments or agreements with respect to
any acquisition, nor are we currently pursuing any acquisition. We may not be
able to identify, negotiate or finance any future acquisition successfully.
Even if we do succeed in acquiring a business, technology, service or product,
the process of integration may produce unforeseen operating difficulties and
expenditures and may absorb significant attention of our management that would
otherwise be available for the ongoing development of our business. If we make
future acquisitions, we may issue shares of stock that dilute other
stockholders, incur debt, assume contingent liabilities or create additional
expenses related to amortizing goodwill and other intangible assets, any of
which might harm our financial results and cause our stock price to decline.
Any financing that we might need for future acquisitions may only be available
to us on terms that restrict our business or that impose on us costs that
reduce our net income.

We may be unable to attract and retain management and other key personnel we
need to succeed.

The loss of any of our senior management or other key research, development,
sales and marketing personnel, particularly if lost to competitors, could harm
our business. Our future success will depend in large part on our ability to
attract, retain and motivate highly skilled employees.

We may not be able to adequately protect our intellectual property, which may
facilitate the development of competing products by others.

We rely on a combination of copyright and trade secret laws, restrictions on
disclosure and patents to protect our intellectual property rights. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. The laws of some
foreign countries do not protect our proprietary rights to as great an extent
as the laws of the United States. If we fail to adequately protect our
intellectual property rights, it will be easier for our competitors to sell
competing products.

Our products may infringe on the intellectual property rights of third parties,
which may result in lawsuits and prohibit us from selling our products.

There is a risk that third parties have filed, or will file applications
for, or have received or will receive, patents or obtain additional
intellectual property rights relating to materials or processes that we use or
propose to use. As a result, from time to time, third parties may assert
exclusive patent or other intellectual property rights to technologies that are
important to us. In addition, third parties may assert claims or initiate
litigation against us or our manufacturers, suppliers or customers with respect
to existing or future products or other proprietary rights. Any claims against
us or customers

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that we indemnify against intellectual property claims, with or without merit,
may be time-consuming, result in costly litigation and diversion of technical
and management personnel or require us to develop non-infringing technology. If
a claim is successful, we may be required to obtain a license or royalty
agreement under the intellectual property rights of those parties claiming the
infringement. If we are unable to obtain the license, we may be unable to
market our affected products. Limitations on our ability to market our products
and delays and costs associated with monetary damages and redesigns in
compliance with an adverse judgment or settlement could harm our business.

Our products depend upon the continued availability of licensed technology from
third parties.

We currently license and will continue to license certain technology
integral to our products and services, such as protocols, from third parties.
While we believe that much of this technology is available from multiple
sources, any difficulties in acquiring third-party technology licenses, or in
integrating the related third-party technology into our products, could result
in delays in product development or upgrade until equivalent technology can be
identified, licensed and integrated. We may require new licenses in the future
as our business grows and technology evolves. We cannot assure you that these
licenses will continue to be available to us on commercially reasonable terms,
if at all.

The ongoing evolution of industry standards may adversely affect demand for our
products and increase our costs.

Our success depends on both the evolution of industry standards for new
technologies and our products' compatibility with multiple industry standards.
Many technological developments occur prior to the adoption of the related
industry standard. The absence of an industry standard related to a specific
technology may prevent market acceptance of products using that technology, or
may result in the development of products not compatible with ultimately
adopted standards, which would limit demand for our products. We intend to
develop products compatible with other technological advancements and may
develop these products prior to the adoption of industry standards related to
these technologies. As a result, we may incur significant expenses and losses
due to lack of customer demand, unusable purchased components for these
products and the diversion of our engineers from future product development
efforts. Further, we may develop products that do not comply with the eventual
industry standard, which could limit our ability to sell these products. If the
industry develops new standards, we may not be able to design and manufacture
new products in a timely fashion that meet these new standards. Even after the
adoption of industry standards, the future success of our products depends on
widespread market acceptance of their underlying technologies.

Defects in our products or problems arising from the use of our products
together with other vendors' products may seriously harm our business and
reputation.

Products as complex as ours may contain known and undetected errors or
performance problems. Defects are frequently found during the period
immediately following introduction and initial implementation of new products
or enhancements to existing products. Although we attempt to resolve all errors
that we believe would be considered serious by our customers before
implementation, our products are not error-free. These errors or performance
problems could result in lost revenues or customer relationships and could be
detrimental to our business and reputation generally. Additionally, reduced
market acceptance of our services due to errors or defects in our technology
would harm our business by reducing our revenues and damaging our reputation.
In some of our contracts, we have agreed to indemnify our customers against
certain liabilities arising

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from defects in our products, but we do not carry insurance policies covering
this type of liability. In addition, our customers generally use our products
together with their own products and products from other vendors. As a result,
when problems occur in the network, it may be difficult to identify the source
of the problem. These problems may cause us to incur significant warranty and
repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
To date, defects in our products or those of other vendors' products with which
ours are used by our customers have not had a material negative effect on our
business. However, we cannot be certain that a material negative effect will
not occur in the future.

Because we derive a significant portion of our revenues from international
sales, we are susceptible to currency fluctuations and other risks.

Sales to customers outside North America accounted for approximately 27% of
our revenues in 1999, and we believe a material portion of our domestic sales
results in the use of our products outside North America. Since customers
generally evaluate our purchase price as expressed in their own currency,
changes in foreign currency exchange rates may hurt our sales in other
countries. In addition, some of our sales transactions are denominated in local
currency and we do not mitigate the currency risk by engaging in currency-
hedging transactions. An increase in the value of the U.S. dollar relative to
foreign currencies could make our products less competitive on a price basis in
international markets or adversely impact the U.S. dollar yield from sales
transactions denominated in local currency.

Other risks arising from our international business include political
instability or recessions in other countries, the imposition of trade and
tariff regulations by foreign governments and the difficulties in managing
operations across disparate geographic areas. These or other factors may limit
our ability to sell our products and services in other countries.

The market segments we target may not develop as rapidly as we anticipate.

We operate in five segments of the networking and communications market: IP
telephony, differentiated IP service provisioning, enhanced services, wireless
network infrastructure and enterprise applications. Although we expect growth
in these areas, each of these market segments is emerging, undergoing rapid
change or both and may fail to generate demand for our products at the levels
we anticipate, which could limit our future revenues and harm our business.

Future regulation or legislation could restrict our business or increase our
costs.

We are unable to predict the impact, if any, that future legislation, legal
decisions or regulations relating to our target market segments may have on our
business, financial condition and results of operations. Regulation may focus
on, among other things, assessing access or settlement charges, or imposing
tariffs or regulations based on the characteristics and quality of products and
services, either of which could restrict our business or increase our cost of
doing business. For example, the Federal Communications Commission is currently
examining the question of whether certain forms of telephone services over the
Internet should be subject to FCC regulations as telecommunications services.
If the FCC were to determine that Internet telephony providers, or the services
they provide, are subject to FCC regulations, then some of the service
providers that buy equipment from our customers may be forced to pay access
charges and make universal service contributions. This could have a material
adverse effect on those customers' business and competitive position and could
therefore force them to limit or cut-off their purchases of our products.

10
<PAGE>

Anti-takeover provisions in Delaware law and our corporate documents may affect
the value of our common stock.

Provisions of Delaware law and our corporate documents may make it difficult
and expensive for a third party to acquire us. For example, our certificate of
incorporation provides for the election of members to our board of directors
for staggered three-year terms. In addition, we have adopted a shareholder
rights plan. The existence of these anti-takeover provisions may substantially
impede the ability of a third party to acquire control of us or accumulate
large blocks of our common stock, which may adversely affect our stock price.

We will have broad discretion as to the use of the proceeds from this offering.

Our board of directors and our management will have broad discretion over
the use of the net proceeds of this offering. Investors will be relying on the
judgment of our board of directors and our management regarding the application
of the proceeds of this offering. See "Use of Proceeds" beginning on page 12.

FORWARD-LOOKING INFORMATION

This prospectus includes and incorporates forward-looking statements that
involve substantial risks and uncertainties and fall within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify these forward-looking statements by our
use of the words "believes," "anticipates," "plans," "expects," "may," "will,"
"would," "intends," "estimates," "predicts," "potential," "continue" and
similar expressions, whether in the negative or affirmative. We cannot
guarantee that we actually will achieve these plans, intentions or
expectations. Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we
make. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Risk Factors," beginning on page 5, as
well as other risks and uncertainties referenced in this prospectus. We do not
assume any obligation to update any of the forward-looking statements after the
date of this prospectus to conform these statements to actual results.

11
<PAGE>

USE OF PROCEEDS

The net proceeds to us from the sale of the 3,000,000 shares of common stock
offered with this prospectus are estimated to be approximately $101.7 million,
at an assumed offering price of $35.88 per share, after deduction of the
estimated underwriting discounts and commissions and our estimated offering
expenses. We expect to use the net proceeds for general corporate purposes,
including working capital and capital expenditures. In addition, we may use a
portion of the net proceeds to acquire businesses, products or technologies
that are complementary to our business, although we have no current plans to
make any specific acquisitions. Prior to using the proceeds in the manner
described above, we plan to invest the net proceeds of this offering in short-
term, interest-bearing, investment-grade securities.

PRICE RANGE OF COMMON STOCK

Our common stock is quoted on the Nasdaq National Market under the symbol
"NMSS." The following table shows the high and low closing sale prices per
share of our common stock, as reported on the Nasdaq National Market, for the
periods indicated:

<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter............................................ $46.94 $34.31
Second Quarter........................................... 38.37 16.00
Third Quarter............................................ 14.75 9.50
Fourth Quarter........................................... 12.56 6.19
Year Ended December 31, 1999:
First Quarter............................................ $ 8.53 $ 4.91
Second Quarter........................................... 10.06 3.06
Third Quarter............................................ 14.50 9.63
Fourth Quarter........................................... 46.88 13.50
Year Ending December 31, 2000:
First Quarter (through February 3, 2000)................. $46.88 $35.88
</TABLE>

On February 3, 2000 the reported last sale price of the common stock on the
Nasdaq National Market was $35.88 per share. As of December 31, 1999, we had
approximately 326 stockholders of record of our common stock.

DIVIDEND POLICY

We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings to fund the development and growth of our
business. In addition, our credit agreement with a bank contains covenants
which prohibit us from paying cash dividends.

12
<PAGE>

CAPITALIZATION

The following table shows our capitalization as of December 31, 1999, and as
adjusted to give effect to the sale of the 3,000,000 shares of common stock
offered in this offering, at an assumed offering price of $35.88 per share, and
after deducting underwriting discounts and commissions and our estimated
offering expenses. The outstanding share information excludes 2,748,350 shares
of common stock issuable on exercise of outstanding options and 19,901 shares
of common stock issuable on exercise of outstanding warrants as of December 31,
1999, with a weighted average exercise price of $11.47 per share and $5.67 per
share, respectively. All figures set out in the table below are in thousands,
except share amounts.

<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
<S> <C> <C>
Short-term debt:
Current portion of long-term debt....................... $ 2,907 $ 2,907
Long-term debt:
Long-term debt less current portion..................... 306 306
Stockholders' equity:
Preferred stock, $.01 par value; 3,000,000 shares
authorized;
none issued............................................ -- --
Common stock, $.01 par value; 45,000,000 shares
authorized;
12,759,807 shares issued and outstanding; 15,759,807
shares
issued and outstanding as adjusted..................... 128 158
Additional paid-in capital.............................. 72,923 174,551
Accumulated deficit..................................... (21,980) (21,980)
Accumulated other comprehensive loss.................... (391) (391)
Notes receivable from common stockholders .............. (99) (99)
Treasury stock.......................................... (68) (68)
------- --------
Total stockholders' equity.............................. 50,513 152,171
------- --------
Total capitalization.................................. $53,726 $155,384
======= ========
</TABLE>

13
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains our selected consolidated financial data and
should be read in conjunction with the more detailed consolidated financial
statements and notes thereto included elsewhere in this prospectus. The
selected consolidated financial data for and as of the end of each of the three
fiscal years in the period ended December 31, 1999 are derived from our
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected consolidated
financial data for and as of the end of each of the two fiscal years in the
period ended December 31, 1996 are derived from audited consolidated financial
statements that do not appear in this prospectus. All figures set out in the
table below are in thousands, except per share data.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues.......................... $32,835 $51,464 $75,363 $76,529 $ 79,476
Cost of revenues.................. 11,485 18,394 25,298 28,118 31,520
------- ------- ------- ------- --------
Gross profit...................... 21,350 33,070 50,065 48,411 47,956
Operating expenses:
Selling, general and
administrative ................ 10,294 15,251 22,294 33,979 39,976
Research and development ....... 6,856 10,328 14,851 21,464 24,705
Purchased in-process research
and development................ -- 4,426 5,601 -- --
Restructuring and other special
charges........................ -- -- -- 3,025 (91)
------- ------- ------- ------- --------
Total operating expenses ...... 17,150 30,005 42,746 58,468 64,590
------- ------- ------- ------- --------
Operating income (loss)........... 4,200 3,065 7,319 (10,057) (16,634)
Interest income (expense) and
other............................ 336 1,208 1,198 1,064 181
Merger-related expenses........... (1,911) -- -- -- (1,235)
------- ------- ------- ------- --------
Income (loss) before income taxes
................................. 2,625 4,273 8,517 (8,993) (17,688)
Income tax expense (benefit)...... 1,350 2,643 4,758 (2,868) 1,000
------- ------- ------- ------- --------
Net income (loss)................. $ 1,275 $ 1,630 $ 3,759 $(6,125) $(18,688)
======= ======= ======= ======= ========
Net income (loss) per share:
Basic........................... $ 0.18 $ 0.17 $ 0.36 $ (0.56) $ (1.63)
======= ======= ======= ======= ========
Diluted......................... $ 0.18 $ 0.17 $ 0.34 $ (0.56) $ (1.63)
======= ======= ======= ======= ========
Weighted average common shares
used in computing net income
(loss) per share:
Basic........................... 7,002 9,370 10,481 10,923 11,482
Diluted......................... 7,005 9,675 11,179 10,923 11,482
</TABLE>

<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities........................... $ 6,863 $33,345 $33,310 $18,070 $23,454
Working capital....................... 14,233 44,572 50,769 38,204 25,605
Total assets.......................... 26,396 62,662 81,693 78,950 70,709
Long-term debt, less current portion.. -- 392 243 260 306
Stockholders' equity.................. 17,745 52,882 68,142 65,213 50,513
</TABLE>

14
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Over the past two years, we have been strategically repositioning our
business to address new, high growth markets resulting from the growth in the
converged network build out. To support this repositioning, we made significant
investments in our sales force, built a service organization, expanded our
research and development and strengthened our management team. As a result,
during 1999, we achieved sequential increases in revenue over the prior quarter
of 6% in the second quarter, 15% in the third quarter and 23% in the fourth
quarter. In the quarter ended December 31, 1999, we achieved record revenues of
$25.0 million, representing a 43% increase over the same period in the prior
year.

In December 1999, we acquired QWES.com, Inc. in a transaction accounted for
as a pooling of interests. QWES is a business in the differentiated IP service
provisioning and application traffic shaping markets. In connection with the
acquisition, we exchanged or reserved 1,500,000 shares of our common stock for
the outstanding shares, options and warrants of QWES. Our consolidated
financial statements have been restated to include the financial position,
results of operations and cash flows of QWES from April 3, 1998, when QWES was
incorporated, through the acquisition date.

In October 1997, we acquired ViaDSP, Inc. for aggregate consideration of
144,562 shares of our common stock in a transaction accounted for as a
purchase. ViaDSP was created to define, develop and deliver standard products
for the telecommunications markets using advanced digital signal processing
technology. The value of the transaction was $7.1 million, including
approximately $236,000 of expenses related to the acquisition.

Our revenues consist primarily of product sales and, to a lesser extent,
services provided to our customers. We sell our products worldwide principally
through direct sales focusing on large original equipment manufacturer and
significant system supplier customers. We use indirect channels to focus on all
other customers and prospects. This strategy allows us to focus our resources
on customers that offer us the largest revenue opportunities.

Our revenue is recognized from product sales upon completion of delivery,
provided that collection is deemed probable. Service revenues are recognized
ratably over applicable contract periods or as the services are performed.

Our cost of revenues consists primarily of product cost, cost of services
provided to our customers and the overhead associated with testing and
fulfillment operations.

Sales, general and administrative expenses consist primarily of salaries,
commissions and related personnel expenses for those engaged in our sales,
marketing, promotional, public relations, executive accounting and
administrative activities and other general corporate expenses. As we add
personnel, launch new products and incur additional costs related to the growth
of our business, we expect these expenses to increase.

15
<PAGE>

Research and development expenses consist primarily of salaries, personnel
expenses and prototype fees related to the design, development, testing and
enhancement of our products. As of December 31, 1999, all research and
development costs have been expensed as incurred. We believe that continued
investment in research and development is critical to attaining our strategic
product and cost reduction objectives, and that these expenses will increase in
the future.

Results of Operations

The following table sets forth, for the periods indicated, selected items
from our consolidated statements of operations as a percentage of revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues...................................... 100.0% 100.0% 100.0%
Cost of revenues.............................. 33.6 36.7 39.7
------- ------- -------
Gross profit.................................. 66.4 63.3 60.3
Operating expenses:
Selling, general and administrative......... 29.6 44.4 50.3
Research and development.................... 19.7 28.0 31.0
Purchased in-process research and
development................................ 7.4 -- --
Restructuring and other special charges..... -- 4.0 (0.1)
------- ------- -------
Total operating expenses.................. 56.7 76.4 81.2
------- ------- -------
Operating income (loss)....................... 9.7 (13.1) (20.9)
Merger-related costs.......................... -- -- (1.6)
Other income, net............................. 1.6 1.4 0.2
------- ------- -------
Income (loss) before income taxes............. 11.3 (11.7) (22.3)
Income tax expense (benefit).................. 6.3 (3.7) 1.2
------- ------- -------
Net income (loss)............................. 5.0% (8.0)% (23.5)%
======= ======= =======
</TABLE>

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Revenues

Revenues increased to $79.5 million for the year ended December 31, 1999
from $76.5 million for the year ended December 31, 1998, representing an
increase of 3.9%. The increase is attributable to the growth of our services
sector, increased revenues in Europe and increased revenues from our strategic
accounts, partially offset by lower revenues in Latin America. Revenues from
sales to customers located outside North America were 27.4%, or $21.8 million,
and 26.9%, or $20.6 million, in 1999 and 1998, respectively. No single customer
accounted for more than 10% of revenues in 1999 or 1998.

Gross Profit

Gross profit decreased to $48.0 million for 1999 from $48.4 million for
1998, representing a decrease of 0.9%. The decrease in gross profit was related
to increased expenses incurred for investment in the services and manufacturing
departments.

Selling, General and Administrative

Selling, general and administrative expense increased to $40.0 million for
1999 from $34.0 million for 1998, representing an increase of 17.6%. The
increase in expenses was due to costs associated with increased selling
activity and increased expenditures for marketing, international

16
<PAGE>

expansion and customer support. In 1999, we added a sales office in Italy.
These increased expenses were in anticipation of increased revenues and aided
in our repositioning.

Research and Development

Research and development expense increased to $24.7 million for 1999 from
$21.5 million in 1998, representing an increase of 15.1%. The increase in
expense was primarily due to increased personnel and project development costs
associated with the Convergence Generation and Alliance Generation product
lines and associated software, and development of PolicyPoint. We expect that
our research and development expense will continue to increase.

Other Income, Net

Other income and expense, reflecting net interest income and foreign
exchange gains and losses, decreased to $181,000 for 1999 from $1.1 million
(exclusive of merger costs) for 1998, representing a decrease of 83.5%. The
decrease is primarily due to lower average cash balances for the period,
foreign exchange losses and an increase in interest expense associated with the
debt assumed in the QWES acquisition.

Merger-Related Expenses

We incurred a charge of $1.2 million in the fourth quarter of 1999
consisting of investment banking, accounting and legal fees connected with
closing the QWES acquisition.

Income Tax Expense (Benefit)

Income tax expense (benefit) was $1.0 million and ($2.9 million) for 1999
and 1998, respectively. During the quarter ended December 31, 1999, we
concluded that a full valuation allowance against our net deferred tax asset
was required, under applicable accounting standards, due to uncertainties
surrounding its realization. Accordingly, we established a full valuation
allowance for the net deferred tax asset of $4.8 million as of the beginning of
the year. This was partially offset by 1999 operating loss carrybacks and a
reduction in the income tax reserve for probable loss contingencies.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Revenues

Revenues increased to $76.5 million for 1998 from $75.4 million for 1997,
representing a 1.5% increase. The increase is attributable to the growth of our
services department, which was added in 1998, as well as increased revenues in
North America and Asia, partially offset by decreased revenues in Europe and
Latin America. Revenues from sales to customers located outside North America
were 26.9%, or $20.6 million, for 1998 and 27.9%, or $21.0 million, for 1997.
No single customer accounted for more than 10% of revenues in 1998 or 1997.

Gross Profit

Gross profit decreased to $48.4 million for 1998 from $50.1 million for
1997, representing a decrease of 3.3%. The decrease in gross profit was
directly related to expenses we incurred for investment in the services and
manufacturing departments. We took additional charges of approximately $1.1
million in 1998 that were related to prepaid technological licenses and product
write-downs due to the discontinuance of certain products.

17
<PAGE>

Selling, General and Administrative

Selling, general and administrative expense increased to $34.0 million for
1998 from $22.3 million for 1997, representing an increase of 52.4%. The
increases in expenses were due to costs associated with increased selling
activity and increased expenditures for marketing, international expansion and
customer support. In 1998, we added sales offices in Tokyo and Beijing. These
increased expenditures were in anticipation of increased revenues.

We recorded a provision in 1998 against a trade receivable of approximately
$2.2 million with a customer that abruptly ceased operations in April 1998. We
recorded revenues of $3.8 million and $2.5 million with this customer in 1997
and 1996, respectively.

Research and Development

Research and development expense increased to $21.5 million for 1998 from
$14.9 million for 1997, representing an increase of 44.5%. The increase in
expense was primarily due to increased personnel and project development costs
associated with the Alliance Generation product line and associated software.

Purchased In-Process Research and Development

At the time of our acquisition of ViaDSP, Inc. in October 1997, we allocated
the purchase price to the tangible and intangible assets of ViaDSP based on the
fair market value of those assets using a risk-adjusted discounted cash flow
approach. Specifically, the purchased in-process research and development,
consisting of completed technology and two separate development projects, was
evaluated through interviews. The development projects were further subjected
to analysis of data concerning the state of the technology and needed
developments. The evaluation of the underlying technology took into account the
inherent difficulties and uncertainties in completing its development, and
thereby achieving technological feasibility, along with the risks related to
the viability of and potential changes in our target markets. At the time of
the acquisition, we expensed the fair value of $5.6 million of the acquired
technology that had not reached technological feasibility as in-process
research and development and had no alternative future use to us in other
research and development projects or otherwise.

Actual revenues resulting from the purchased in-process research and
development have not met our expectations. These shortfalls from expectations
have adversely affected the expected return on our investment in ViaDSP.

Other Income, Net

Other income and expense, reflecting net interest income and foreign
exchange gains and losses, decreased to $1.1 million in 1998 from $1.2 million
(exclusive of merger costs) in 1997, reflecting a decrease of 11.2%.

Income Tax Expense (Benefit)

Income tax expense (benefit) was ($2.9 million) and $4.8 million for 1998
and 1997, respectively. The tax rates for 1998 and 1997 differ from the
effective tax rate due to state income taxes, net of federal tax benefit; the
effect of research and experimentation federal tax credits; and permanent
differences for nondeductible merger and purchased in-process research and
development costs.

18
<PAGE>

Restructuring and Other Special Charges

In the fourth quarter of 1998, in response to changes in our business
environment we took several actions to create efficiency, to decrease cash
outflows and to manage our business more effectively, that resulted in
restructuring and other special charges. To eliminate payroll and other related
expenditures, we reduced our headcount by three senior international managers.
The accrued cost to implement this reduction was approximately $951,000 (of
which approximately $65,000 was paid in 1998). We also committed to reduce
future lease commitments for a new corporate office and engineering space
neither of which will be occupied. The accrued cost to reduce or terminate
these lease commitments was approximately $2.1 million, with a projected
avoidance of future costs of approximately $10.2 million over ten years.

We were able to buy out the lease commitment at one of the locations and
sublease the other location at an aggregate cost of approximately $958,000,
resulting in a savings of approximately $1.1 million from our original
estimate. These savings resulted in credits against our accruals in 1999. The
savings in the first quarter were partially offset by an additional accrual of
approximately $288,000 for unexpected delays in disposing of the other lease
commitment. There is no remaining balance for the lease accruals at December
31, 1999.

In the first quarter of 1999, we completed our management reorganization and
terminated two additional senior managers. The severance costs were
approximately $441,000, with an anticipated savings of approximately $327,000 a
year. In addition, in the fourth quarter of 1999, we incurred a special charge
of approximately $557,000 for payroll-related taxes on an option exercise by
one of the terminated managers. At December 31, 1999 the aggregate severance
accruals have a remaining accrued balance of approximately $450,000, which will
be fully paid in 2000.

Recent Accounting Pronouncements

In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-9, "Modification of SOP No. 97-2, Software
Revenue Recognition, with Respect to Certain Transactions" ("SOP 98-9"). SOP
98-9 amends SOP 97-2 to require recognition of revenue using the "residual
method" in circumstances outlined in SOP 98-9. Under the residual method,
revenue is recognized as follows: (1) the total fair value of undelivered
elements, as indicated by vendor-specific objective evidence, is deferred and
subsequently recognized in accordance with the relevant sections of SOP 97-2
and (2) the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to the
delivered elements. SOP 98-9 is effective for transactions entered into in
fiscal years beginning after March 15, 1999. Accordingly, we have adopted the
provisions of SOP 98-9 for our fiscal year 2000 which commenced on January 1,
2000. Also, the provisions of SOP 97-2 that were deferred by SOP 98-4 will
continue to be deferred until the date SOP 98-9 becomes effective. We do not
expect the adoption of SOP 98-9 to have a significant impact on our results of
operations or financial position.

In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 137 amends SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which was issued
in June 1998. SFAS No. 137 defers the effective date of SFAS No. 133 to all
fiscal years beginning after June 15, 2000. Accordingly, we will adopt the
provisions of SFAS No. 133 for our fiscal year 2001 which commences on January
1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
will be recorded each period in current earnings or

19
<PAGE>

accumulated other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and the type of hedge transaction. We
do not expect the adoption of SFAS No. 133 to have a material impact on our
financial position or results of operations.

In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. This
bulletin summarizes certain views of the staff on applying generally accepted
accounting principals to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when all of the
following criteria are met: persuasive evidence of an arrangement exists;
delivery has occurred or services have been rendered; the seller's price to the
buyer is fixed or determinable; and collectibility is reasonably assured. We
believe that our current revenue recognition policy complies with the
Commission's guidelines.

Liquidity and Capital Resources

Cash provided by (used by) operations for the years ended December 31, 1999,
1998 and 1997 was $7.6 million, ($4.1 million) and $3.2 million, respectively.
Cash was provided by operations in 1999 from decreases in our accounts
receivable, inventory and prepaid assets and increases in accrued expenses,
partially offset by the net loss. Cash was used in operations in 1998 from the
net loss, and increases in inventory, prepaid expenses and a restructuring
accrual partially offset by a decrease in accounts receivable. Cash was
provided by operations in 1997 from net income and increased accounts payable
partially offset by increased accounts receivable and inventory in support of
higher revenues.

Cash (used in) provided by investing activities in 1999, 1998 and 1997 was
($7.7 million), $7.2 million and ($7.8 million), respectively. Cash of $17.3
million, $6.5 million and $33.0 million was used to purchase marketable
securities, with cash of $16.4 million, $27.6 million and $32.7 million
provided from maturities of marketable securities for 1999, 1998 and 1997,
respectively. Capital expenditures were $6.2 million, $8.6 million and $7.2
million for 1999, 1998 and 1997, respectively. Increased capital expenditures
in 1998 were primarily due to increases in personnel-related and capital
improvement costs. Capital expenditures for 1997 were associated with our new
headquarters facility. We expect capital expenditures in 2000 will approximate
$7.0 million, principally for testing equipment, development equipment and
computer hardware and software.

Cash provided by financing activities in 1999, 1998 and 1997 was $4.2
million, $3.2 million and $4.1 million, respectively. The financing in 1999 was
provided primarily by the exercise of stock options and the issuance of debt
used to fund QWES operations. This was partially offset by our purchase for
$1.1 million of 100,000 shares of common stock through our repurchase plan,
which our board of directors authorized in July 1999 and subsequently
rescinded. The financing in 1998 was provided primarily from the exercise of
stock options and the issuance of debt used to fund QWES operations. The
financing in 1997 was provided primarily from the exercise of stock options.

We established a new $7.5 million bank line of credit for working capital
purposes effective in May 1999. Borrowings under our line of credit bear
interest at the bank's floating rate of prime plus one percent. We are subject
to covenants requiring maintenance of certain profitability, equity and
liquidity ratios. As of December 31, 1999, we were in compliance with all of
those covenants, and there were no amounts outstanding. This credit agreement
is subject to renewal on May 13, 2000.

We believe that our current cash and marketable securities together with the
proceeds from this offering will be sufficient to meet our cash requirement to
fund operations and expected expenditures for the foreseeable future.

20
<PAGE>

Quarterly Results

The following tables set forth unaudited selected financial information for
the periods indicated, as well as certain information expressed as a percentage
of total revenues for the same periods. This information has been derived from
unaudited consolidated financial statements, which we believe include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of such information. This information has not been audited or
reviewed by our independent accountants in accordance with standards
established for such reviews. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any future period.

Revenues have grown relatively steadily over the four quarters for the
period ended December 31, 1999, after we significantly increased expenses in
1998 as we began our repositioning. Revenue growth from the first quarter of
1999 to the second quarter was 6%, from the second quarter to the third quarter
was 15% and from the third quarter to the fourth quarter was 23%. We believe
that our repositioning efforts have been successful to date. We expect that
revenues will continue to increase into the period ending December 31, 2000.

Operating income (loss) during the eight quarters has varied, decreasing as
a percentage of revenues from quarter to quarter for 1999, after increasing
steadily over four quarters of 1998. Cost of revenues remained flat in 1999
after increasing steadily over the four quarters in 1998. In 1998 and 1999,
increases in the services and manufacturing departments led to higher cost of
revenues percentages. During this eight-quarter period, selling, general and
administrative expenses have varied due to costs associated with increased
sales activity and increased expenditures for marketing and international
operations. Research and development remained relatively constant as a
percentage of revenues.

Our quarterly operating results may fluctuate as a result of a number of
other factors, including timing of customer orders, adjustments of delivery
schedules to accommodate customer or regulatory requirements, availability of
components from suppliers, timing and level of international sales, mix of
products sold and timing and level of expenditures for sales, marketing and new
product development.

21
<PAGE>

We operate on a relatively small backlog. Quarterly sales and operating results
therefore generally depend on the volume and timing of orders received during
or just before the start of the quarter. Our expense levels are based in part
on our forecasts of future revenues and, if such revenues were to fall below
expectations, our operating results could be adversely affected. Accordingly,
we cannot be sure that we will be profitable in any particular quarter. All
figures set out in the table below are in thousands.

<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
31-Mar-98 30-Jun-98 30-Sep-98 31-Dec-98 31-Mar-99 30-Jun-99 30-Sep-99 31-Dec-99
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $20,007 $18,436 $20,611 $ 17,475 $16,621 $17,565 $20,276 $25,014
Cost of revenues........ 6,066 6,629 7,678 7,745 6,625 6,953 8,080 9,862
------- ------- ------- -------- ------- ------- ------- -------
Gross profit............ 13,941 11,807 12,933 9,730 9,996 10,612 12,196 15,152
Operating expenses:
Selling, general and
administrative........ 8,805 7,186 8,039 9,949 9,743 9,775 9,966 10,492
Research and
development........... 4,583 4,664 5,345 6,872 5,925 6,258 6,278 6,244
Restructuring and
other special
charges............... -- -- -- 3,025 -- -- -- (91)
------- ------- ------- -------- ------- ------- ------- -------
Total operating
expenses............ 13,388 11,850 13,384 19,846 15,668 16,033 16,244 16,645
------- ------- ------- -------- ------- ------- ------- -------
Operating income
(loss)................. 553 (43) (451) (10,116) (5,672) (5,421) (4,048) (1,493)
Merger-related
expenses............... -- -- -- -- -- -- -- (1,235)
Other income (loss),
net.................... 223 234 272 335 (208) 191 50 148
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 776 191 (179) (9,781) (5,880) (5,230) (3,998) (2,580)
Income tax expense
(benefit).............. 272 92 31 (3,264) (1,858) (1,580) (1,156) 5,594
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)....... $ 504 $ 99 $ (210) $ (6,517) $(4,022) $(3,650) $(2,842) $(8,174)
======= ======= ======= ======== ======= ======= ======= =======

<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------------
31-Mar-98 30-Jun-98 30-Sep-98 31-Dec-98 31-Mar-99 30-Jun-99 30-Sep-99 31-Dec-99
Percent of Revenues --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 30.3 36.0 37.3 44.3 39.9 39.6 39.8 39.4
------- ------- ------- -------- ------- ------- ------- -------
Gross profit............ 69.7 64.0 62.7 55.7 60.1 60.4 60.2 60.6
Operating expenses:
Selling, general and
administrative........ 44.0 39.0 39.0 57.0 58.6 55.7 49.2 41.9
Research and
development........... 22.9 25.3 25.9 39.3 35.7 35.6 31.0 25.0
Restructuring and
other special
charges............... -- -- -- 17.3 -- -- -- (0.3)
------- ------- ------- -------- ------- ------- ------- -------
Total operating
expenses............ 66.9 64.3 64.9 113.6 94.3 91.3 80.2 66.6
------- ------- ------- -------- ------- ------- ------- -------
Operating income
(loss)................. 2.8 (0.3) (2.2) (57.9) (34.2) (30.9) (20.0) (6.0)
Merger-related
expenses............... -- -- -- -- -- -- -- (4.9)
Other income (loss),
net.................... 1.1 1.3 1.3 1.9 (1.2) 1.1 0.3 0.6
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 3.9 1.0 (0.9) (56.0) (35.4) (29.8) (19.7) (10.3)
Income tax expense
(benefit).............. 1.4 0.5 0.2 (18.7) (11.2) (9.0) (5.7) 22.4
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)....... 2.5% 0.5% (1.1)% (37.3)% (24.2)% (20.8)% (14.0)% (32.7)%
======= ======= ======= ======== ======= ======= ======= =======
</TABLE>

22
<PAGE>

Year 2000 Readiness Disclosure

We believe that all of our current major product offerings are Year 2000
compliant. Certain older legacy products, which we no longer sell, may not be
Year 2000 compliant. We have addressed the issue of legacy products by
publishing on our external website a notice to the effect that certain of these
products may not be Year 2000 compliant and that each customer who purchased
these products should test and, as needed, repair or replace any of them to the
extent that they are still in use. We spent approximately $1.0 million during
1999 in addressing Year 2000 compliance issues. To this date, we are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems or the products and services of third parties.

European Union Currency Conversion

On January 1, 1999, 11 member nations of the European Economic and Monetary
Union began using a common currency, the euro. For a three-year transition
period ending June 30, 2002, both the euro and each of the currencies for such
member nations will remain in circulation. After June 30, 2002, the euro will
be the sole legal tender for those countries. The adoption of the euro will
affect many financial systems and business applications, as the commerce of
those countries will be transacted in both the euro and the existing national
currency during the transition period. We have subsidiary operations in three
of the eleven countries currently using the euro, France, Germany and Italy,
and we have branch operations in a fourth country, Spain. We have assessed the
potential impact of the euro conversion in a number of areas, particularly the
potential impact on pricing and other marketing strategies and on product
development. Although we do not currently expect that the conversion, either
during or after the transition period, will adversely affect our operations or
financial condition, the conversion has only recently been implemented and we
cannot be sure that it will not have some adverse impact.

Other

Our primary market risk exposures are in the areas of interest rate risk and
foreign currency exchange rate risk. Our investment portfolio of cash
equivalents and marketable securities is subject to interest rate fluctuations,
but we believe this risk is immaterial due to the short-term nature of these
investments. At December 31, 1999, we had $2.9 million of short-term and
$306,000 of long-term debt outstanding. The short-term debt was issued under
various notes payable and due to their short-term maturities, a hypothetical
10% decrease in our weighted-average short-term borrowing rate at December 31,
1999 would not have materially affected the year-end carrying value of the
debt. Our exposure to currency exchange rate fluctuations has been and is
expected to remain moderate due to the fact that the operations of our
international subsidiaries are primarily conducted in their respective local
currencies.

For U.S. federal income tax purposes we have net operating loss
carryforwards available to reduce taxable income of approximately $16.4 million
at December 31, 1999, of which $2.9 million is subject to Internal Revenue Code
Section 382. These carryforwards will begin to expire in 2004. We also have a
foreign net operating loss carryforward of approximately $845,000. Utilization
of net operating loss carryforwards is subject to an annual limitation of
approximately $772,000 under Internal Revenue Code Section 382. We have $1.5
million of tax credits which are composed of federal research and development
credits and state and local credits. These credits expire beginning in 2004.

We believe that our revenues and results of operations have not been
significantly impacted by inflation during the past three fiscal years.

23
<PAGE>

BUSINESS

Overview

Our products, which use technologies including digital signal processing,
media processing, signal protocol processing, switching and packet
classification, are essential components in networking and communications
equipment deployed in the wireline and wireless Internet and PSTN. We also
provide our customers with software development tools and systems architecture
and engineering design services. These products, tools and services facilitate
the rapid creation and deployment of enhanced services and applications while
conforming to the high quality, availability, scalability and manageability
required in service provider networks. Our products and technologies are
compliant with open industry standards to insure interoperability and
compatibility, and leverage mass-market components, such as general purpose
microprocessors, digital signal processors and operating system software. We
use the term Open Communications to describe products that share these
characteristics.

Demand for our solutions arises from the explosive growth in data traffic
coupled with the need of networking and communications system vendors and
service providers to bridge the gap between the IP network and the PSTN. In
addition, deregulation and the emergence of new service providers, coupled with
rapid technological changes and increasing competition, has led these system
vendors to purchase subsystems and enabling technologies from outside
suppliers, such as Natural MicroSystems. Our products and enabling technologies
help our customers achieve a reduced time to market and allow them to focus
their development efforts on new service creation and next generation
infrastructure.

Our products and solutions target applications in five market segments: IP
telephony, differentiated IP service provisioning, enhanced services, wireless
network infrastructure and enterprise applications. We target original
equipment manufacturers, system suppliers and other strategic customers in
these market segments and seek to provide them with essential enabling
components for their system offerings. To date, our solutions have been
deployed in over 40 countries and our customers include leading vendors such as
Alcatel, Clarent, Comverse, Ericsson, Lucent, Motorola, Nortel, Siemens and
Teradyne.

Industry Background

The networking and communications industries have experienced dynamic change
and rapid growth over the past few years. These changes have led to growing
challenges for both service providers as well as networking and communications
equipment vendors. These trends are expected to continue. The primary factors
driving this change and growth include those described below.

Explosive growth in data communications traffic. The increasing use of the
Internet has led to an explosive growth in data communications traffic. This
growth has been fueled by the increasing number of users of the Internet, the
increased use of electronic mail, the transmission of multimedia content and
the increased volume of information retrieved from the Internet. According to
International Data Corporation, the number of users of the Internet is expected
to grow from 142 million at the end of 1998 to 500 million in 2002. In
addition, organizations are increasingly using the Internet to communicate with
customers and partners. These business-to-business e-commerce

24
<PAGE>

transactions are further contributing to the surge in data traffic. This growth
in data traffic is placing huge strains on the traditional PSTN, creating the
need for new types of networking equipment.

Service provider deregulation and competition. Global deregulation and rapid
technological advances have resulted in the emergence of many new
communications service providers, thereby increasing competition within the
communications market, lowering prices and accelerating the development of
innovative new services to attract and retain customers. This environment is
forcing service providers to differentiate themselves by offering new services.
Many of these service providers are using packet technologies to gain a
competitive advantage through the lower cost of deployment, operation and
expansion of networks and rapid implementation of these new services. IP
telephony, differentiated IP service provisioning, customer interaction
center/web integration and unified messaging are examples of such services.

Structure and Evolution of Communications Networks

Network components. There are three fundamental components of communications
networks. The first component is the medium over which the communications
signal is transmitted, such as conventional copper wires, fiber optic cable or
radio waves. The second component is signaling, switching and other devices
that create and manage the transmission of signals. The third component is
standards or protocols that provide agreed languages that permit the various
signaling, switching and other devices to communicate with one another. For
example, the PSTN includes telephone lines, which transmit signals
incorporating both the sound or data being communicated and the signals that
route and manage the communication; telephones, switches, amplifiers and other
devices that create, route, amplify and reproduce the signals; and numerous
industry and country protocols governing the transmission and routing of the
signals and the management of the network.

Principal public communications networks today include the PSTN and the
Internet. Although each network is based on a distinct architecture, both the
PSTN and the Internet require sophisticated equipment to transmit, route and
manage communications and protocols that permit the equipment to communicate
with other equipment between and within networks.

Convergence of voice and data. Historically, voice and data communications
have been transmitted and managed on separate networks, each with distinct
technologies, standards and protocols. Traditional telephone systems require
that a dedicated connection, or circuit, be established and maintained for the
duration of a call in order to transfer voice or data. Dedicated connections
result in the poor use of bandwidth since no traffic travels through the
circuit when users are silent, which can account for a significant amount of
time during a transfer. IP networks differ fundamentally from circuit-switched
networks in that the packet network's resources and infrastructure can be
shared simultaneously by several users and bandwidth can be flexibly allocated.
Packet-based communications systems format the information to be transmitted,
like e-mail, voice, fax and data, into a series of shorter digital packages of
information called "packets." Each of these packets is then transmitted over
the network and is reassembled as a complete communication at the receiving
end. IP networks offer a number of advantages over circuit-switched networks.
Rather than requiring a dedicated circuit for each individual call, IP networks
commingle packets of voice, fax and data from several communications sources on
a single physical link, providing superior utilization of network resources.
Additionally, this integration of voice and data communications makes possible
an enrichment of services and an entire range of new, value-added applications.

Standards and protocols. IP and circuit-switched networks, deployed by
service providers across multiple geographies, rely on an array of standards
and protocols for communicating information among switches and other devices.
The PSTN requires basic signaling software protocols such as

25
<PAGE>

ISDN and SS7 in order to ensure that calls from one network to another are
transmitted correctly. Similarly, the IP network requires a set of standards
and protocols to route information correctly. For example, these standards
include H.323 for the transmission of voice signals in an IP network. While
these networks and protocols are distinct today, communications equipment
vendors are striving to build equipment that enables the interconnection and
interoperability of the different networks, protocols and standards.

Interoperability. The evolution of the packet-based network combined with
the extensively deployed circuit-switched network creates the need for
interoperability. Interoperable communications components can interconnect and
work with both circuit and packet networks. Complete interoperability of these
networks presents significant challenges. The PSTN, which consists of
approximately 1.2 billion telephones worldwide, contains a large number of
signaling protocol variants. The Internet utilizes a small number of open
protocols. Many of these are still being defined and implemented by standards
bodies and leading vendors. Interoperability requires the ability to execute
all of the associated protocol variants, as well as the ability to process the
data from its source to its destination format.

Market Needs

The explosive increase in data traffic, heightened competition, the need for
network interoperability and the emergence of converged network infrastructures
are causing service providers and enterprises to deploy new enhanced services
and applications in order to compete more effectively. In addition, the
increasing use of packet networks, which must interoperate with existing
networks, requires network equipment and applications that can operate in both
packet and circuit networks. Service providers require that their packet
networks have the high levels of quality, availability, scalability and
manageability traditionally associated with circuit networks. Finally, the
emerging packet networks can support completely new enhanced services and
applications, but only with new technologies such as traffic classification and
bandwidth management.

The Natural MicroSystems Solution

We provide 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
communications service providers and enterprises to rapidly and cost-
effectively deploy data, voice and fax applications and enhanced services in
converged networks. Our products, which utilize technologies including digital
signal processing, media processing, signal protocol processing, switching, and
packet classification, are essential components in networking and
communications equipment deployed in the wireline and wireless Internet and
PSTN. We also provide our customers with software development tools and systems
architecture and engineering design services. These tools and services
facilitate the rapid creation and deployment of enhanced services and
applications while conforming to the high quality, availability, scalability
and manageability required in service provider networks. Our products and
technologies are compliant with open industry standards to insure
interoperability and compatibility, and leverage mass-market components, such
as general purpose microprocessors, digital signal processors and operating
system software.

26
<PAGE>

Our products and services enable our customers to:

Reduce time to market. Our products, technologies and services are designed
to help reduce our customers' product development cycles, enabling them to
deliver their products to market more quickly, capture greater market share and
compete more effectively. Service providers and enterprises, in turn, can
deploy enhanced services and applications more quickly.

Provide for network interoperability. Our knowledge of emerging Internet and
established PSTN protocols facilitates the deployment of our solutions across
diverse networks. As new network deployments are increasingly IP-based, our
products allow connectivity and interoperability with the PSTN. Our customers
rely on us to assist them in the deployment of their products in networks
worldwide.

Meet carrier class requirements. Our products are designed to deliver the
high quality, availability, reliability, scalability and manageability required
in service provider networks. These, combined with our solutions for network
interoperability, enable the deployment and scaling of enhanced services and
applications across diverse network infrastructures. We provide an easy-to-use
open development environment that allows our customers to develop
differentiated systems and solutions for the converged network. In addition,
this capability facilitates upgrades and enhancements to deployed network
systems, reducing the life-cycle cost of ownership.

Create and deploy enhanced services. We provide the foundation for the
creation and deployment of enhanced services, such as unified messaging, in
both the IP network and the PSTN environments. Our products and technologies
enable the delivery of differentiated packet services, including service
provisioning and traffic classification based on application type and per-flow
metering. This capability enables equipment vendors, service providers and
enterprises to build new classes of enhanced services and applications.

Strategy

Our objective is to be the leading provider of enabling technologies to the
premier networking and communications systems original equipment manufacturers
addressing converged network solutions. The following are key elements of our
strategy:

Focus on high growth market segments. We believe that our technologies,
products and services are critical to several high growth market segments. We
focus our technology, sales and marketing resources on the following five
market segments:

<TABLE>
<CAPTION>
Examples of Applications
-----------------------------------------------
Market Segment Existing Emerging
- ------------------------------- --------------------- -------------------------
<S> <C> <C>
IP telephony IP voice gateways IP media servers

Differentiated IP service Internet access Guaranteed service levels
provisioning for voice and e-commerce

Enhanced services Prepaid and debit Unified messaging
card calling services

Wireless network infrastructure Analog cellular Wireless Internet
services

Enterprise applications Voicemail Customer interaction
centers/web integration
</TABLE>

27
<PAGE>

Extend our technology leadership. We invest heavily in developing enabling
technologies that are essential to providing high performance voice, data and
fax transmission over and connectivity to both packet and circuit networks. We
provide products and technologies essential to the creation and deployment of
enhanced services on converged networks. We have assembled a team of
approximately 250 engineers and technical personnel who are currently dedicated
to this market. Over our 17 years of experience, we have developed significant
expertise in digital signal processing software, media stream protocol
processing, global network interface and protocol technologies and a
comprehensive software development environment. We intend to continue to invest
in our technological expertise through in-house development and strategic
acquisitions.

Strengthen and expand relationships with strategic customers. Our strategy
is to establish and maintain long term working relationships and to sell our
products and services to leading original equipment manufacturers in the
networking and communications industries. We dedicate over 130 sales and
technical services personnel to approximately 100 networking and communications
systems vendors worldwide. We also target emerging companies addressing high
growth markets. We use indirect channel partners to reach a broader market. By
focusing on leading equipment manufacturers with large volume potential, we
believe that we reach the largest portion of our potential customer base while
minimizing the costs and complexity of our marketing efforts. These customer
relationships also provide us with multiple sales opportunities across our
customers' product lines. We work closely with our customers to design our
software and hardware solutions into their products and use consulting and
support services to facilitate and reinforce these relationships. By working
with leading customers early in their product design and development stages, we
gain valuable insights into future industry requirements and trends.

Broaden our product offering. We believe that breadth of product line is one
of the principal attributes that equipment manufacturers consider in selecting
suppliers of enabling technology. We offer a broad selection of enabling
technologies for networking and communications equipment vendors, and we intend
to continue to broaden our product offering. For example, in December 1999 we
acquired QWES.com, Inc., the developer of PolicyPoint, an enabling technology
for differentiated packet-based services. Our strategy is to continue to expand
our product offerings, both by internal development and acquisitions.

Support open architecture and drive evolving standards. We will continue to
support open architectures, allowing developers of high performance, high value
applications to utilize standards-based products or components. This will in
turn reduce development time and enable customers to take advantage of advances
made in complementary technologies. Our products are accessible to developers
and allow them, through the use of our software development environment, to
develop software and algorithms for their products. We have a record of
developing and promoting open industry standards and intend to continue our
leadership role.

Strengthen customer relationships through consulting and support services.
Our consulting and support services extend from initial product conception and
design through implementation, field trial and deployment. These fee-based
service relationships increase our visibility to our customers and facilitate
the design-in process while providing us with insight into future market
requirements.

Products and Services

The principal functions addressed by our products include connectivity to
communications networks, call processing, real-time media processing, and media
stream protocol processing. These capabilities are accessed through a series of
application programming interfaces that expose the hardware and firmware
functions to the developer for the purpose of creating an application or
system.

28
<PAGE>

Our products are developed for global markets and allow customers to
integrate their applications and systems into the IP network and the PSTN. Our
products are compatible with signaling protocols and are approved for use in
many countries. In order to have a presence in the fastest growing and largest
international markets, we use our technological expertise, open architecture,
and familiarity with international regulatory requirements to obtain the
approvals required for use of our products in principal foreign markets. Our
products have been incorporated into products sold to end users in over 40
countries.

Our products are open, accessible, standards-based, layered, network
protocol- and operating system-independent, modular and scalable. These
features offer developers significant reduction in time and effort when
developing sophisticated applications and systems.

Convergence Generation. The Convergence Generation product family, currently
in field trials, consists of software and hardware components configured
specifically for convergence-centric systems and applications. This product
family is designed for an Intel StrongARM co-processor and Texas Instruments
(TI) C54x family of digital signal processors. We believe the architecture is
extensible to hundreds of ports per slot and capable of integrating high-
density IP network and PSTN interfaces including T3 and OC-3. We believe this
product family offers the best price performance for converged network
solutions such as IP telephony gateways and IP media servers.

PolicyPoint. The PolicyPoint product family, currently in field trials,
consists of software and hardware components that provide reliable, cost-
effective, predictable and consistent transport of voice, video and data over
packet networks. The product family is designed for the TI C6x family of
digital signal processors and does not require a host processor. It provides
connectivity to any ATM WAN while controlling network and application specific
usage and performance. The PolicyPoint architecture offers a soft-ASIC
capability that allows for the integration of additional WAN protocols
including frame relay, point-to-point protocol, multi-protocol label switching
and differentiated services. We believe the architecture is extensible to
higher density LAN and WAN interfaces. We believe PolicyPoint's architecture
delivers a compelling price performance advantage.

Alliance Generation. The Alliance Generation is a proven product line with a
field history of over eight years. It consists of software and hardware
components configured to meet the needs of enterprise and enhanced services
applications for circuit-switched environments. This product family is designed
for an Intel x86 co-processor and TI C51 or TI C549 families of digital signal
processors. The port densities offered range from 2 to 120 ports per slot and
the Alliance Generation product line is differentiated from competition due to
its unique extensibility. The product family enables systems to maximize
resources, thereby reducing costs.

Intelligent Networks/SS7. The Intelligent Networks/SS7 product family
consists of software and hardware components that provide a complete suite of
intelligent networking protocols for PSTN connectivity. The product family is
designed for the Motorola 68xxx family of processors. It allows for a full
implementation of the SS7 protocol stack with access at all layers and contains
a set of switch-specific and high availability extensions that meet service
provider requirements and facilitate worldwide deployment and interoperability.

Natural Access Software. The Natural Access Software suite consists of CT
Access with Natural Call Control, NaturalFax, ActiveAG, TAPI support, ISDN,
Channel Associated Signaling and high availability extensions. This suite was
designed as the development and run-time environment for the Alliance and
Convergence Generation product families and provides for the rapid development
of high performance, scalable applications. Natural Access allows developers,
working with common programming languages and different programming models,
independent of host platforms and operating systems, to implement applications
and systems requiring communications functionality.

29
<PAGE>

The following table depicts our product families, capabilities and benefits:

Natural MicroSystems Products

<TABLE>
<CAPTION>
Product
Family Capabilities Benefits
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Convergence Hardware Platform Specific: Software Specific: .Provides interoperability
Generation .Integrated PSTN and IP .Programmable media with circuit and packet-
network interfaces streaming switched networks
.Media stream protocol .SNMP support .Flexible media streaming
processing .Hot-swap drivers supports new converged
(flexible packet .Hosting enhanced services
processing) environment for .Integrates into carrier
--Jitter buffer management speech grade solutions
--Low latency technologies .Maximizes system price
.Digital Signal Processing .Media support performance
--Echo cancellation --Play/record .Optimized platform for
--Vocoding --Transcoding speech recognition and
--Fax text-to-speech
--Conferencing applications
.PSTN Interface
--Worldwide signaling
.ISDN
.Channel associated
signaling
.IP Interface
--Ethernet
.Low power consumption
.Low host-processor
utilization

- -----------------------------------------------------------------------------------------------
PolicyPoint Hardware Platform Specific: Software Specific: .Enables service level
.Integrated LAN and WAN .Bandwidth shaping guarantees for
network interfaces --Wirespeed packet differentiated IP
.WAN Interface classification applications
--T1/E1 --Fine granularity .Provisioning of premium
.LAN Interface discrimination IP services
--10/100-BaseT Ethernet --LAN to WAN .Integrates with existing
.Standalone operation bandwidth management systems
.Integrated CSU/DSU management and .Lowers deployment and
bounds delay maintenance costs
--Per flow
metering
.Remote management
--SNMP support
--Web-based
provisioning
--In-field
software upgrades
.Routing support
.Software
programmable WAN
protocol
--ATM

- ------------------------------------------------------------------------------------------------
Alliance Hardward Platform Specific: Software Specific: .Allows for PBX
Generation .Digital Signal Processing .SNMP support integration
--Echo cancellation .Hot-swap drivers .Provides interoperability
--Vocoding .Hosting with circuit-switched
--Fax environment for networks worldwide
--Conferencing speech .Integrates into carrier
.PSTN Interface technologies grade solutions
--Worldwide signaling .Media support .Maximizes system price
.ISDN --Play/record performance
.Channel associated --Transcoding .Optimized platform for
signaling speech recognition and
.Analog interfaces text-to-speech
.Station interfaces applications
.Low power consumption
.Low host-processor
utilization
- -----------------------------------------------------------------------------------------------
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
Product
Family Capabilities Benefits
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intelligent Hardware Platform Specific: Software Specific: .Programmability allows
Networks/SS7 .PSTN Interface .Multiple layers wireless network
--T1/E1 --MTP1-3 components to interact
--V.35 --SCCP with PSTN
--10-BaseT Ethernet --TCAP .Facilitates the creation
--TUP of enhanced services
.Fully redundant platforms and
.4-16 Links applications
.Hardware implementation
enables host to operate
independently

- -----------------------------------------------------------------------------------------------
Natural Software development Features: .Development environment
Access environment: .Natural call allows for operational
Software .Alliance Generation control compatibility
.Convergence Generation .Access to global .Simplifies development of
.Windows NT signaling switching and call
.SPARC Solaris protocols processing applications
.Unixware .High availability .Simplifies development of
and manageability extensions to deployed
.Point-to-point systems
switching
.Configuration and
installation
- -----------------------------------------------------------------------------------------------
</TABLE>

Fusion. In addition, we market Fusion, a branded package incorporating
several of our products. It is a scalable, high performance development
platform for standards-based IP telephony solutions. Fusion provides a software
development environment designed specifically for the creation of IP telephony
gateway solutions. Fusion's modular architecture allows support for existing
protocols such as the International Telecommunication Union's H.323
specification and a growing list of emerging protocols like Media Gateway
Control Protocol (MGCP) and Session Initiation Protocol. Fusion enables
developers to create application solutions with configurations from four analog
ports to multiple T1s/E1s with no increase in latency or decrease in
performance.

Services and Customer Support. To complement our hardware and software
products, we also offer consulting and support services. Our NaturalEdge
Engineering Consulting Services include:

. Systems architecture and engineering services that assist customers with
all facets of product development, from concept definition to
feasibility analysis to functional specifications;

. Design consulting services that create working prototypes and provide a
range of engineering services, including specifications and detailed
project plans; and

. Development and integration services that help customers develop value-
added product features, extend product functionality, or migrate to
newer technology while protecting investments in existing offerings.

In addition, as part of our NaturalEdge Global Support, we offer a variety of
support programs ranging from NaturalEdge Web Support to Global On-Call
Support, which provides support 24 hours a day, seven days a week.

Technology

We offer high performance software and hardware component technologies for
converged network solutions such as communications gateways and enhanced
service platforms for IP, ATM, wireless and wireline communications networks.
Our technology components include a flexible software architecture that allows
our technology to be readily adopted by major communications equipment
suppliers. Our technology is engineered to provide telecommunications quality
and availability while leveraging the broad capabilities of mass-market
computer platforms. Our software technology is available on board-level
products for open computing platforms or as hardware reference designs for
embedded applications and systems. To facilitate the development of specific
solutions, we provide sample applications and demonstration programs. Our
architecture includes software and hardware reference designs, as well as
hardware and firmware implementations of these core technologies:

31
<PAGE>

Digital signal processing software and related compute engines. We base our
solutions on high performance commercial digital signal processors integrated
with proprietary technology to provide high density, scalable signal processing
arrays.

Media stream protocol processing. Our high performance packet processing
digital signal processor firmware technology allows for the efficient support
of media streams on IP and other packet networks and enhanced services
platforms for packet networks.

Global network interfaces and protocol technology. We offer many of the
commonly used digital and analog telephony interfaces as well as Ethernet and
T1/E1 WAN data interfaces. Our PSTN protocol technologies include all major
channel-associated signaling variants and ISDN and SS7 signaling, as well as
leading Voice-over-IP call control protocols such as H.323 and MGCP. Our
interface and protocol technology allows us to rapidly obtain interoperability
and approvals for new products in all major markets, and to efficiently respond
to our customers' requirements for public network connections and approvals in
other markets.

Telecommunications switching technology. Our Natural Call Control call
management software and our efficient hardware implementation of industry
standard CTBus interfaces combine to provide an extremely flexible, scalable
and cost-effective platform for telecommunications switching.

Packet classification and queuing for differentiated IP servicing
provisioning. Our packet classification and queuing technology supports
differentiated quality of IP services using ATM and other wide area network
protocols. The proprietary digital signal processor-based technology provides
wire speed performance levels with the flexibility of a software-only approach.

Flexible, high performance communications software and systems architecture.
Our high performance software architecture minimizes the computational load on
the host processors, freeing system resources for the use of our customers'
applications while providing the highest possible capacity on any specific
computing platform. The flexibility of our programming interface supports
diverse customer software models and simplifies our customers' development
efforts.

Carrier class high availability technology. We deliver hot-swap enabled
CompactPCI products and have established an industry leading software
infrastructure to support carrier class deployments. We offer systems level
software that extends system availability during component failures, system
maintenance and upgrades.

Customers and Market Segments

Our customers are primarily leading original equipment manufacturers. Our
customers also include system integrators, communications service providers and
international distributors in the networking and communications equipment
industry.

32
<PAGE>

The table below is a representative list of our customers within each market
segment, together with examples of applications in each segment. Each of these
customers purchased at least $500,000 of our products and services in 1999.
<TABLE>
<CAPTION>
Market Segment
-----------------------------------------------------------------------------------------------------
Differentiated
IP Service Wireless Network Enterprise
IP Telephony Provisioning Enhanced Services Infrastructure Applications
------------------- --------------- ----------------------- --------------------- -------------------
<S> <C> <C> <C> <C> <C>
Representative . Clarent . Clarent . Centigram . Ericsson . Alcatel
Customers . Lucent . Comverse . Motorola . Aspect
. Nortel Communications
. Siemens . Mitel
- ---------------------------------------------------------------------------------------------------------------------
Examples of . Programmable . Bandwidth . Unified messaging . Modular wireless . Customer
Applications gateways management base stations interaction
for carriers . Billing/payment centers
. Voice-over IP . Wireless data
. Enterprise . One number/ . Messaging
communications "follow me" . Mobile switching
servers centers . Interactive voice
. Internet call waiting response
. Emerging gateway . Wireless local loop
opportunities such . E-commerce enablers
as cable and
DSL
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

Sales and Marketing

We focus our sales and marketing efforts on selling directly to
approximately 100 leading suppliers of networking and communications systems.
Customers targeted in our direct sales efforts are divided into three groups:

. Strategic accounts, including large, multinational companies with
multiple products, such as Lucent and Ericsson, each of which is served
by a dedicated account team;

. Major accounts, including original equipment manufacturers with discrete
product lines; and

. Emerging accounts, including new entrants in high-growth markets.

We intend to serve all other customers and prospects through indirect sales-
channel partners. This focus allows us to use our resources on customers that
offer us the largest revenue opportunities.

Our sales and marketing organization consists of 90 employees in 18 sales
offices worldwide, of which 9 are in the United States, 5 are in Europe and 4
are in Asia. During 1999, 27% of our revenues were from sales and services to
customers based outside North America.

Research and Development

We believe that the extension and enhancement of existing products, the
development of new products and the support of joint product development
activities are critical to our future success. During 1999, we spent $24.7
million, or 31% of our revenues, on research and development.

Our current research and development is conducted by 166 employees located
at our headquarters in Framingham, Massachusetts, and at our offices in
Schaumburg, Illinois, Tustin,

33
<PAGE>

California and Le Plessis Robinson, France. Our current research and
development is focused on developing emerging, high growth technologies, such
as IP traffic management, IP telephony, SS7/IP network integration and
wireless/IP network integration. Our product development investment is focused
on bringing these technologies to market and on increasing scalability and
performance, providing high availability through CompactPCI, hot swap and
related technologies, and enhancing our software development environment to
facilitate shorter development cycles for our customers and partners.

Manufacturing

We outsource assembly of specific printed circuit boards to three ISO 9002
certified contract manufacturers, each of which is our sole source for the
products it manufactures.

We perform quality control and final testing of completed products at our
Framingham facility, for which we received ISO 9002 certification in 1996.
Since then, we have participated in all required processes and audits required
to maintain this certification. The British Approvals Board for
Telecommunications conducted its most recent audit in November 1999 and found
no nonconformity.

We seek to use industry-standard components for our products. Many of these
components are generally available from multiple sources. However, we acquire
certain custom integrated circuits and other devices which are components on
one or more of our products from single-source suppliers. Although we believe
we could develop other sources for each of these custom devices, the process
could take several months.

Competition

The market for our products is highly competitive. We have many competitors
whose products compete with one or more of our products. We may also compete
with our existing and potential customers' in-house development teams. Examples
of our current competitors include the Dialogic division of Intel Corporation,
AudioCodes Ltd., Radisys Corporation and Brooktrout Technology, Inc. Some of
our competitors may have greater resources than we have. As we enter new
markets, we expect to encounter competition from additional competitors, some
of which may also have greater resources than we do.

Intellectual Property and Proprietary Rights

Our success depends on proprietary technology and know-how. We rely
primarily on a combination of copyrights and restrictions on access to our
trade secrets to protect our proprietary rights. In addition, we have
applications pending on 17 patents and have received a notice of allowance on
one patent, which we expect to issue shortly. We distribute our software
products under license agreements which grant customers a nonexclusive license
to use the software and contain certain terms and conditions prohibiting its
unauthorized reproduction or transfer. We enter into confidentiality agreements
with our suppliers and customers when we disclose proprietary information to
them. In addition, we enter into confidentiality agreements and assignment of
invention agreements with our employees and consultants. We believe that our
products and technology do not infringe on any existing proprietary rights of
others.

Despite these precautions, it may be possible for unauthorized third parties
to copy aspects of our products or to obtain information that we regard as
proprietary. We believe that, due to the rapid pace of innovation within the
industry in which we participate, factors such as the technological and
creative skills of our personnel and ongoing reliable product maintenance and
support are more important in establishing and maintaining a leadership
position within the industry than are the various legal protections for our
technologies.

34
<PAGE>

We depend on development, supply, marketing, licensing and other
relationships with companies for complementary technologies necessary for us to
offer a broad range of products. These relationships are generally
nonexclusive, run for a finite term and are renewable with the consent of both
parties.

Employees

As of December 31, 1999, we had 399 full-time employees, including 62 in
sales, 28 in marketing, 166 in research and development, 59 in services, 38 in
operations and 46 in administration and finance. None of the employees is
represented by a labor union. We have never experienced a work stoppage and
consider our relations with our employees to be good.

Legal Proceedings

From time to time, we are a party to various legal proceedings incidental to
our business. We have no material legal proceedings currently pending.

Properties

We lease a facility totaling approximately 100,000 square feet for our
corporate headquarters in Framingham, Massachusetts. The lease on this facility
expires in May 2012.

We also lease facilities in Le Plessis Robinson, France, Schaumburg,
Illinois and Tustin, California in which we conduct design and engineering
operations. The Le Plessis Robinson office also serves as our European sales
and service headquarters.

In addition, we have short-term leases for 15 sales offices throughout North
America, Europe and Asia. We believe our facilities are adequate for our
current needs and that we will be able to secure suitable space as needed in
the future.

35
<PAGE>

MANAGEMENT

The following table lists our executive officers and directors as of
December 31, 1999.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Robert P. Schechter 51 Chairman of the Board, President and
Chief Executive Officer
Robert E. Hult 52 Senior Vice President of Finance and
Operations, Chief Financial Officer and
Treasurer
George D. Kontopidis, Ph.D. 45 Senior Vice President of Engineering
Dorothy A. Terrell 54 Senior Vice President of Worldwide Sales
and Services and President of the
Services Group
R. Brough Turner 53 Senior Vice President of Technology
Alex N. Braverman 40 Vice President and Corporate Controller
Dianne L. Callan 54 Vice President and General Counsel
Allen P. Carney 49 Vice President of Marketing
Joel A. Hughes 35 Vice President of Business Development
James E. Toale 46 Vice President of Human Resources
Charles J. Walker 54 Vice President and General Manager,
PolicyPoint Division
Zenas W. Hutcheson, III 46 Director
W. Frank King, Ph.D. 60 Director
Pamela D. A. Reeve 50 Director
Ronald W. White 59 Director
</TABLE>

Each member of our board of directors is elected at the annual meeting of
stockholders and holds office for three years and until his or her successor is
elected and qualified.

Mr. Schechter has served as a member of the Board, President and Chief
Executive Officer of Natural MicroSystems since April 1995 and as Chairman of
the Board since March 1996. From 1987 to 1994, Mr. Schechter held various
senior executive positions with Lotus Development Corporation and from 1980 to
1987 he was a partner of Coopers and Lybrand LLP. Mr. Schechter is also a
director of Infinium Software, Inc., a developer of enterprise-level business
software applications.

Mr. Hult joined Natural MicroSystems as Vice President of Finance, Chief
Financial Officer and Treasurer in October 1998 and became Senior Vice
President of Finance and Operations in April 1999. From 1996 to 1998 he held
numerous senior executive positions at AltaVista Search Service (a division of
Digital Equipment Corporation), departing as Chief Operating Officer, Chief
Financial Officer and General Manager. He served Digital Equipment Corporation
in a variety of financial executive positions from 1972 to 1995.

Dr. Kontopidis has served as our Vice President of Engineering of the
Company since January 1989 and became Senior Vice President of Engineering in
April 1999. From 1984 until 1989, he was director of engineering of the Sea
Data Division of Pacer Systems, Inc., a maker of oceanographic instruments.

Ms. Terrell joined Natural MicroSystems as our Senior Vice President of
Corporate Operations and President of the Services Group in February 1998, and
became Senior Vice President of Worldwide Sales and Services and President of
the Services Group in April 1999. From 1991 until 1997, she was President of
Sun Express, Inc., the after-marketing and online services company of

36
<PAGE>

Sun Microsystems, Inc. Ms. Terrell is also a director of Sears Roebuck and
Company, General Mills, Inc. and Herman Miller, Inc., a maker of office
furniture.

Mr. Turner, a co-founder of Natural MicroSystems, has served as our Senior
Vice President of Technology since 1994. He served as Vice President of
Operations from 1983 to 1994.

Mr. Braverman has served as our Vice President and Corporate Controller
since February 1999. From 1994 to 1998, Mr. Braverman held senior financial
executive positions at Concentra Corporation, a developer of sales and
engineering software automation products, most recently as Vice President,
Chief Financial Officer and Treasurer. From 1988 to 1994, Mr. Braverman was
Controller of Artel Communications Corporation, a manufacturer of networking
products.

Ms. Callan has served as our Vice President and General Counsel since April
1997. She was Deputy General Counsel of Lotus Development Corporation from 1996
to 1996.

Mr. Carney has served as our Vice President of Marketing since April 1996.
From 1992 to 1996, Mr. Carney held various marketing positions including Vice
President, Applications Marketing and Vice President of International Marketing
at Lotus Development Corporation. From 1982 to 1992, Mr. Carney held various
marketing positions including Vice President, European Operations with Atex,
Inc., a turnkey supplier of pre-press automation systems.

Mr. Hughes has served as Vice President of Business Development since
September 1999. He joined Natural MicroSystems in 1997 as part of the
acquisition of ViaDSP, Inc., which he founded in 1996 and of which he served as
President. Mr. Hughes was a founder of DSP Software Engineering in 1989 and
served as its Vice President of Consulting until 1996.

Mr. Toale has served as our Vice President, Human Resources since August
1998. From 1984 to 1998 he held various positions in human resources for
Digital Equipment Corporation, most recently Vice President, Human Resources
for Digital's AltaVista division.

Mr. Walker, Vice President and General Manager of the PolicyPoint Division,
joined Natural MicroSystems in December 1999 as part of its acquisition of
QWES.com, Inc., which he founded in April 1998 and of which he served as
Chairman, President and Chief Executive Officer. Prior to founding QWES, he was
Senior Vice President of Engineering at Ascom Timeplex. He joined Ascom
Timeplex in 1990 as part of its acquisition of Doelz Networks, a pioneering
company of asynchronous transfer mode technology, which he founded in 1977 and
of which he was Vice President of Engineering. Mr. Walker is also a director of
ASI Wireless Inc., a provider of support services for wireless service
providers.

Mr. Hutcheson has served as a director of Natural MicroSystems since 1989.
He has been, since September 1997, a general partner of St. Paul Venture
Capital, a venture capital firm. From 1996 to 1998, Mr. Hutcheson was chief
executive officer of Vivo Software, Inc., a developer of web- based video and
audio streaming applications. From 1981 to 1996, Mr. Hutcheson was president of
Hutcheson & Co., Inc., a management consulting firm.

Dr. King has served as a director of Natural MicroSystems since 1997. He has
been, since November 1998, a private investor. From 1992 to 1998, he was Chief
Executive Officer and a director of PSW Technologies, Inc. (formerly a division
of Pencom, Inc.), a provider of software services. From 1988 to 1992, Dr. King
was Senior Vice President of Development of Lotus Development Corporation, and
for the previous 19 years he served in various positions with IBM Corporation,
including his last position as Vice President of Development for the entry
system division. He is also a director of Auspex Systems, Inc., a provider of
network-attached storage devices; eOn Communications Corporation, formerly
known as Cortelco Systems, Inc., a provider of

37
<PAGE>

telecommunications applications; Excalibur Technologies Corporation, a
developer of document management software; PSW Technologies, Inc.; Best
Software, Inc., a supplier of corporate resource management software solutions;
and Perficient, Inc., a provider of virtual professional services organizations
to Internet software companies.

Ms. Reeve has served as a director of Natural MicroSystems since 1997. She
has served, since September 1993, as Chief Executive Officer and a director
and, from 1989 to September 1993, as President, Chief Operating Officer and a
director of Lightbridge, Inc., a provider of products and services which enable
wireless telecommunications carriers to improve customer acquisition and
retention processes. From 1978 to 1989, she was with The Boston Consulting
Group, a management consulting firm. Ms. Reeve is a director of WebLink
Wireless, Inc., formerly known as PageMart Wireless, Inc., a provider of
wireless messaging services.

Mr. White has served as a director of Natural MicroSystems since 1988. Since
October 1997, he has been a partner of Argo Global Capital, formerly known as
GSM Capital, a venture capital fund focused on wireless technology. Since 1983,
Mr. White has been a partner of Advanced Technology Development Fund, a venture
capital firm.

38
<PAGE>

STOCK OWNERSHIP

The following table shows information known to us about the beneficial
ownership of our common stock as of December 31, 1999, by our executive
officers, directors and all directors and executive officers as a group. As of
December 31, 1999, there were 12,759,807 shares of common stock outstanding.

The following table assumes that the underwriters do not exercise their
option to purchase additional shares in the offering. Beneficial ownership is
determined by the rules of the Securities and Exchange Commission. In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock subject to options or warrants
held by that person that are currently exercisable or will become exercisable
within 60 days after December 31, 1999 are considered outstanding, while these
shares are not considered outstanding for purposes of computing percentage
ownership of any other person. Unless otherwise indicated in the footnotes
below, the persons and entities named in the table have sole voting and
investment power as to all shares beneficially owned, subject to community
property laws where applicable.

<TABLE>
<CAPTION>
Shares Beneficially Percentage
Owned Before Offering Beneficially Owned
------------------------- ----------------------
Common Before After
Name of Beneficial Owner Stock Options Total Offering Offering
- ---------------------------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Robert P. Schechter......... 90,291 413,250 503,541 3.9% 3.2%
Robert E. Hult.............. 800 31,875 32,675 * *
George D. Kontopidis,
Ph.D....................... 33,414 60,000 93,414 * *
Dorothy A. Terrell.......... 1,200 80,781 81,981 * *
R. Brough Turner............ 151,738 43,438 195,176 1.5% 1.2%
Alex N. Braverman........... 400 5,750 6,150 * *
Dianne L. Callan............ 1,528 17,500 19,028 * *
Allen P. Carney............. 7,900 63,125 71,025 * *
Joel A. Hughes.............. 52,164 8,512 60,676 * *
James E. Toale.............. 800 17,500 18,300 * *
Charles J. Walker........... 205,825 -- 205,825 1.6% 1.3%
Zenas W. Hutcheson, III..... 55,312 17,000 72,312 * *
W. Frank King, Ph.D......... 2,000 14,900 16,900 * *
Pamela D. A. Reeve.......... -- 14,900 14,900 * *
Ronald W. White............. 11,765 14,205 25,970 * *
All directors and executive
officers as a group
(15 persons)............... 615,137 802,736 1,417,873 11.1% 9.0%
</TABLE>
- --------
*Represents beneficial ownership of less than one percent of the outstanding
common stock.

39
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, for whom Deutsche Bank Securities Inc., Dain Rauscher
Incorporated, U.S. Bancorp Piper Jaffray Inc. and FAC/Equities, a division of
First Albany Corporation, are acting as representatives, have severally but not
jointly agreed to purchase from us the following respective number of shares of
common stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:

<TABLE>
<CAPTION>
Number Of
Underwriters Shares
------------ ---------
<S> <C>
Deutsche Bank Securities Inc....................................
Dain Rauscher Incorporated......................................
U.S. Bancorp Piper Jaffray Inc..................................
FAC/Equities, a division of First Albany Corporation............
---------
Total........................................................... 3,000,000
=========
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are subject to approval of certain conditions precedent and that the
underwriters will be obligated to purchase all of the shares of the common
stock offered hereby, other than those shares covered by the over-allotment
option described below, if any are purchased. The underwriting agreement
provides that, in the event of a default by an underwriter, in certain
circumstances the purchase commitments of nondefaulting underwriters may be
increased or the underwriting agreement may be terminated.

We have been advised by the representatives that the underwriters propose to
offer the shares of common stock to the public initially at the public offering
price set forth on the cover page of this prospectus and, through the
representatives, to selling group members at such price less a concession of $
per share. The underwriters and such selling group members may allow a
discount of $ per share on sales to certain other broker-dealers. After
the offering, the public offering price and concession and discount to dealers
may be changed by the representatives.

We have granted to the underwriters an option expiring on the thirtieth day
after the date of this prospectus to purchase up to 450,000 additional shares
of common stock at the public offering price, less the underwriting discounts
and commissions set forth on the cover page of this prospectus. Such option may
be exercised only to cover overallotments in the sale of shares of common
stock. To the extent such option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of common stock as the number of shares of
common stock to be purchased by it in the above table bears to 3,000,000.

40
<PAGE>

We have agreed to indemnify the underwriters against liabilities, including
civil liabilities under the Securities Act, or to contribute to payments which
the underwriters may be required to make in respect thereof.

Our directors and some of our officers have agreed not to offer, sell,
contract to sell or otherwise dispose of, or enter into any transaction that is
designed to, or could be expected to, result in the disposition of any portion
of, any common stock for a period of 90 days after the effective date of the
registration statement of which this prospectus is a part, without the prior
written consent of Deutsche Bank Securities Inc. This consent may be given at
any time without public notice. We have entered into a similar agreement with
Deutsche Bank Securities Inc., except that we may issue shares of our common
stock upon the exercise of outstanding options and warrants and may issue
additional options and shares of our common stock pursuant to our existing
stock option and stock purchase plans.

The representatives, on behalf of the underwriters, may engage in
overallotment, stabilizing transactions, syndicate-covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934. Overallotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit bids
to purchase the underlying security so long as the stabilizing bids do not
exceed a specified maximum. Syndicate-covering transactions involve purchases
of shares of the common stock in the open market after the distribution has
been completed in order to cover syndicate short positions. Penalty bids permit
the representatives to reclaim a selling concession from a syndicate member
when shares of the common stock originally sold by such syndicate member are
purchased in a syndicate-covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate-covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

From time to time, including in connection with the QWES acquisition,
Deutsche Bank Securities, Inc. has provided financial advisory services to us,
for which we have paid customary financial advisory fees.

LEGAL MATTERS

The validity of the shares of common stock we are offering will be passed on
for us by Choate, Hall & Stewart, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Ropes & Gray, Boston, Massachusetts.

EXPERTS

The consolidated financial statements of Natural MicroSystems as of December
31, 1998 and 1999, and for each of the three years in the period ended December
31, 1999, included in this prospectus and in the registration statement, have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-3 under the Securities Act with respect to the common stock
we propose to sell in this offering. This prospectus, which is a part of the
registration statement, does not contain all of the information set forth in
the registration statement. For further information about us and the common
stock we propose to sell in this offering, we refer you to the registration
statement and the exhibits and

41
<PAGE>

schedules filed as a part of the registration statement. Statements contained
in this prospectus as to the contents of any contract or other document filed
as an exhibit to the registration statement are not necessarily complete. If a
contract or document has been filed as an exhibit to the registration
statement, we refer you to the copy of the contract or document that has been
filed. The registration statement, including exhibits, may be inspected without
charge at the principal office of the Commission in Washington, D.C. and copies
of all or any part of it may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can also be obtained at prescribed
rates by mail from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the Commission at 1-800-SEC-
0330. In addition, the Commission maintains a website at www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants, such as our company, that make electronic filings with
the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Securities and Exchange Commission allows us to incorporate into this
prospectus information we file with the Commission in other documents. The
information incorporated by reference is considered to be part of this
prospectus and information we later file with the Commission will automatically
update and supersede this information. We incorporate by reference the
documents listed below and any future filings made with the Commission under
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
until all of the shares of common stock that are part of this offering have
been sold. The documents that we incorporate by reference are:

. Our Annual Report on Form 10-K for the year ended December 31, 1999;

. Our Current Report on Form 8-K filed January 13, 2000;

. The description of our common stock contained in our Registration
Statement on Form 8-A effective February 17, 1994; and

. The description of our preferred share purchase rights contained in our
Registration Statement on Form 8-A filed January 19, 1999, as amended by
a filing on June 15, 1999.

You may request a copy of these filings at no cost by writing or telephoning
Natural MicroSystems Corporation, 100 Crossing Boulevard, Framingham,
Massachusetts 01702, Attention: Investor Relations, Telephone: (508) 620-9300.

42
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................ F-2

Consolidated Balance Sheets at December 31, 1998 and 1999................ F-3

Consolidated Statements of Operations for the years ended December 31,
1997, 1998 and 1999..................................................... F-4

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999........................................ F-5

Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1998 and 1999..................................................... F-6

Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORTS OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Natural MicroSystems Corporation:

In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Natural MicroSystems Corporation and its subsidiaries (the "Company") at
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. The consolidated financial statements give retroactive effect to
the merger of QWES.com, Inc. in a transaction accounted for as a pooling of
interests, as described in Note 3 to the consolidated financial statements. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP

Boston, Massachusetts
January 24, 2000

F-2
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
(In thousands
except share
and
per share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $12,172 $16,617
Marketable securities...................................... 5,898 6,837
Accounts receivable, net of allowance of doubtful accounts
of $779 and $1,408, respectively.......................... 17,224 11,604
Inventories................................................ 9,773 5,393
Prepaid expenses and other assets.......................... 3,811 3,030
Income tax receivable...................................... 12 2,014
Deferred tax asset, net.................................... 2,791 --
------- -------
Total current assets..................................... 51,681 45,495
------- -------
Property and equipment, net.................................. 14,130 14,871
License agreements, net...................................... 571 267
Other assets................................................. 6,621 6,616
Goodwill, net................................................ 3,925 3,460
Deferred tax asset, net...................................... 2,022 --
------- -------
Total assets............................................. $78,950 $70,709
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... 5,723 7,211
Accrued expenses and other liabilities..................... 7,674 9,772
Current portion of long term debt.......................... 80 2,907
------- -------
Total current liabilities................................ 13,477 19,890
Long-term debt less current portion.......................... 260 306
Commitments and contingencies (see note 15)
Stockholders' equity:
Preferred stock, $.01 par value; 3,686,086 and 3,000,000
shares authorized at December 31, 1998 and 1999,
respectively, 37,506 and 0 shares issued and outstanding
in 1998 and 1999, respectively............................ -- --
Common stock, $.01 par value; 47,469,908 and 45,000,000
shares authorized at December 31, 1998 and 1999,
respectively, 11,951,541 and 12,766,261 shares issued at
December 31, 1998 and 1999, respectively, and 11,951,541
and 12,759,807 shares outstanding at December 31, 1998 and
1999, respectively........................................ 120 128
Additional paid-in capital................................. 68,642 72,923
Accumulated deficit........................................ (3,292) (21,980)
Accumulated other comprehensive loss....................... (48) (391)
Deferred compensation...................................... (110) --
Notes receivable from common stockholders.................. (99) (99)
Treasury stock, at cost, 6,454 shares in 1999.............. -- (68)
------- -------
Total stockholders' equity................................. 65,213 50,513
------- -------
Total liabilities and stockholders' equity............... $78,950 $70,709
======= =======
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
(In thousands
except per share data)
<S> <C> <C> <C>
Revenues............................................ $75,363 $76,529 $ 79,476
Cost of revenues.................................... 25,298 28,118 31,520
------- ------- --------
Gross profit........................................ 50,065 48,411 47,956
Operating expenses:
Selling, general and administrative............... 22,294 33,979 39,976
Research and development.......................... 14,851 21,464 24,705
Purchased in-process research and development..... 5,601 -- --
Restructuring and other special charges........... -- 3,025 (91)
------- ------- --------
Total operating expenses........................ 42,746 58,468 64,590
------- ------- --------
Operating income (loss)............................. 7,319 (10,057) (16,634)
Interest income................................... 1,434 1,389 849
Interest expense.................................. (34) (119) (239)
Other............................................. (202) (206) (429)
Merger-related expenses........................... -- -- (1,235)
------- ------- --------
Other income (expense), net..................... 1,198 1,064 (1,054)
------- ------- --------
Income (loss) before income taxes................... 8,517 (8,993) (17,688)
Income tax expense (benefit).................... 4,758 (2,868) 1,000
------- ------- --------
Net income (loss)................................... $ 3,759 $(6,125) $(18,688)
======= ======= ========
Basic:
Net income (loss) per common share................ $ 0.36 $ (0.56) $ (1.63)
======= ======= ========
Weighted average shares outstanding............... 10,481 10,923 11,482
======= ======= ========
Diluted:
Net income (loss) per common share................ $ 0.34 $ (0.56) $ (1.63)
======= ======= ========
Weighted average shares outstanding............... 11,179 10,923 11,482
======= ======= ========
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Accumulated
Preferred Other Notes Total
Stock Common Stock Additional Comprehensive Receivable Stock-
------------- -------------- Paid-In Accumulated Income Deferred from Common Treasury holders'
(in thousands) Shares Amount Shares Amount Capital Deficit (Loss) Compensation Stockholders Stock Equity
- ----------------- ------ ------ ------ ------ ---------- ----------- ------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996............ -- -- 9,936 $ 99 $53,623 $ (926) $ 86 -- -- -- $52,882
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Exercise of
common stock
options........ 625 6 2,985 2,991
Issuance of
common stock
under employee
purchase plan.. 67 1 1,194 1,195
Issuance of
common stock
related to
acquisition.... 160 2 7,401 7,403
Foreign currency
translation
adjustment..... (88) (88)
Net income
(loss)......... 3,759 3,759
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Balance,
December 31,
1997............ -- -- 10,788 $108 $65,203 $ 2,833 $ (2) -- -- -- $68,142
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Exercise of
common stock
options........ 164 2 1,461 1,463
Issuance of
common stock
under employee
purchase plan.. 66 1 920 921
Issuance of
common stock... 934 9 869 (102) 776
Reduction of
notes
receivable
related to
expenses of the
Company paid by
certain
stockholders... 3 3
Issuance of
preferred
stock.......... 38 35 35
Deferred
compensation... 154 (154)
Amortization of
deferred
compensation... 44 44
Foreign currency
translation
adjustment..... (46) (46)
Net income
(loss)......... (6,125) (6,125)
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Balance,
December 31,
1998............ 38 -- 11,952 $120 $68,642 $ (3,292) $ (48) $(110) $(99) -- $65,213
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Tax benefit from
stock option
exercises...... 2,165 2,165
Exercise of
common stock
options and
warrants....... 370 3 2,289 2,292
Conversion of
preferred into
common......... (38) 396 4 144 148
Amortization of
deferred
compensation... 110 110
Issuance of
common stock
under employee
purchase plan.. 54 1 235 236
Stock
repurchase..... (100) (1,058) (1,058)
Treasury Stock
used in ESPP
Plan........... 94 (552) 990 438
Foreign currency
translation
adjustment..... (436) (436)
Change in market
value of
securities
available for
sale........... 93 93
Net income
(loss)......... (18,688) (18,688)
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
Balance, December
31, 1999........ -- -- 12,766 $128 $72,923 $(21,980) $(391) -- $(99) $ (68) $50,513
--- --- ------ ---- ------- -------- ----- ----- ---- ------ -------
<CAPTION>
Compre-
hensive
Income
(in thousands) (Loss)
- ------------------ ---------
<S> <C>
Balance,
December 31,
1996............ $ 1,536
---------
Exercise of
common stock
options........
Issuance of
common stock
under employee
purchase plan..
Issuance of
common stock
related to
acquisition....
Foreign currency
translation
adjustment..... (88)
Net income
(loss)......... 3,759
---------
Balance,
December 31,
1997............ $ 3,671
---------
Exercise of
common stock
options........
Issuance of
common stock
under employee
purchase plan..
Issuance of
common stock...
Reduction of
notes
receivable
related to
expenses of the
Company paid by
certain
stockholders...
Issuance of
preferred
stock..........
Deferred
compensation...
Amortization of
deferred
compensation...
Foreign currency
translation
adjustment..... (46)
Net income
(loss)......... (6,125)
---------
Balance,
December 31,
1998............ $ (6,171)
---------
Tax benefit from
stock option
exercises......
Exercise of
common stock
options and
warrants.......
Conversion of
preferred into
common.........
Amortization of
deferred
compensation...
Issuance of
common stock
under employee
purchase plan..
Stock
repurchase.....
Treasury Stock
used in ESPP
Plan...........
Foreign currency
translation
adjustment..... (436)
Change in market
value of
securities
available for
sale........... 93
Net income
(loss)......... (18,688)
---------
Balance, December
31, 1999........ $(19,031)
---------
</TABLE>

F-5

<PAGE>

NATURAL MICROSYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1998 1999
-------- ------- --------
(In thousands)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)............................... $ 3,759 $(6,125) $(18,688)
Adjustments to reconcile net income (loss) to
cash provided by (used in) operating
activities:
Depreciation and amortization................. 2,995 5,635 6,581
Gain (loss) on sales of marketable
securities................................... (331) (22) 43
Loss on sale of fixed assets.................. -- (4) --
Amortization of deferred stock compensation
expense...................................... -- 44 110
Amortization of original issue discount....... -- -- 120
Purchased in-process research and
development.................................. 5,601 -- --
Deferred income taxes......................... (1) -- 4,820
Tax benefit from stock option exercises....... -- -- 2,165
Changes in operating assets and liabilities:
Accounts receivable......................... (6,572) 2,535 5,132
Inventories................................. (3,321) (1,053) 4,195
Prepaid expenses and other assets........... (1,510) (2,216) 529
Income tax receivable....................... -- 139 (2,002)
Accounts payable............................ (305) 298 1,619
Accrued expenses and other liabilities...... 2,842 (3,328) 2,975
-------- ------- --------
Cash provided by (used in) operating
activities................................ 3,157 (4,097) 7,599
-------- ------- --------
Cash flow from investing activities:
Additions to property and equipment............. (7,207) (8,618) (6,194)
Additions to license agreements................. (267) (255) (103)
Additions to goodwill for contingent payments... -- (1,923) (515)
Purchases of marketable securities.............. (32,983) (6,470) (17,326)
Proceeds for the sale of marketable securities.. 32,690 27,578 16,393
Purchase of convertible debenture............... -- (3,000) --
Proceeds from the sale of property and
equipment...................................... -- 100 61
Additions to other long term assets............. (80) (250) (56)
-------- ------- --------
Cash provided by (used in) investing
activities................................ (7,847) 7,162 (7,740)
-------- ------- --------
Cash flow from financing activities:
Payments on capital lease obligations........... -- (4) (7)
Repayment on stockholders note receivable....... -- 3 --
Payments on government advances................. (49) (125) (98)
Proceeds from the issuance of preferred stock,
net............................................ -- 812 --
Proceeds from the issuance of notes payable..... -- 100 2,256
Proceeds from issuance of common stock.......... 4,187 2,381 2,125
Repurchase of common stock...................... -- -- (1,058)
Issuance of repurchased treasury common stock... -- -- 990
Grant of non-statutory stock options............ -- 3 --
-------- ------- --------
Cash provided by financing activities...... 4,138 3,170 4,208
-------- ------- --------
Effect of exchange rate changes on cash.......... 292 (381) 378
-------- ------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (260) 5,854 4,445
-------- ------- --------
Cash and cash equivalents, beginning of year..... 6,578 6,318 12,172
-------- ------- --------
Cash and cash equivalents, end of year........... $ 6,318 $12,172 $ 16,617
======== ======= ========
Supplemental cash flow information:
Interest paid................................... $ 128 $ 134 $ 239
Taxes paid...................................... 3,748 1,551 197
Noncash transactions:
Issuance of common stock for ViaDSP
acquisition.................................... 6,903 -- --
Accrued acquisition expenses for ViaDSP
acquisition.................................... 236 -- --
Acquisition of assets under capital lease....... -- 13 --
Issuance of common stock in exchange for notes
receivable..................................... -- 102 --
Issuance of warrants............................ -- -- 147
Assets and liabilities recognized upon
acquisition of ViaDSP
Inventories..................................... 22 -- --
Other current assets............................ 35 -- --
Property and equipment.......................... 105 -- --
Purchased in-process research and development... 5,601 -- --
Intangibles..................................... 2,417 -- --
Accounts payable................................ 585 -- --
Accrued expenses and other liabilities.......... 680 -- --
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>

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. Intercompany 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.

Revenue Recognition

Revenue from product sales is recorded upon completion of delivery provided
that collection is deemed probable. Service revenues are recognized ratably
over applicable contract periods or as the services are performed.

Cash Equivalents

Cash equivalents include short-term investments with remaining maturities
of three months or less at date of purchase.

Marketable Securities

Marketable securities are classified as "available for sale" and are
carried at fair market value.

F-7
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Inventories

Inventories are valued at the lower of cost (first-in, first-out method) or
market.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is based on the
following estimated useful lives of the assets using the straight-line method:

<TABLE>
<S> <C>
Machinery and equipment...... 3 years
Computer equipment........... 3-5 years
Furniture and fixtures....... 5 years
Telecommunications computer
equipment................... 5 years
Leasehold improvements....... Shorter of the lease term or economic life
</TABLE>

Expenditures for additions, renewals and betterments of property and
equipment are capitalized. Expenditures for repairs and maintenance are charged
to expense as incurred. As assets are retired or sold, the related cost and
accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in the results of operations.

Goodwill

Goodwill is amortized on a straight-line basis over its estimated useful
life. Accumulated amortization was $1.2 million and $2.2 million as of December
31, 1998 and 1999, respectively.

Impairment of Long-Lived Assets

The Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparision of the undiscounted cash flows to the recorded value of the asset.
If an impairment is indicated, the asset is written down to its estimated fair
value on a discounted cash flow basis.

License Agreements

License agreements are stated at cost. Amortization of licenses is computed
on the shorter of a per unit sold basis or over the estimated useful lives of
these licenses.

Research and Development

All research and development costs are expensed as incurred.

Capitalized Software Development Costs

The Company capitalizes software development costs incurred after a
product's technological feasibility has been established and before it is
available for general release to customers. Amortization of capitalized
software costs and acquired completed technology is computed on an individual
product basis and is the greater of a) the ratio that current gross revenues
for a product bear to the total of current and anticipated future gross
revenues of that product or b) the straight-line method over the estimated
economic life of the product. Costs qualifying for capitalization have been
immaterial for all periods presented and accordingly have not been capitalized.

F-8
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Financial Instruments

Financial instruments, primarily cash and cash equivalents, marketable
securities, accounts receivable, and long term debt, are carried at amounts
which approximate their fair value.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their tax bases.
Deferred tax assets and liabilities are measured using enacted statutory tax
rates in effect in the year in which the differences are expected to reverse. A
deferred tax asset is established for the expected future benefit of net
operating loss and credit carry-forwards. A valuation reserve against net
deferred tax assets is required, if, based upon available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized.

Basic and Diluted Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
period. Diluted net income (loss) per common share is computed by dividing the
net income (loss) by the sum of the weighted-average number of common shares
outstanding plus all additional common shares that would have been outstanding
if potentially dilutive common stock equivalents had been issued.

2--Dependence on Outside Suppliers and Contract Assembly Manufacturers

The Company relies on various suppliers of components for its products. Many
of these components are standard and generally available from multiple sources.
However, certain integrated circuits and other devices which are components of
one or more of the Company's products are purchased from single source
suppliers of the Company. Although the Company believes it could develop other
sources for each of these custom devices, the process could take several
months, and the inability or refusal of any of the Company's suppliers to
continue to supply devices could have a material adverse effect on the Company
pending the development of an alternative source. The Company also currently
relies on a single contract manufacturer to assemble certain printed circuit
boards for each of its North American and European operations. Although a
number of such contract manufacturers exist, the interruption or termination of
the Company's current manufacturing relationships could have a short-term
adverse effect on the Company's business.

3--Mergers and Acquisitions

In June 1996, the Company acquired the outstanding shares of Teknique, Inc.
and an affiliate. The final purchase price totaled $8.3 million, including
contingent payments discussed below and transaction costs of $284,000. The
transaction was accounted for as a purchase and accordingly, the purchase price
was allocated to assets purchased and liabilities assumed based on their fair
values at the date of acquisition. During the years ended December 31, 1997 and
1998, $1.9 million and $625,000 of contingent consideration was earned and
added to goodwill, which is being amortized on a straight-line basis over the
remaining life of the goodwill of seven years. There are no possible further
contingent payments.

In October 1997 the Company acquired ViaDSP, Inc. for aggregate
consideration of 144,562 shares of the Company's common stock. ViaDSP was
formed in 1996 as a spin-off of DSP Software Engineering on January 26, 1996.
ViaDSP was created to define, develop and deliver standard products for the
telecommunications markets using advanced digital signal processing technology.
The value of the transaction was $7.1 million, including approximately $236,000
of expenses related to the acquisition. The transaction was accounted for as a
purchase.

F-9
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At the time of acquisition, the purchase price was allocated to the tangible
and intangible assets of ViaDSP based on the fair market value of those assets
using a risk-adjusted discounted cash flow approach. Specifically, the
purchased technology, consisting of completed technology and two separate
development projects, was evaluated through interviews. The development
projects were further subjected to analysis of data concerning the state of the
technology and needed developments. This evaluation of underlying technology
acquired considered the inherent difficulties and uncertainties in completing
the two development projects, and thereby achieving technological feasibility,
and the risks related to the viability of and potential changes in future
target markets. At the time of the acquisition, the fair value of $5.6 million
of the acquired technology that had not reached technological feasibility was
expensed as purchased in-process research and development. The underlying
technology had no alternative future use to the Company in other research and
development projects or otherwise. The completed technology was valued at $1.5
million based upon a risk adjusted discounted cash flows basis and is being
amortized to cost of revenues over a five year life. The goodwill life used is
seven years.

Total ViaDSP purchase price was allocated as follows:

<TABLE>
<CAPTION>
in
thousands
---------
<S> <C>
Working Capital....................................................... $ (984)
Property and equipment................................................ 105
Completed Technology.................................................. 1,468
In-process research and development................................... 5,601
Goodwill.............................................................. 949
------
$7,139
======
</TABLE>

The unaudited proforma results listed below reflect purchase price
accounting adjustments assuming the ViaDSP acquisition occurred at the
beginning of each year presented:

<TABLE>
<CAPTION>
Year Ended
December 31,
1997
(unaudited)
(in thousands, except per share data) ------------
<S> <C>
Revenue............................................................ $76,529
Income before Income Taxes......................................... 8,521
Net Income......................................................... 3,762
Net Income per common share--diluted............................... $ 0.34
</TABLE>

In December 1999, the Company acquired QWES.com, Inc. ("QWES") in a
transaction accounted for as a pooling of interests. QWES is a business in the
differentiated IP service provisioning and application traffic shaping market.
In connection with the acquisition, the Company exchanged or reserved 1,500,000
shares of its common stock for the outstanding shares, options and warrants of
QWES, at an exchange ratio of 0.1372 shares for each QWES common equivalent.
Upon effectiveness of the merger, the Company issued an aggregate of 1,449,785
shares of common stock in exchange for the outstanding shares of capital stock
of QWES, and it reserved 30,314 shares and 19,901 shares, respectively, for
issuance upon exercise of the options and warrants that it assumed from QWES.
The consolidated financial statements of the Company for 1998 have been
restated to include the financial position, results of operations and cash
flows of QWES, since QWES was incorporated in April 1998. The Company incurred
a charge of $1.2 million in the fourth quarter of 1999 consisting of investment
banking, accounting and legal fees connected with closing the QWES acquisition.

F-10
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net revenue for the combined companies in 1998 was $76.5 million which was
totally related to Natural MicroSystems, as QWES had no revenues in 1998.
Operating income (loss) for the combined companies in 1998 was ($10.1 million)
of which ($9.3 million) related to Natural MicroSystems and ($0.8 million)
related to QWES. Net income (loss) for the combined companies in 1998 was ($6.1
million) of which ($5.3 million) related to Natural MicroSystems and ($0.8
million) related to QWES.

Net revenue for the combined companies in 1999 was $79.5 million which was
totally related to Natural MicroSystems, as QWES had no revenues in 1999.
Operating income (loss) for the combined companies in 1999 was ($16.6 million)
of which ($14.2 million) related to Natural MicroSystems and ($2.4 million)
related to QWES. Net income (loss) for the combined companies in 1999 was
($18.7 million) of which ($15.9 million) related to Natural MicroSystems and
($2.8 million) related to QWES.

QWES will continue to operate as a separate operation maintaining its West
Coast location and expects to market its family of products through a dedicated
sales force.

4--Restructuring and Other Special Charges

In the fourth quarter of 1998, in response to changes in the Company's
business environment, several actions were taken to create efficiency, to
decrease cash outflows and to manage the business more effectively, that
resulted in restructuring and other special charges. To eliminate payroll and
other related expenditures, the Company reduced headcount by three senior
international managers. The accrued cost to implement this reduction was
approximately $951,000 (of which approximately $65,000 was paid in 1998). The
Company also committed to reduce future lease commitments for a new corporate
office and engineering space of which neither will be occupied. The accrued
cost to reduce or terminate these lease commitments was approximately $2.1
million.

The Company was able to buy out the lease commitment at one location and
sublease the other location at an aggregate cost of approximately $958,000,
resulting in a savings of approximately $1.1 million from the original
estimate. There is no remaining balance for the lease accruals at December 31,
1999.

In 1999, the Company completed the management reorganization and terminated
two additional senior managers. The severance costs were approximately
$441,000. In addition, in the fourth quarter of 1999, the Company incurred a
special charge of approximately $557,000 for payroll-related taxes on an option
exercise by one of the terminated managers. At December 31, 1999 the aggregate
severance accruals have a remaining accrued balance of approximately $450,000
which will be fully paid in 2000.

5--Business and Credit Concentration

No customer accounted for 10% or more of the Company's revenues for the
years ended December 31, 1997, 1998 and 1999, respectively. The Company did
have two customers that each had ending accounts receivable balances that were
greater than 10% of the Company's balance at December 31, 1999. The Company
does not require collateral on accounts receivable or letters of credit on many
foreign export sales. The Company periodically evaluates its customers'
creditworthiness before extending credit.

F-11
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6--Marketable Securities

Marketable securities categorized as "available for sale" are carried at
their fair value of $27.0 million, $5.9 million and $6.8 million at December
31, 1997, 1998 and 1999, respectively. The unrealized gain (loss) at December
31, 1999 is included as a component of accumulated other comprehensive loss
within total stockholders' equity. The unrealized gain (loss) was immaterial
for 1997 and 1998. Proceeds and gross realized gains (losses) from sale of
securities for the years ended December 31, 1997, 1998 and 1999, were, $32.7
million, $27.6 million and $16.4 million and $331,000, $185,000 and $0,
respectively. At December 31, 1999, all marketable securities, which consist
primarily of commercial paper, had a maturity date within one year.

7--Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
December 31,
(in thousands) -------------
1998 1999
------ ------
<S> <C> <C>
Raw materials............................................... $ 967 $ 517
Work in process............................................. 5,747 2,611
Finished goods.............................................. 3,059 2,265
------ ------
$9,773 $5,393
====== ======
</TABLE>

8--Property and Equipment

Property and equipment consist of the following:

<TABLE>
<CAPTION>
December 31,
(in thousands) -----------------
1998 1999
-------- -------
<S> <C> <C>
Computer equipment..................................... $ 10,748 $14,015
Computer software...................................... 3,066 4,495
Furniture and fixtures................................. 2,683 2,331
Machinery and equipment................................ 896 1,670
Evaluation units....................................... 90 --
Leasehold improvements................................. 5,045 4,744
-------- -------
22,528 27,255
-------- -------
Less accumulated depreciation.......................... (8,398) (12,384)
-------- -------
$ 14,130 $14,871
======== =======
</TABLE>

Depreciation and amortization expense was $3.0 million, $5.6 million and $6.6
million for the years ended December 31, 1997, 1998 and 1999, respectively.

F-12
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9--Income Taxes

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

<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands) ---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Current income tax expense (benefit):
Federal.................................. $ 4,161 $ (311) $ (3,927)
State.................................... 361 40 25
Foreign.................................. 237 158 89
------- -------- --------
4,759 (113) (3,813)
Deferred income tax expense (benefit):
Federal.................................. 252 (2,184) 3,340
State.................................... 61 (636) 613
Foreign.................................. (314) 65 860
------- -------- --------
(1) (2,755) 4,813
------- -------- --------
$ 4,758 $ (2,868) $ 1,000
======= ======== ========
Deferred tax assets (liabilities) consist
of the following:
Net operating loss carryforward.......... $ 1,646 $ 2,040 $ 7,211
Inventories.............................. 201 314 682
Tax credit carryforwards................. -- 370 1,547
Receivable allowances.................... 250 302 637
Accrued expenses......................... 55 1,168 (516)
Other.................................... 19 1,291 1,495
------- -------- --------
$ 2,171 $ 5,485 $ 11,056
------- -------- --------
Fixed assets............................... (117) (313) (1,048)
------- -------- --------
Valuation allowance:....................... -- (359) (10,008)
------- -------- --------
$ 2,054 $ 4,813 $ --
======= ======== ========
</TABLE>

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.

F-13
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The difference between the total expected income tax expense computed by
applying the federal income tax rate of 34.0% to income before income taxes and
the reported income tax expense is as follows:

<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1997 1998 1999
---- ----- -----
<S> <C> <C> <C>
Computed expected tax expense at U.S. federal
statutory rate.................................. 34.0% (34.0)% (34.0)%
State income taxes, net of U.S. federal tax
benefit......................................... 5.8 (5.3) (4.9)
Rate differential of foreign operations.......... 1.1 -- 1.9
State tax credits................................ -- -- (3.4)
U.S, federal research and development credits.... (2.0) -- (3.2)
Change in valuation allowance.................... (6.0) 3.1 43.3
Exempt interest.................................. -- (1.8) --
Purchased in-process research and development.... 22.2 -- --
Nondeductible intangibles........................ 0.6 3.6 1.9
Acquisition expenses............................. -- -- 2.2
Other............................................ 0.2 2.5 1.9
---- ----- -----
Effective tax rate............................... 55.9% (31.9)% 5.7%
==== ===== =====
</TABLE>

The domestic and foreign components of earnings before income tax were:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
(in thousands) ------- ------- --------
<S> <C> <C> <C>
Domestic...................................... $ 9,157 $ (441) $(15,435)
Foreign....................................... (640) (8,552) (2,253)
------- ------- --------
$ 8,517 $(8,993) $(17,688)
======= ======= ========
</TABLE>

10--Accrued Expenses and Other Liabilities

Components of accrued expenses and other liabilities consist of the
following:

<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
(in thousands) ------ ------
<S> <C> <C>
Accrued compensation and related expenses.................. $1,547 $6,314
Income taxes payable....................................... 838 114
Accrued restructuring and other special charges............ 2,960 450
Other liabilities.......................................... 2,329 2,894
------ ------
$7,674 $9,772
====== ======
</TABLE>

F-14
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11--Indebtedness

Bank Lines of Credit

The Company established a new $7.5 million bank line of credit for working
capital purposes effective May 14, 1999. Borrowings under the line of credit
bear interest at the bank's floating rate of prime plus one percent. The
Company is subject to covenants requiring maintenance of certain profitability,
equity and liquidity ratios. As of December 31, 1999, the Company is currently
compliant with all covenants under the line, and there are no amounts currently
outstanding. This agreement is subject to renewal on May 13, 2000.

As part of the acquisition of QWES, the Company assumed its outstanding debt
which consisted of promissory notes and notes payable. The total amount of debt
outstanding at December 31, 1999 was $2.5 million from the QWES acquisition.
The debt bears interest ranging from 8.0% to 10.0% per annum. At December 31,
1999, $2.2 million of the debt matures on various dates in 2000 and is included
in the current portion of long-term debt, and the remaining amount of $275,000
is included in long-term debt less current portion and matures in 2002. The
acquisition of QWES caused the Company to be in default of a covenant with one
of the lenders, however, as a condition of the acquisition being consummated,
the lender waived the default. In connection with the issuance of some of the
notes, the Company issued warrants to purchase 84,835 shares of common stock of
the Company at an exercise price of $.07 per share for 70,542 shares and $7.87
per share for the remaining 14,293 shares. The warrants are exercisable in
whole or in part at any time from the date of the grant and expire four years
from the date of grant. At December 31, 1999, warrants to purchase 19,901
shares were outstanding. The estimated fair value of the warrants aggregating
approximately $147,000, has been reflected as original issue discount reducing
the carrying value of the notes on the accompanying balance sheet and is being
amortized to interest expense over the respective lives of the notes.

The Company has a 2.0 million French franc ($309,000 at December 31, 1999)
line of credit with a European bank. At December 31, 1999, there were no
borrowings outstanding under this line. Borrowings under this line bear
interest at rates ranging from 7.5% to 9.0%. Borrowings are collateralized by
certain of the Company's assets.

Included in debt is a government advance of $231,000 and $31,000 at December
31, 1998 and 1999, respectively. This represents an interest free loan from the
French government repayable from the proceeds of export sales from France.

12--Profit Sharing Plans

The Company has established a 401(k) cash or deferred profit sharing plan
covering all eligible full-time employees of the Company. Contributions to the
401(k) plan are made by the participants to their individual accounts through
payroll withholding. Additionally, the plan provides for the Company to make
profit sharing contributions to the plan in amounts at the discretion of
management. The employer contribution for the years ended December 31, 1997,
1998 and 1999 was $258,000, $416,000 and $452,000, respectively.

The Company currently matches contributions each pay period at 50.0% of the
employee's contributions up to 6.0% of the employee's compensation, not to
exceed the federal limit of $10,000 per calendar year.

F-15
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13--Basic and Diluted Net Income (Loss) Per Common Share

The following is a reconciliation of basic and diluted net income (loss) per
common share computations for net income, pursuant to SFAS 128:

<TABLE>
<CAPTION>
Year Ended December 31, 1999
--------------------------------
Income Per
(loss) Shares Share
(Numerator) (Denominator) Amount
---------- ------------ ------
(In thousands except for share
and per share data)
<S> <C> <C> <C>
Basic net income (loss) per common
share ................................ $(18,688) 11,482,342 $(1.63)
Effect of dilutive securities (stock
options).............................. -- -- --
-------- ---------- ------
Diluted net income (loss) per common
share................................. $(18,688) 11,482,342 $(1.63)
======== ========== ======

<CAPTION>
Year Ended December 31, 1998
--------------------------------
Income Per
(loss) Shares Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Basic net income (loss) per common
share ................................ $ (6,125) 10,923,261 $(0.56)
Effect of dilutive securities (stock
options).............................. -- -- --
-------- ---------- ------
Diluted net income (loss) per common
share................................. $ (6,125) 10,923,261 $(0.56)
======== ========== ======

<CAPTION>
Year Ended December 31, 1997
--------------------------------
Income Per
(loss) Shares Share
(Numerator) (Denominator) Amount
---------- ------------ ------
<S> <C> <C> <C>
Basic net income (loss) per common
share ................................ $ 3,759 10,481,340 $ 0.36
Effect of dilutive securities (stock
options).............................. -- 697,887 --
-------- ---------- ------
Diluted net income (loss) per common
share ................................ $ 3,759 11,179,227 $ 0.34
======== ========== ======
</TABLE>

The effect of dilutive options excludes those stock options for which the
impact would have been anti-dilutive based on the exercise price of the
options. The number of options that were anti-dilutive at December 31, 1997,
1998 and 1999 were 75,950, 3,349,701 and 2,748,488, respectively.

14--Stock Option and Stock Purchase Plans

1989 Stock Option and Stock Purchase Plan

In July 1989, the Company's Board of Directors adopted the 1989 Stock Option
and Stock Purchase Plan (the "1989 Plan"), which permitted both incentive and
non-statutory options exercisable for the purchase of shares of common stock to
be granted to employees, directors and consultants of the Company. In October
1993, the Board of Directors amended the 1989 Plan to provide that no further
options were to be granted under the 1989 Plan after the effective date of the
Company's initial public offering.

1993 Stock Option Plan

In October 1993, the Company's Board of Directors adopted the 1993 Stock
Option Plan (the "1993 Plan"). The 1993 Plan permits both incentive and non-
statutory options to be granted to

F-16
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

employees, directors and consultants. In March 1998, the Board of Directors
adopted and in April 1998, the Company's stockholders approved (i) an increase
in the number of shares available under the 1993 Plan from 1.5 million to 1.9
million and (ii) a requirement that the exercise price of options granted under
the 1993 Plan be at least equal to the fair market value of the Company's
common stock on the date of grant.

1993 Non-Employee Directors Stock Option Plan

In October 1993, the Company's Board of Directors adopted the 1993 Non-
Employee Directors Stock Option Plan (the "Directors Plan") which provides for
the purchase of up to 120,000 shares of common stock pursuant to the grant of
non-statutory stock options to directors who are not employees of the Company.
In March 1996 the Board of Directors adopted and in May 1996 the Company's
stockholders approved (i) an increase in the number of shares for which options
shall be granted to newly elected non-employee directors from 10,000 to 15,000
and (ii) an increase in the number of shares for which options shall be granted
to incumbent non-employee directors from 2,000 to 5,000. In March 1999, the
Board of Directors adopted and in April 1999, the Company's stockholders
approved an increase in the number of shares available under the Directors Plan
from 120,000 to 240,000 shares. The exercise price of the options may not be
less than 100% of the fair market value of the Company's common stock on the
date of the grant. As of December 31, 1999, 140,000 shares had been granted at
prices ranging from $4.88 to $49.25 per share.

1995 Non-Statutory Stock Option Plan

In October 1995, the Company's Board of Directors adopted the 1995 Non-
Statutory Stock Option Plan (the "1995 Plan"). The 1995 Plan permits non-
statutory options to be granted to non-executive officer employees and
consultants of the Company. In April 1998, the Board of Directors amended the
plan to increase the number of shares available for purchases to 1,300,000
shares of common stock, and in March 1999, the Board of Directors amended the
plan to increase the number of shares available for purchases to 1,800,000
shares of common stock. The exercise price of non-statutory options may not be
less than 100% of the fair market value of the company's common stock on the
date of grant.

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 2,087,157 $10.28 1,766,251 $15.68 2,364,508 $11.39
Granted................. 338,155 28.66 1,932,035 16.39 1,030,447 9.87
Exercised............... (622,772) 4.77 (171,309) 9.19 (303,561) 7.36
Forfeited or expired.... (36,289) 15.89 (1,162,469) 26.64 (343,044) 9.58
--------- ------ ---------- ------ --------- ------
Outstanding at end of
period................. 1,766,251 15.68 2,364,508 11.39 2,748,350 11.47
--------- ------ ---------- ------ --------- ------
Exercisable at end of
period................. 609,092 $10.76 824,229 $10.93 1,176,460 $11.50
========= ====== ========== ====== ========= ======
</TABLE>

F-17
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information concerning currently outstanding
and exercisable options as of December 31, 1999:

<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- ------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.17-$10.00 1,195,654 7.9 $ 6.26 470,688 $ 6.50
$10.01-$20.00 1,275,222 6.8 11.29 591,291 12.08
$20.01-$30.00 105,893 6.8 25.44 85,667 25.53
$30.01-$40.00 50,831 8.4 35.00 17,977 34.31
$40.01-$50.00 120,750 9.7 44.27 10,837 48.94
--------- --- ------ --------- ------
2,748,350 7.4 $11.47 1,176,460 $11.50
========= === ====== ========= ======
</TABLE>

Other Stock Option Information

On July 9, 1998, the Company gave certain holders of stock options,
including executive officers, the opportunity to exchange options for new
options with a lower exercise price and with a new vesting schedule beginning
on the grant date of the new options. The Company believes the repricing
restored the long term incentive element of its stock option programs. The
options were valued at $10.19, which reflects the market closing price on the
date of the re-pricing. There were 1,040,639 options that were exchanged at
exercise prices ranging from $12.31 to $48.62. Prior to this event, the Company
had never engaged in a repricing of common stock options.

All options granted under the various plans administered by the Company have
a vesting life not to exceed four years. These options have an expiration date
of ten years from the date of grant, with the exception of all repriced
options, which have an expiration date of seven years from the date of grant.

The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations in accounting for
its stock option and employee stock purchase plan.

The weighted average fair value at date of grant for stock options granted
during the years ended December 31, 1997, 1998 and 1999 was $14.95, $3.33 and
$6.83, respectively. Had compensation cost for the Company's stock option
grants been determined based on the fair value at the grant dates, as
calculated in accordance with SFAS No.123, the Company's net income (loss), and
net income (loss) per diluted common share for the years ended December 31,
1997, 1998 and 1999, would have been $571,000, ($8.2 million) and ($23.6
million) and $0.05, ($0.75) and ($2.06), respectively. The fair value of each
option granted during the years ended December 31, 1997, 1998 and 1999 is
estimated on the date of grant using the Black-Scholes option pricing model
with the following assumptions; an expected life of five years, no dividend
yield, 50.0% expected volatility in 1997 and 1998 and 80.0% in 1999, and a risk
free interest rate of 6.6% for 1997, 5.6% for 1998 and 6.4% for 1999.

The effects of applying SFAS No.123 in the disclosure are not indicative of
future amounts. SFAS No.123 does not apply to awards prior to 1995 and
additional awards in future years are anticipated.

F-18
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1993 Employee Stock Purchase Plan

The 1993 Employee Stock Purchase Plan ("Purchase Plan"), which was adopted
by the Board of Directors in 1993 and amended by the Company's stockholders in
1996, permits employees and officers of the Company to participate in periodic
plan offerings, in which payroll deductions may be used to purchase shares of
common stock. The purchase price is 85% of the lower of the fair market value
at the date the offering commences or terminates. The Company reserved 400,000
shares for the Purchase Plan. In March 1999, the Board of Directors adopted and
in April 1999, the Company's stockholders approved an increase in the number of
shares available under the Purchase Plan from 400,000 to 700,000 shares. As of
December 31, 1999, 292,864 shares have been issued under the Purchase Plan at
prices ranging from $4.36 to $48.62 per share.

Restricted Stock Awards

On April 3, 1998, QWES.com, Inc. issued 933,762 shares of restricted common
stock at a fair value of $0.11 per share to its founders. The stock was
scheduled to vest over a three-year period, but vested in full when the Company
acquired QWES in December 1999.

15--Commitments

The Company leases its current manufacturing and office facilities under
non-cancelable leases extending to April 30, 2012. The Company occupies other
facilities under leases, which expire within one year. Rental expenses under
all operating lease agreements in effect during December 31, 1997, 1998 and
1999 amount to approximately $1.2 million, $1.3 million and $1.8 million,
respectively.

The Company currently has a sublease on one of its facilities located in
Schaumburg, Illinois. The lease calls for payments of $5.6 million over a nine-
year period beginning in November 1999.
These payments over time would reduce the overall lease burden of the Company
to $17.5 million. Due to the acquisition of QWES, the Company is currently
looking for a new facility in the Tustin, California area to replace its
current facility. QWES's current lease expires in February 2000.

The Company has various other facilities throughout North America, Europe
and Asia that have short term leases and act as sales offices. The Company
believes that the existing facilities are adequate for our current needs and
that suitable space will be available to meet future needs.

At December 31, 1999, commitments under operating leases for minimum future
payments consist of the following:

<TABLE>
<CAPTION>
Leases
(in thousands) -------
<S> <C>
Year ending December 31,
2000........................... $ 2,148
2001........................... 2,316
2002........................... 2,304
2003........................... 2,047
2004........................... 2,009
Thereafter..................... 12,247
-------
$23,071
=======
</TABLE>

F-19
<PAGE>

NATURAL MICROSYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16--Segment and Geographic Information

The Company manages its business on the basis of geographic area. See Note 1
for a description of the Company's business. All intercompany revenues and
expenses are eliminated in computing revenues and operating income. As of
December 31, 1999 the Company has operations established in 12 countries
outside the United States and its products are sold throughout the world. The
Company is exposed to the risk of changes in social, political and economic
conditions inherent in foreign operations and the Company's results of
operations and the value of its foreign assets are affected by fluctuations in
foreign currency exchange rates. Net sales by geographic region are presented
by attributing revenues from external customers on the basis of where products
are sold. "Other" includes the regions of Asia and Latin America.

<TABLE>
<CAPTION>
North America Europe Other Corporate Total
------------- ------- ------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net Sales to
unaffiliated customers:
1999.................. $ 57,664 $14,329 $ 7,483 $ 79,476
1998.................. 55,906 11,772 8,851 76,529
1997.................. 54,358 11,393 9,612 75,363
Income (loss) from
operations:
1999.................. $(16,780) $ (608) $ 754 $(16,634)
1998.................. (1,283) (4,208) (4,566) (10,057)
1997.................. 7,900 (1,876) 1,295 7,319
Segment assets:
1999.................. $ 47,287 $ 9,764 $ 1,355 $12,303 $ 70,709
1998.................. 51,655 9,540 1,086 16,669 78,950
1997.................. 45,242 7,616 800 28,035 81,693
Long-lived assets:
1999.................. $ 30,901 $ 2,522 $ 503 $ 33,926
1998.................. 27,035 2,532 554 30,121
1997.................. 17,441 1,940 188 19,569
Capital expenditures:
1999.................. $ 5,668 $ 423 $ 103 $ 6,194
1998.................. 7,354 909 355 8,618
1997.................. 6,724 408 75 7,207
Depreciation and
amortization expense:
1999.................. $ 6,028 $ 497 $ 56 $ 6,581
1998.................. 5,074 459 102 5,635
1997.................. 2,570 351 74 2,995
</TABLE>

Included in North America are the United States and Canada. Net sales to
unaffiliated customers from North America were $54.4 million, $55.9 million and
$57.7 million for the years ended December 31, 1997, 1998 and 1999,
respectively. There are no other countries that had material net sales to
unaffiliated customers or long-lived assets.

F-20
<PAGE>

Inside Back Cover

The diagram entitled "Quality, Technology, Connectivity--The Perfect Foundation
for the New Converged Network" includes a diagram of the five market segments in
which we operate. These segments are: enterprise applications, IP telephony,
differentiated IP services, enhanced services and wireless network
infrastructure.

<PAGE>

You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of the shares
of common stock means that information contained in this prospectus is correct
after the date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares in any circumstances under which
the offer or solicitation is unlawful.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Forward-Looking Information.............................................. 11
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 12
Dividend Policy.......................................................... 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 24
Management............................................................... 36
Stock Ownership.......................................................... 39
Underwriting............................................................. 40
Legal Matters............................................................ 41
Experts.................................................................. 41
Where You Can Find More Information...................................... 41
Incorporation of Certain Documents by Reference.......................... 42
Index to Consolidated Financial Statements............................... F-1
</TABLE>
- --------------------------------------------------------------------------------

Natural MicroSystems Logo Appears Here

3,000,000 Shares

Common Stock

Deutsche Banc Alex. Brown

Dain Rauscher Wessels

U.S. Bancorp Piper Jaffray

FAC/Equities

Prospectus

, 2000

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses payable by the
registrant in connection with the distribution of the securities being
registered hereunder. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee, the Nasdaq National Market
listing fee and the NASD filing fee.

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 36,546
Nasdaq National Market Listing Fee................................. 17,500
National Association of Securities Dealers Filing Fee.............. 14,344
Blue Sky Fees and Expenses......................................... 20,000
Printing Expenses.................................................. 100,000
Legal Fees and Expenses............................................ 160,000
Accountants' Fees and Expenses..................................... 200,000
Miscellaneous Fees and Expenses.................................... 51,610
--------
Total............................................................ $600,000
========
</TABLE>

Item 15. Indemnification of Directors and Officers

Section 145 of the General Corporation Law of the State of Delaware provides
that a corporation may indemnify a director, officer, employee or agent against
expenses (including attorneys' fees), judgments, fines and for amounts paid in
settlement in respect of or in successful defense of any action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.

Article Tenth of the Company's Fourth Restated Certificate of Incorporation
provides that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law or (iv) for any transaction from which
the director derived an improper personal benefit. Article Tenth further
provides that a director's personal liability shall be eliminated or limited in
the future to the fullest extent permitted from time to time by the Delaware
General Corporation Law.

Article Eleventh of the Company's Fourth Restated Certificate of
Incorporation provides that the Company shall, to the fullest extent permitted
from time to time under the Delaware General Corporation Law, indemnify each of
its directors and officers against all expenses (including attorneys' fees),
liabilities, judgments, fines and amounts paid in settlement in respect of any
action, suit or proceeding in which such director or officer may be involved or
with which he may be threatened, while in office or thereafter, by reason of
his or her actions or omissions in connection with services to the Company,
such indemnification to include prompt payment of expenses in advance of the
final disposition of any such action, suit or proceeding.

Item 16. Exhibits

<TABLE>
<C> <S>
1.1 Underwriting Agreement.
5.1 Opinion of Choate, Hall & Stewart as to validity of shares being
registered and Consent.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
24.1 Power of Attorney (part of Signature Page).
</TABLE>

II-1
<PAGE>

Item 17. Undertakings

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing a Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Framingham, The Commonwealth of Massachusetts on
February 3, 2000.

Natural MicroSystems Corporation

/s/ Robert P. Schechter*
By: _________________________________
Robert P. Schechter,
President,
Chief Executive Officer and
Chairman of the Board of
Directors

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on the dates indicated by the
following persons in the capacities indicated.

<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----

<S> <C> <C>
/s/ Robert P. Schechter* President, Chief Executive 2/3/2000
______________________________________ Officer and Chairman of
Robert P. Schechter the Board of Directors
(Principal Executive
Officer)

/s/ Robert E. Hult* Senior Vice President of 2/3/2000
______________________________________ Finance and Operations,
Robert E. Hult Chief Financial Officer
and Treasurer (Principal
Financial Officer)

/s/ Alex N. Braverman* Vice President and 2/3/2000
______________________________________ Corporate Controller
Alex N. Braverman (Principal Accounting
Officer)

/s/ Zenas W. Hutcheson, III* Director 2/3/2000
______________________________________
Zenas W. Hutcheson, III

/s/ W. Frank King, Ph.D.* Director 2/3/2000
______________________________________
W. Frank King, Ph.D.

/s/ Pamela D. A. Reeve* Director 2/3/2000
______________________________________
Pamela D. A. Reeve

/s/ Ronald W. White* Director 2/3/2000
______________________________________
Ronald W. White
*By: 2/3/2000
/s/ Robert E. Hult
____________________________________
Robert E. Hult
Attorney-in-Fact
</TABLE>

II-3
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit Number
--------------
<C> <S>
1.1 Underwriting Agreement.
5.1* Opinion of Choate, Hall & Stewart as to validity of shares
being registered and Consent.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Choate, Hall & Stewart (included in Exhibit 5.1).
24.1* Power of Attorney (included in page II-4).
</TABLE>
- --------

*Previously filed.

<PAGE>
EXHIBIT 1.1

FORM OF UNDERWRITING AGREEMENT

[ ] Shares
---------------

NATURAL MICROSYSTEMS CORPORATION

Common Stock

($.01 Par Value)

EQUITY UNDERWRITING AGREEMENT
-----------------------------

[ ], 2000
------------- --

DEUTSCHE BANK SECURITIES INC.
DAIN RAUSCHER INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
FIRST ALBANY CORPORATION
As Representatives of the Several Underwriters
c/o Deutsche Bank Securities Inc.
One South Street
Baltimore, Maryland 21202

Ladies and Gentlemen:

Natural MicroSystems Corporation, a Delaware corporation (the "Company"),
proposes to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of [ ] shares of the Company's Common
----------
Stock, $.01 par value (the "Firm Shares"). The respective amounts of the Firm
Shares to be so purchased by the several Underwriters are set forth opposite
their names in Schedule I hereto. The Company also proposes to sell at the
Underwriters' option an aggregate of up to [ ] additional shares of the
----------
Company's Common Stock (the "Option Shares") as set forth below.

As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
<PAGE>

In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:

1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
---------------------------------------------
warrants to each of the Underwriters as follows:

(a) A registration statement on Form S-3 (File No. 333-95431) with
respect to the Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder
and has been filed with the Commission. The Company has complied with
the conditions for the use of Form S-3 and the registration statement
filed by electronic transmission pursuant to the Commission's
Electronic Data Gathering, Analysis and Retrieval System ("EDGAR")
(except as may be permitted by Regulation S-T under the Act) was
identical to the copy thereof delivered to you for use in connection
with the offer and sale of the Shares. Copies of such registration
statement, including any amendments thereto, the preliminary
prospectuses (meeting the requirements of the Rules and Regulations)
contained therein and the exhibits, financial statements and
schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement,
together with any registration statement filed by the Company pursuant
to Rule 462(b) of the Act, herein referred to as the "Registration
Statement," which shall be deemed to include all information omitted
therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-
effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means the form of prospectus
first filed with the Commission pursuant to Rule 424(b). Each
preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus." Any reference herein to the Registration Statement, any
Preliminary Prospectus or to the Prospectus shall be deemed to refer
to and include any documents incorporated by reference therein, and,
in the case of any reference herein to any Prospectus, also shall be
deemed to include any documents incorporated by reference therein, and
any supplements or amendments thereto, filed with the Commission after
the date of filing of the Prospectus under Rules 424(b) or 430A, and
prior to the termination of the offering of the Shares by the
Underwriters.

(b) The Company has not distributed and will not distribute, prior to the
later of the Option Closing Date (as defined below) and the completion
of the Underwriters' distribution of the Shares, any offering material
in connection with the offering and sale of the Shares other than the
Preliminary Prospectus, the Prospectus or the Registration Statement.

(c) This Agreement has been duly authorized, executed and delivered by,
and is a valid and binding agreement of, the Company, enforceable
against the Company

2
<PAGE>

in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.

(d) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware,
with corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement and to
enter into and perform its obligations under this Agreement. Each of
the subsidiaries of the Company listed in Exhibit A hereto
(collectively, the "Subsidiaries") has been duly organized and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement. The Subsidiaries are the only
subsidiaries, direct or indirect, of the Company and the Company does
not own or control, directly or indirectly, any corporation,
association or other entity other than the Subsidiaries. The
Subsidiaries listed on Exhibit B hereto (collectively, the
"Significant Subsidiaries") and the Company collectively generated
more than 98% of the consolidated revenue of the Company and the
Subsidiaries during the year ended December 31, 1999, and currently
own more than 98% of the consolidated assets of the Company and the
Subsidiaries. The Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the
conduct of their business requires such qualification. The outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable and
are owned by the Company or another Subsidiary free and clear of all
liens, encumbrances and equities and claims; and no options, warrants
or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital
stock or ownership interests in the Subsidiaries are outstanding.

(e) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable;
the Shares to be issued and sold by the Company have been duly
authorized and when issued and paid for as contemplated herein will be
validly issued, fully paid and non-assessable; and no preemptive
rights of stockholders exist with respect to any of the Shares or the
issue and sale thereof. None of the outstanding shares of Common
Stock were issued in violation of any preemptive rights, rights of
first refusal or other rights to subscribe for or purchase securities
of the Company. There are no authorized or outstanding options,
warrants, preemptive rights, rights of first refusal or other rights
to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or
any of the Subsidiaries other than those described in the Prospectus.
Neither the filing of the Registration Statement nor the offering or
sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock.

3
<PAGE>

(f) The Company has filed a notification of listing of the Shares on the
Nasdaq National Market.

(g) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form
of certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.

(h) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares
nor instituted proceedings for that purpose. The Registration
Statement contains, and the Prospectus and any amendments or
supplements thereto will contain, all statements which are required to
be stated therein by, and will conform, to the requirements of the Act
and the Rules and Regulations. The documents incorporated by
reference in the Prospectus, at the time filed with the Commission,
conformed in all material respects to the requirements of the
Securities Exchange Act of 1934 or the Act, as applicable, and the
rules and regulations of the Commission thereunder. The Registration
Statement and any amendments thereto do not contain, and will not
contain, any untrue statement of a material fact and do not omit, and
will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
The Prospectus and any amendments and supplements thereto do not
contain, and will not contain, any untrue statement of material fact;
and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or
omitted from the Registration Statement or the Prospectus, or any such
amendment or supplement, in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives, specifically for use in the
preparation thereof.

(i) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth
or incorporated by reference in the Registration Statement, present
fairly the financial position and the results of operations and cash
flows of the Company and the consolidated Subsidiaries, at the
indicated dates and for the indicated periods. Such financial
statements and related schedules have been prepared in accordance with
generally accepted accounting principles, consistently applied
throughout the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such
periods have been made. No other financial statements or supporting
schedules are required to be included in the Registration Statement.
The summary financial and statistical data included or incorporated by
reference in the Registration Statement presents fairly the

4
<PAGE>

information shown therein and such data has been compiled on a basis
consistent with the financial statements presented therein and the
books and records of the Company.

(j) PricewaterhouseCoopers LLP, who have certified certain of the
financial statements filed with the Commission as part of, or
incorporated by reference in, the Registration Statement, are
independent public accountants as required by the Act and the Rules
and Regulations.

(k) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise
which if determined adversely to the Company or any of its
Subsidiaries might result in any material adverse change in the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and of the Subsidiaries taken as a whole or prevent the
consummation of the transactions contemplated hereby.

(l) The Company and the Subsidiaries have good and marketable title to all
of the properties and assets reflected in the financial statements
hereinabove described (or as described in the Registration Statement),
and such properties and assets are not subject to any lien, mortgage,
pledge, charge or encumbrance of any kind except those reflected in
such financial statements (or as described in the Registration
Statement) or which are not material, individually or in the
aggregate, in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases.

(m) The Company and the Subsidiaries have filed all federal, state, local
and foreign tax returns which have been required to be filed and have
paid all taxes indicated by said returns and all assessments received
by them or any of them to the extent that such taxes have become due.
All tax liabilities have been adequately provided for in the financial
statements of the Company, and the Company does not know of any actual
or proposed additional material tax assessments.

(n) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there
has not been any material adverse change or any development involving
a prospective material adverse change in or affecting the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise), or prospects of the Company and
its Subsidiaries taken as a whole, whether or not occurring in the
ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable
of being entered into by the Company or any Subsidiary, other than
transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be
amended or supplemented. The Company and the Subsidiaries have no
material contingent obligations which are not disclosed in the
Company's financial statements and described in the Registration
Statement.

5
<PAGE>

(o) Neither the Company nor any of the Subsidiaries is or with the giving
of notice or lapse of time or both, will be, in violation of or in
default under its charter or by-laws or under any agreement, lease,
contract, indenture or other instrument or obligation to which it is a
party or by which it, or any of its properties or assets, is bound and
which default is of material significance in respect of the business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated
and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms or provisions of, or constitute
a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any Subsidiary is a
party or by which its properties or assets are bound, or of the
charter or by-laws of the Company or any order, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body
having jurisdiction.

(p) Each approval, consent, order, authorization, designation, declaration
or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may
be required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or such additional steps as may be
necessary to qualify the Shares for public offering by the
Underwriters under state securities or blue sky laws) has been
obtained or made and is in full force and effect.

(q) The Company and each of the Subsidiaries holds all material licenses,
certificates and permits from governmental authorities which are
necessary to the conduct of their respective businesses and are in
compliance with the terms thereof, and all such licenses, certificates
and permits are in full force and effect.

(r) The Company and each of the Subsidiaries are conducting their business
in compliance with all the local, state, federal and foreign laws,
rules and regulations of the jurisdictions in which the Company and
each of the Subsidiaries are conducting their respective businesses.

(s) The Company and the Subsidiaries own or possess sufficient trademarks,
trade names, service marks, patents, patent rights, copyrights,
licenses, approvals, inventions, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and
intellectual property necessary to conduct their businesses as now
conducted and have taken all steps reasonably necessary to secure
assignments of such intellectual property from their employees and

6
<PAGE>

contractors; to the knowledge of the Company none of the technology
employed by the Company or its Subsidiaries has been obtained or is
being used by the Company or its Subsidiaries in violation of any
contractual or fiduciary obligation binding on the Company, its
Subsidiaries or any of their respective directors or executive
officers or, to the Company's knowledge, any of their respective
employees or consultants; and the Company and its Subsidiaries have
taken and will maintain reasonable measures to prevent the
unauthorized dissemination or publication of its confidential
information.

The Company knows of no material infringement by others of patents,
patent rights, trade names, trademarks or copyrights owned by or
licensed to the Company. The Company has good and marketable title to
the patents and patent applications referred to in the Prospectus.

Neither the Company nor any of the Subsidiaries has infringed,
interfered with or misappropriated any patents, patent rights, trade
names, trademarks, copyrights or other intellectual property rights of
others, which infringement, if the subject of any unfavorable
decision, ruling or finding would, individually or in the aggregate,
be reasonably likely to result in a material adverse change in the
earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the
Company and the Subsidiaries taken as a whole.

To the Company's knowledge, there are no legal or governmental
proceedings pending relating to trademarks, trade names, patent
rights, mask works, copyrights, licenses, trade secrets or other
intellectual property rights of the Company or any of the Subsidiaries
other than the prosecution by the Company and the Subsidiaries of
their patent applications before the United States Patent Office and
appropriate foreign government agencies, and no proceedings are
threatened or contemplated by governmental authorities or others
relating to trademarks, trade names, patent rights, mask works,
copyrights, licenses or other intellectual property rights of the
Company or the Subsidiaries.

(t) Neither the Company nor, to the Company's knowledge, any of its
affiliates, has taken, directly or indirectly, any action designed to
cause or result in, or which has constituted or which might reasonably
be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale
of the Shares. The Company acknowledges that the Underwriters may
engage in stabilizing and passive market making transactions in the
Shares on the Nasdaq National Market and other activities in
accordance with Regulation M under the Exchange Act.

(u) Neither the Company nor any Subsidiary is, or after the issuance and
sale of, and the receipt of payment for, the Shares and the
application of the net proceeds therefrom as described in the
Prospectus will be, an "investment company" or an entity "controlled"
by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations of the Commission thereunder.

7
<PAGE>

(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.

(w) The Company and each of its Subsidiaries, taken as a whole, carry, or
are covered by, insurance from recognized, financially sound and
reputable institutions in such amounts and covering such risks as is
adequate for the conduct of their businesses and the value of their
properties and as is customary for companies engaged in similar
industries.

(x) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability
that is intended to be qualified under Section 401(a) of the Code is
so qualified in all material respects and nothing has occurred,
whether by action or by failure to act, which would cause the loss of
such qualification.

(y) To the Company's knowledge, there are no affiliations or associations
between any member of the NASD and any of the Company's officers or
directors.

(z) Neither the Company nor any of its Subsidiaries nor, to the Company's
knowledge, any employee or agent of the Company or any Subsidiary, has
made any contribution or other payment to any official of, or
candidate for, any federal, state or foreign office in violation of
any law or of a character required to be disclosed in the Prospectus.

(aa) There are no costs or liabilities associated with applicable foreign,
federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or

8
<PAGE>

compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties, which would be reasonably expected,
singly or in the aggregate, to have a material adverse effect on the
Company and the Subsidiaries, taken as a whole.

(bb) The Company has reviewed its operations and that of its Subsidiaries
and any third parties with which the Company or any of its
Subsidiaries has a material relationship to evaluate the extent to
which the business or operations of the Company or any of its
Subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will result in a material adverse
change in the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or result in any
material loss or interference with the Company's business or
operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the
receipt, transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.

(cc) Any certificate signed by an officer of the Company or any of its
Subsidiaries delivered to the Representatives or to counsel for the
Underwriters shall be deemed to be a representation and warranty
hereunder by the Company to each Underwriter as to the matters covered
thereby.

2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------

(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $[_____] per
share, the number of Firm Shares set forth opposite the name of each
Underwriter in Schedule I hereof, subject to adjustments in accordance
with Section 9 hereof.

(b) Payment for the Firm Shares to be sold hereunder is to be made in New
York Clearing House funds by federal (same day) funds against delivery
of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be
made through the facilities of the Depository Trust Company, New York,
New York at 10:00 a.m., New York time, on the third business day after
the date of this Agreement or at such other time and date not later
than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing
Date." As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York
are

9
<PAGE>

open for business and are not permitted by law or executive order
to be closed. [The certificates for the Firm Shares, if any, will be
delivered in such denominations and in such registrations as the
Representatives request in writing not later than the second full
business day prior to the Closing Date, and will be made available for
inspection by the Representatives at least one business day prior to
the Closing Date.]

(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth,
the Company hereby grants an option to the several Underwriters to
purchase the Option Shares at the price per share as set forth in the
first paragraph of this Section 2. The option granted hereby may be
exercised in whole or in part by giving written notice (i) at any time
before the Closing Date and (ii) only once thereafter within 30 days
after the date of this Agreement, by you, as Representatives of the
several Underwriters, to the Company setting forth the number of
Option Shares as to which the several Underwriters are exercising the
option, the names and denominations in which the Option Shares are to
be registered and the time and date at which such certificates are to
be delivered. The time and date at which certificates for Option
Shares are to be delivered shall be determined by the Representatives
but shall not be earlier than three nor later than 10 full business
days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the
"Option Closing Date"). If the date of exercise of the option is
three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to the
total number of Firm Shares being sold hereunder, adjusted by you in
such manner as to avoid fractional shares. The option with respect to
the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel such
option at any time prior to its expiration by giving written notice of
such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on
the Option Closing Date in federal (same day funds) through the
facilities of the Depository Trust Company in New York, New York.

3. OFFERING BY THE UNDERWRITERS.
----------------------------

It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.

10
<PAGE>

It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.

4. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
------------------------
several Underwriters that:

(a) The Company will (A) use its best efforts to prepare and timely file
with the Commission under Rule 424(b) of the Rules and Regulations a
Prospectus in a form approved by the Representatives containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representatives shall not
previously have been advised and furnished with a copy or to which the
Representatives shall have reasonably objected in writing or which is
not in compliance with the Rules and Regulations, and (C) file on a
timely basis all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission
subsequent to the date of the Prospectus and prior to the termination
of the offering of the Shares by the Underwriters.

(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall
have become effective, (B) of receipt of any comments from the
Commission, (C) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (D) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts
to prevent the issuance of any such stop order preventing or
suspending the use of the Prospectus and to obtain as soon as possible
the lifting thereof, if issued.

(c) The Company will cooperate with the Representatives in endeavoring to
qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that
purpose, provided the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction where it is not now so qualified or required to
file such a consent. The Company will, from time to time, prepare and
file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long a
period as the Representatives may reasonably request for distribution
of the Shares.

(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company
will deliver to, or upon the order of, the Representatives during the
period when delivery of a

11
<PAGE>

Prospectus is required under the Act, as many copies of the Prospectus
in final form, or as thereafter amended or supplemented, as the
Representatives may reasonably request. The Company will deliver to
the Representatives at or before the Closing Date, four signed copies
of the Registration Statement and all amendments thereto including all
exhibits filed therewith, and will deliver to the Representatives such
number of copies of the Registration Statement (including such number
of copies of the exhibits filed therewith that may reasonably be
requested), including documents incorporated by reference therein, and
of all amendments thereto, as the Representatives may reasonably
request.

(e) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations of the Commission thereunder, so
as to permit the completion of the distribution of the Shares as
contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in
the judgment of the Company or in the reasonable opinion of the
Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of
the circumstances existing at the time the Prospectus is delivered to
a purchaser, not misleading, or, if it is necessary at any time to
amend or supplement the Prospectus to comply with any law, the Company
promptly will either (i) prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to
the Prospectus or (ii) prepare and file with the Commission an
appropriate filing under the Securities Exchange Act of 1934 which
shall be incorporated by reference in the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.

(f) The Company will make generally available to its security holders, as
soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an
earning statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after
the effective date of the Registration Statement, which earning
statement shall satisfy the requirements of Section 11(a) of the Act
and Rule 158 of the Rules and Regulations and will advise you in
writing when such statement has been so made available.

(g) Prior to the Closing Date, the Company will furnish to the
Underwriters, as soon as they have been prepared by or are available
to the Company, a copy of any unaudited interim financial statements
of the Company for any period subsequent to the period covered by the
most recent financial statements appearing in the Registration
Statement and the Prospectus.

(h) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative
of Common Stock (or

12
<PAGE>

agreement for such) will be made for a period of 90 days after the
date of this Agreement, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of Deutsche
Bank Securities Inc.; provided, however, that this Section 4(h) shall
not apply to (I) the sale of the Shares to the Underwriters hereunder;
(II) the issuance by the Company of shares of Common Stock upon the
exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which Deutsche Bank Securities Inc.
has been advised in writing; or (III) the issuance of additional
options under the Company's existing stock option plans, provided that
such stock options are not exercisable during such 90 day period, or
additional shares of Common Stock under the Company's existing
employee stock purchase plan.

(i) The Company has caused the persons listed on Exhibit C hereto to
furnish to you, on or prior to the date of this agreement, a letter or
letters, in form and substance satisfactory to the Underwriters,
pursuant to which each such person shall agree not to offer, sell,
sell short or otherwise dispose of any shares of Common Stock of the
Company or other capital stock of the Company, or any other securities
convertible, exchangeable or exercisable for Common Shares or
derivative of Common Shares owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to
which such person has the right to direct the disposition of) for a
period of 90 days after the date of this Agreement, directly or
indirectly, except with the prior written consent of Deutsche Bank
Securities Inc. (the "Lockup Agreements").

(j) The Company shall apply the net proceeds of its sale of the Shares as
set forth in the Prospectus.

(k) The Company shall not invest, or otherwise use the proceeds received
by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an
investment company under the 1940 Act.

(l) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar for the
Common Stock.

(m) The Company will not take, and will use its best efforts to cause its
affiliates not to take, directly or indirectly, any action designed to
cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.

5. COSTS AND EXPENSES.
------------------

The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting
fees of the Company; the fees and disbursements of counsel for the Company; the
cost of printing and delivering to, or as requested by, the

13
<PAGE>

Underwriters copies of the Registration Statement, Preliminary Prospectuses, the
Prospectus, this Agreement, the Underwriters' Selling Memorandum, if any, the
Underwriters' Invitation Letter, the Blue Sky Survey and any supplements or
amendments thereto; the filing fees of the Commission; the filing fees and
expenses (including legal fees and disbursements) incident to securing any
required review by the NASD of the terms of the sale of the Shares; the Listing
Fee of the Nasdaq National Market; and the expenses, including the fees and
disbursements of counsel for the Underwriters, incurred in connection with the
qualification of the Shares under state securities or blue sky laws. Any
transfer taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Company. The Company shall not, however, be required to pay
for any of the Underwriters expenses (other than those related to qualification
under NASD regulation and state securities or blue sky laws) except that, if
this Agreement shall not be consummated because the conditions in Section 6
hereof are not satisfied, or because this Agreement is terminated by the
Representatives pursuant to Section 11 hereof, or by reason of any failure,
refusal or inability on the part of the Company to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the terms
hereof on its part to be performed, unless such failure to satisfy said
condition or to comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations hereunder;
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from the sale
by them of the Shares.

6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------

The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:

(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule
424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the
Commission and no injunction, restraining order, or order of any
nature by a federal or state court of competent jurisdiction shall
have been issued as of the Closing Date or the Option Closing Date, as
the case may be, which would prevent the issuance of the Shares.

14
<PAGE>

(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Choate, Hall &
Stewart, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to
the effect that:

(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the
Registration Statement; each of the Significant Subsidiaries has
been duly organized and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease
its properties and conduct its business as described in the
Registration Statement; the Company and each of the Significant
Subsidiaries are duly qualified to transact business in all
jurisdictions in which the conduct of their business requires
such qualification, or in which the failure to qualify would have
a materially adverse effect upon the business of the Company and
the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Significant Subsidiaries have been
duly authorized and validly issued and are fully paid and non-
assessable and are owned of record and, to the knowledge of such
counsel, beneficially by the Company or a Subsidiary; and, to
such counsel's knowledge (A) the outstanding shares of capital
stock of each of the Significant Subsidiaries is owned free and
clear of all liens, encumbrances and equities and claims, (B)
there are no outstanding securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any
shares of capital stock of the Significant Subsidiaries, and (C)
there are no outstanding or authorized options, warrants or
rights of any character obligating the Company or the Significant
Subsidiaries to issue any shares of any Significant Subsidiary's
capital stock or any securities convertible or exchangeable into
or evidencing the right to purchase or subscribe for any shares
of such stock.

(ii) The Company has authorized and outstanding capital stock as set
forth in the column entitled "Actual" under the caption
"Capitalization" in the Prospectus; the authorized shares of the
Company's Common Stock have been duly authorized; the outstanding
shares of the Company's Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable; all of
the Shares conform to the description thereof contained in the
Prospectus; the certificates for the Shares, assuming they are in
the form filed with the Commission, are in due and proper form;
the shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been
duly authorized and will be validly issued, fully paid and non-
assessable when issued and paid for as contemplated by this
Agreement; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue or sale thereof.

15
<PAGE>

(iii) Except as described in or contemplated by the Prospectus, to the
knowledge of such counsel, there are no outstanding securities of
the Company convertible or exchangeable into or evidencing the
right to purchase or subscribe for any shares of capital stock of
the Company and there are no outstanding or authorized options,
warrants or rights of any character obligating the Company to
issue any shares of its capital stock or any securities
convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel, no
holder of any securities of the Company or any other person has
the right, contractual or otherwise, which has not been satisfied
or effectively waived, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of, any
of the Shares or the right to have any Common Shares or other
securities of the Company included in the Registration Statement
or the right, as a result of the filing of the Registration
Statement, to require registration under the Act of any shares of
Common Stock or other securities of the Company.

(iv) The Registration Statement has become effective under the Act
and, to the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or
threatened under the Act.

(v) The Registration Statement, the Prospectus and each amendment or
supplement thereto and document incorporated by reference therein
comply as to form in all material respects with the requirements
of the Act or the Securities Exchange Act of 1934, as applicable,
and the applicable rules and regulations thereunder (except that
such counsel need express no opinion as to the financial
statements and related schedules included or incorporated by
reference therein). The conditions for use of Form S-3 set forth
in the General Instructions thereto, have been satisfied.

(vi) The statements (i) in the Company's Registration Statement on
Form 8-A dated February 17, 1994, describing the Common Stock,
(ii) in the Company's Registration Statement on Form 8-A dated
January 19, 1999, as amended on June 15, 1999, describing the
Company's preferred share purchase rights, and (iii) in Item 15
of the Registration Statement, insofar as such statements
constitute a summary of documents referred to therein or matters
of law, fairly summarize in all material respects the information
called for with respect to such documents and matters.

(vii) Such counsel does not know of any contracts or documents required
to be filed as exhibits to or incorporated by reference in the
Registration Statement or described in the Registration Statement
or the Prospectus

16
<PAGE>

which are not so filed, incorporated by reference or described as
required, and such contracts and documents as are summarized in
the Registration Statement or the Prospectus are fairly
summarized in all material respects.

(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of
the Subsidiaries except as set forth in the Prospectus.

(ix) The execution and delivery of this Agreement and the consummation
of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the charter or by-
laws of the Company, or any agreement or instrument known to such
counsel to which the Company or any of the Subsidiaries is a
party or by which the Company or any of the Subsidiaries may be
bound.

(x) This Agreement has been duly authorized, executed and delivered
by the Company.

(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative
or other governmental body is necessary in connection with the
execution and delivery of this Agreement and the consummation of
the transactions herein contemplated (other than as may be
required by the NASD or as required by state securities and blue
sky laws as to which such counsel need express no opinion) except
such as have been obtained or made, specifying the same.

(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement,
and application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under
the 1940 Act.

In rendering such opinion Choate, Hall & Stewart may rely as to
matters governed by the laws of states other than The Commonwealth of
Massachusetts, the General Corporation Law of the State of Delaware or
federal laws on local counsel in such jurisdictions, provided that in
each case Choate, Hall & Stewart shall state that they believe that
they and the Underwriters are justified in relying on such other
counsel. In addition to the matters set forth above, such opinion
shall also include a statement to the effect that nothing has come to
the attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act
(but after giving effect to any modifications incorporated therein
pursuant to Rule 430A under the Act) and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not

17
<PAGE>

misleading, and (ii) the Prospectus, or any supplement thereto, on the
date it was filed pursuant to the Rules and Regulations and as of the
Closing Date or the Option Closing Date, as the case may be, contained
an untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that
such counsel need express no view as to financial statements,
schedules and statistical information included or incorporated by
reference therein). With respect to such statement, Choate, Hall &
Stewart may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.

(c) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C., intellectual property counsel
for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it
may be relied upon by counsel to the Underwriters) to the effect that:

(i) The statements in the portions of the Registration Statement and
the Prospectus headed: "Risk Factors -- We may not be able to
adequately protect our intellectual property, which may
facilitate the development of competing products by others",
"Risk Factors -- Our products may infringe on the intellectual
property rights of third parties, which may result in lawsuits
and prohibit us from selling our products" and "Business -
Intellectual Property and Proprietary Rights" (collectively, the
"Intellectual Property Portion"), insofar as such statements
constitute a summary of documents referred to therein or matters
of law, are accurate summaries and fairly and correctly present,
in all material respects, the information called for with respect
to such documents and matters.

(ii) Such counsel has no knowledge of any facts which would preclude
the Company from having clear title to its patents or patent
applications referenced in the Intellectual Property Portion. To
such counsel's knowledge, the Company owns or possesses
sufficient licenses or other rights to use all trademarks, trade
names, patents, copyrights, licenses, trade secrets, know-how and
other intellectual property necessary to conduct the business now
conducted or proposed to be conducted by the Company as described
in the Prospectus and, to such counsel's knowledge, the Company
is in compliance in all material respects with the terms of any
such licenses and no claims, assertions or allegations with
respect to such licenses have been made to the contrary.

(iii) To such counsel's knowledge, there are no legal or governmental
proceedings pending relating to trademarks, trade names, patents,
patent applications, mask works, copyrights, licenses, trade
secrets or other intellectual property rights which could result
in any material adverse

18
<PAGE>

effect upon the Company other than the prosecution by the Company
of its patent applications before the United States Patent and
Trademark Office and appropriate foreign government agencies, and
to such counsel's knowledge no such proceedings are threatened or
contemplated by governmental authorities or others.

(iv) Such counsel does not know of any contract or other document
relating to the Company's intellectual property of a character
required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the
Prospectus that has not been filed or described as required.

In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the
Intellectual Property Portion of the Registration Statement, at the
time the Registration Statement became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant
to Rule 430A under the Act) and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (ii) the Intellectual Property Portion of the
Prospectus, or any supplement to the Prospectus, on the date such
Prospectus or supplement was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are
made, not misleading. With respect to such statement, Mintz, Levin,
Cohn, Ferris, Glovsky and Popeo, P.C. may state that their belief is
based upon the procedures set forth therein, but is without
independent check and verification.

(d) The Representatives shall have received from Ropes & Gray, counsel for
the Underwriters, an opinion dated the Closing Date or the Option
Closing Date, as the case may be, with respect to the incorporation of
the Company, the validity of the Shares delivered on the Closing Date
or the Option Closing Date, as the case may be, the Registration
Statement, the Prospectus and other related matters as the
Representatives may require, and the Company shall have furnished to
such counsel such documents as they request for the purpose of
enabling them to pass upon such matters. In rendering such opinion,
Ropes & Gray may rely as to all matters governed other than by the
laws of The Commonwealth of Massachusetts, the General Corporation Law
of the State of Delaware, or federal laws on the opinion of counsel
referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement
to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement, or
any amendment thereto, as of the time it became effective under the
Act (but after giving effect to any modifications incorporated therein
pursuant to

19
<PAGE>

Rule 430A under the Act) as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii)
the Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact,
necessary in order to make the statements, in the light of the
circumstances under which they are made, not misleading (except that
such counsel need express no view as to financial statements,
schedules and statistical information included or incorporated by
reference therein). With respect to such statement, Ropes & Gray may
state that their belief is based upon the procedures set forth
therein, but is without independent check and verification.

(e) The Representatives shall have received at or prior to the Closing
Date from Ropes & Gray a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification
for offering and sale by the Underwriters of the Shares under the
state securities or blue sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.

(f) You shall have received, on each of the dates hereof, the Closing Date
and the Option Closing Date, as the case may be, a letter dated the
date hereof, the Closing Date or the Option Closing Date, as the case
may be, in form and substance satisfactory to you, of
PricewaterhouseCoopers LLP confirming that they are independent public
accountants within the meaning of the Act and the applicable Rules and
Regulations thereunder and stating that in their opinion the financial
statements and schedules examined by them and included in the
Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the Act and the related
published Rules and Regulations; and containing such other statements
and information as is ordinarily included in accountants' "comfort
letters" to Underwriters with respect to the financial statements and
certain financial and statistical information contained in the
Registration Statement and Prospectus.

(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates
of the Chief Executive Officer and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option
Closing Date, as the case may be, each of them severally represents as
follows:

(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registrations
Statement has been issued, and no proceedings for such purpose
have been taken or are, to his knowledge, contemplated by the
Commission;

20
<PAGE>

(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or
the Option Closing Date, as the case may be;

(iii) All filings required to have been made pursuant to Rules 424 or
430A under the Act have been made;

(iv) The Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at or
prior to such closing date;

(v) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the
Registration Statement were true and correct, and such
Registration Statement and Prospectus did not omit to state a
material fact required to be stated therein or necessary in order
to make the statements therein not misleading, and since the
effective date of the Registration Statement, no event has
occurred which should have been set forth in a supplement to or
an amendment of the Prospectus which has not been so set forth in
such supplement or amendment; and

(vi) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a
prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its
Subsidiaries taken as a whole or the earnings, business,
management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the
Subsidiaries taken as a whole, whether or not arising in the
ordinary course of business.

(h) On each of the Closing Date and the Option Closing Date, if any, the
Representatives shall have received a certificate or certificates of
the Secretary of the Company in form and substance reasonably
satisfactory to the Representatives.

(i) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and
warranties, covenants and conditions contained herein and related
matters as the Representatives may reasonably have requested.

(j) The Lockup Agreements described in Section 4(j) are in full force and
effect.

The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Ropes & Gray, counsel for
the Underwriters.

21
<PAGE>

If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing, by
telecopy or by telegram at or prior to the Closing Date or the Option Closing
Date, as the case may be.

In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).

7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
--------------------------------------------

The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.

8. INDEMNIFICATION.
---------------

(a) The Company agrees:

(i) to indemnify and hold harmless each Underwriter and each person,
if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which
such Underwriter or any such controlling person may become
subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (A) any untrue
statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement
thereto, (B) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make
the statements therein not misleading, or (C) any act or failure
to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Shares or the
offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (A) or (B)
above (provided, that the Company shall not be liable under this
clause (C) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss,
claim, damage, liability or action resulted directly from any
such acts or failures to act undertaken or omitted to be taken by
such Underwriter through its gross negligence or willful
misconduct); provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged
omission made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in conformity with

22
<PAGE>

written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof.

(ii) to reimburse each Underwriter and each such controlling person
upon demand for any legal or other out-of-pocket expenses
reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such
loss, claim, damage or liability, action or proceeding or in
responding to a subpoena or governmental inquiry related to the
offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding. In the
event that it is finally judicially determined that the
Underwriters were not entitled to receive payments for legal and
other expenses pursuant to this subparagraph, the Underwriters
will promptly return all sums that had been advanced pursuant
hereto.

(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, against any
losses, claims, damages or liabilities to which the Company or any
such director, officer, or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or (ii) the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light
of the circumstances under which they were made; and will reimburse
any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability,
action or proceeding; provided, however, that each Underwriter will be
liable in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged
omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in
reliance upon and in conformity with written information furnished to
the Company by or through the Representatives specifically for use in
the preparation thereof. This indemnity agreement will be in addition
to any liability which such Underwriter may otherwise have.

(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity
may be sought pursuant to this Section 8, such person (the
"indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing.
No indemnification provided for in Section 8(a) or (b) shall be
available to any party who shall fail to give notice as provided in
this Section 8(c) if the party to whom notice was not given was

23
<PAGE>

unaware of the proceeding to which such notice would have related and
was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party
or parties from any liability which it or they may have to the
indemnified party for contribution or otherwise than on account of the
provisions of Section 8(a) or (b). In case any such proceeding shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party
shall be entitled to participate therein and, to the extent that it
shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of
presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing
interests between them, or (iii) the indemnifying party shall have
failed to assume the defense and employ counsel acceptable to the
indemnified party within a reasonable period of time after notice of
commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable
fees and expenses of more than one separate firm for all such
indemnified parties. Such firm shall be designated in writing by you
in the case of parties indemnified pursuant to Section 8(a) and by the
Company in the case of parties indemnified pursuant to Section 8(b).
The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the
prior written consent of the indemnified party, settle or compromise
or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding of which indemnification may be sought
hereunder (whether or not any indemnified party is an actual or
potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising out of such claim,
action or proceeding and does not include a statement as to or an
admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.

(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section
8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
therein, then each indemnifying party

24
<PAGE>

shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriters on the other from the offering of
the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by
such indemnified party in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities, (or actions or proceedings in
respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the
one hand and the Underwriters on the other shall be deemed to be in
the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of
a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the
one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.

The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this Section 8(d). The amount paid or payable by
an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of
the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty
of such fraudulent misrepresentation. The Underwriters' obligations
in this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.

(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing

25
<PAGE>

party, agrees that process issuing from such court may be served upon
him or it by any other contributing party and consents to the service
of such process and agrees that any other contributing party may join
him or it as an additional defendant in any such proceeding in which
such other contributing party is a party.

(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under
this Section 8 shall be paid by the indemnifying party to the
indemnified party as such losses, claims, damages, liabilities or
expenses are incurred. The indemnity and contribution agreements
contained in this Section 8 and the representations and warranties of
the Company set forth in this Agreement shall remain operative and in
full force and effect, regardless of (i) any investigation made by or
on behalf of any Underwriter or any person controlling any
Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment
therefor hereunder, and (iii) any termination of this Agreement. A
successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to
the benefits of the indemnity, contribution and reimbursement
agreements contained in this Section 8.

9. DEFAULT BY UNDERWRITERS.
-----------------------

If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you,
as the Representatives of the Underwriters, will have the right, by written
notice given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the

26
<PAGE>

Closing Date or Option Closing Date, as the case may be, may be postponed for
such period, not exceeding seven days, as you, as Representatives, may determine
in order that the required changes in the Registration Statement or in the
Prospectus or in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.

10. NOTICES.
-------

All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Deutsche Bank Securities Inc.,
One South Street, Baltimore, Maryland 21202, Attention: Jay S. Eastman; with a
copy to Deutsche Bank Securities Inc., One Bankers Trust Plaza, 130 Liberty
Street, New York, New York 10006, Attention: General Counsel; if to the Company,
to Natural MicroSystems Corporation, 100 Crossing Boulevard, Framingham,
Massachusetts 01702, Attention: President, with a copy to Choate, Hall &
Stewart, Exchange Place, 53 State Street, Boston, Massachusetts 02109,
Attention: Richard N. Hoehn, Esq..

11. TERMINATION.
-----------

(a) This Agreement may be terminated by you by notice to the Company at
any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material
adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise,
of the Company and its Subsidiaries taken as a whole or the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it
impracticable or inadvisable to market the Shares or to enforce
contracts for the sale of the Shares, or (iii) suspension of trading
in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market or limitation on prices
(other than limitations on hours or numbers of days of trading) for
securities on either such Exchange or the Nasdaq National Market, (iv)
the enactment, publication, decree or other promulgation of any
statute, regulation, rule or order of any court or other governmental
authority which in your opinion materially and adversely affects or
may materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by United States or
New York State authorities, (vi) any downgrading, or placement on any
watch list for possible downgrading, in the rating of the Company's
debt securities by any "nationally recognized statistical rating
organization" (as

27
<PAGE>

defined for purposes of Rule 436(g) under the Exchange Act); (vii) the
suspension of trading of the Company's common stock by the Nasdaq
National Market, the Commission, or any other governmental authority
or, (viii) the taking of any action by any governmental body or agency
in respect of its monetary or fiscal affairs which in your reasonable
opinion has a material adverse effect on the securities markets in the
United States; or

(b) This Agreement may be terminated as provided in Sections 6 and 9 of
this Agreement.

12. SUCCESSORS.
----------

This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.

13. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------

The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (relating to
the Underwriters' expected delivery of the Shares) and the information set forth
in the table after the first paragraph, the third paragraph (insofar as it
relates to concessions and reallowances) and seventh paragraph under the caption
"Underwriting" in the Prospectus.

14. MISCELLANEOUS.
-------------

The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers, and (c) delivery of and payment for the Shares under
this Agreement.

This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Maryland.

28
<PAGE>

If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.

Very truly yours,

NATURAL MICROSYSTEMS CORPORATION

By:
---------------------------------------------
Name:
Title:

The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.

DEUTSCHE BANK SECURITIES INC.
DAIN RAUSCHER INCORPORATED
U.S. BANCORP PIPER JAFFRAY INC.
FIRST ALBANY CORPORATION

As Representatives of the several
Underwriters listed on Schedule I

By: DEUTSCHE BANK SECURITIES INC.

By:
------------------------------------
Authorized Officer

29
<PAGE>

SCHEDULE I

Schedule of Underwriters

Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------

Deutsche Bank Securities Inc.
Dain Rauscher Incorporated
U.S. Bancorp Piper Jaffray Inc.
First Albany Corporation

TOTAL [ ]
========

30
<PAGE>

EXHIBIT A

SUBSIDIARIES

31
<PAGE>

EXHIBIT B

SIGNIFICANT SUBSIDIARIES

32
<PAGE>

EXHIBIT C

LOCKUP AGREEMENTS

Robert P. Schechter
Zenas W. Hutcheson, III
W. Frank King, Ph.D.
Pamela D. A. Reeve
Ronald W. White
Robert E. Hult
George D. Kontopidis, Ph.D.
Dorothy A. Terrell
R. Brough Turner
Allen P. Carney
Charles J. Walker

<PAGE>

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

The Board of Directors
Natural MicroSystems Corporation

We hereby consent to the inclusion in this Registration Statement on Form S-
3 (file No. 333- 95431) of our report dated January 24, 2000 relating to the
financial statements of Natural MicroSystems Corporation. We also consent to
the incorporation by reference in such Registration Statement of our report
dated January 24, 2000 relating to the financial statements and financial
statement schedule, which appears in Natural MicroSystems Corporation's Annual
Report on Form 10-K for the year ended December 31, 1999. We also consent to
the reference to our firm under the caption "Experts" and "Selected Financial
Data."

PricewaterhouseCoopers LLP

Boston, MA

February 3, 2000