Back to GetFilings.com



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2004

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934


COMMISSION FILE NUMBER: 0-30121


ULTICOM, INC.
(Exact name of registrant as specified in its charter)

NEW JERSEY 22-2050748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1020 BRIGGS RD. MT. LAUREL, NJ 08054
(Address of principal executive offices) (Zip Code)

(856) 787-2700
(Registrant's telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

[X] Yes [ ] No

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

[X] Yes [ ] No


APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares of Common Stock, no par value,
outstanding as of September 3, 2004 was 42,502,344





TABLE OF CONTENTS
-----------------

PART I
FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS.
Page
----

1. Condensed Consolidated Balance Sheets as
of January 31, 2004 and July 31, 2004 2

2. Condensed Consolidated Statements of Income
for the Three and Six-Month Periods ended
July 31, 2003 and 2004 3

3. Condensed Consolidated Statements of Cash Flows
for the Six-Month Periods ended
July 31, 2003 and 2004 4

4. Notes to Condensed Consolidated Financial
Statements 5


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 8

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. 19

ITEM 4. CONTROLS AND PROCEDURES. 19

PART II
OTHER INFORMATION


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 21

SIGNATURES 22



ii




FORWARD-LOOKING STATEMENTS

From time to time, the Company makes forward-looking statements.
Forward-looking statements include financial projections, statements of plans
and objectives for future operations, statements of future economic performance,
and statements of assumptions relating thereto. Forward-looking statements are
often identified by future or conditional words such as "will," "plans,"
"expects," "intends," "believes," "seeks," "estimates," or "anticipates" or by
variations of such words or by similar expressions.

The Company may include forward-looking statements in its periodic
reports to the Securities and Exchange Commission on Forms 10-K, 10-Q, and 8-K,
in its annual report to shareholders, in its proxy statements, in its press
releases, in other written materials, and in statements made by employees to
analysts, investors, representatives of the media, and others.

By their very nature, forward-looking statements are subject to
uncertainties, both general and specific, and risks exist that predictions,
forecasts, projections and other forward-looking statements will not be
achieved. Actual results may differ materially due to a variety of factors
including, without limitation, those discussed under "Certain Trends and
Uncertainties" and elsewhere in this report. Investors and others should
carefully consider these factors and other uncertainties and events, whether or
not the statements are described as forward-looking.

Forward-looking statements made by the Company are intended to apply
only at the time they are made, unless explicitly stated to the contrary.
Moreover, whether or not stated in connection with a forward-looking statement,
the Company makes no commitment to revise or update any forward-looking
statements in order to reflect events or circumstances after the date any such
statement is made. If the Company were in any particular instance to update or
correct a forward-looking statement, investors and others should not conclude
that the Company will make additional updates or corrections thereafter.




1

PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)



JANUARY 31, JULY 31,
2004* 2004
---------- ----------
(UNAUDITED)
ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 128,713 $ 190,111
Short-term investments 95,817 44,321
Accounts receivable, net 6,417 6,678
Inventories 762 1,054
Prepaid expenses and other current assets 3,300 4,617
---------- ----------
Total current assets 235,009 246,781
Property and equipment, net 2,182 1,997
Investments 5,463 5,375
Other assets 163 159
---------- ----------
Total assets $ 242,817 $ 254,312
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 5,914 $ 9,434
Deferred revenue 3,707 3,927
---------- ----------
Total current liabilities 9,621 13,361

Other liabilities 1,349 1,360
---------- ----------
Total liabilities 10,970 14,721
---------- ----------

SHAREHOLDERS' EQUITY:
Undesignated stock, no par value, 10,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value, 200,000,000 shares authorized,
42,150,857 and 42,453,316 shares issued and outstanding -- --
Additional paid-in capital 208,576 210,525
Accumulated other comprehensive loss (598) (982)
Retained earnings 23,869 30,048
---------- ----------
Total shareholders' equity 231,847 239,591
---------- ----------
Total liabilities and shareholders' equity $ 242,817 $ 254,312
========== ==========




* The Condensed Consolidated Balance Sheet as of January 31, 2004 has
been summarized from the Company's audited Consolidated Balance Sheet as of
that date.

The accompanying notes are an integral part of these financial statements.



2

ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)




SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31, JULY 31, JULY 31,
2003 2004 2003 2004
---- ---- ---- ----

Sales $ 18,563 $ 29,276 $ 9,434 $ 16,087
Cost of sales 5,512 7,037 2,745 3,541
--------- --------- --------- ---------
Gross profit 13,051 22,239 6,689 12,546


Operating expenses:
Research and development 4,608 5,345 2,346 2,568
Selling, general and administrative 7,444 8,942 3,721 4,666
Workforce reduction and restructuring credit (233) - (233) -
--------- --------- --------- ---------

Income from operations 1,232 7,952 855 5,312
Interest and other income, net 2,182 1,134 1,073 652
--------- --------- --------- ---------

Income before income tax provision 3,414 9,086 1,928 5,964
Income tax provision 1,160 2,907 655 1,970
--------- --------- --------- ---------

Net income $ 2,254 $ 6,179 $ 1,273 $ 3,994
========= ========= ========= =========


Earnings per share:
Basic $ 0.05 $ 0.15 $ 0.03 $ 0.09
========= ========= ========= =========
Diluted $ 0.05 $ 0.14 $ 0.03 $ 0.09
========= ========= ========= =========




The accompanying notes are an integral part of these financial statements.



3

ULTICOM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)



SIX MONTHS ENDED
JULY 31, JULY 31,
2003 2004
---- ----

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,254 $ 6,179
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 957 722
Deferred income tax provision -- (791)
Changes in operating assets and liabilities:
Accounts receivable, net (1,169) (261)
Inventories 138 (292)
Prepaid expenses and other current assets (904) 233
Accounts payable and accrued expenses (730) 3,520
Deferred revenue (336) 220
Other (637) (380)
---------- ----------
Net cash provided by (used in) operating activities (427) 9,150
---------- ----------



CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (476) (537)
Maturities and sales (purchases) of investments, net (10,241) 51,584
---------- ----------
Net cash provided by (used in) investing activities (10,717) 51,047
---------- ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock in connection with
exercise of stock options and employee stock purchase plan 1,354 1,201
---------- ----------
Net cash provided by financing activities 1,354 1,201
---------- ----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,790) 61,398
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 102,672 128,713
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 92,882 $ 190,111
========== ==========




The accompanying notes are an integral part of these financial statements.



4

ULTICOM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY BUSINESS AND BACKGROUND - Ulticom, Inc. (together with its
subsidiary, the "Company"), a New Jersey corporation and a majority-owned
subsidiary of Comverse Technology, Inc. ("CTI"), designs, develops, markets,
licenses, and supports service enabling signaling software for wireline,
wireless and Internet communications software and hardware for use in the
communications industry.

BASIS OF PRESENTATION - The accompanying financial information should
be read in conjunction with the financial statements, including the notes
thereto, for the year ended January 31, 2004. The condensed consolidated
financial information included herein is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair statement of
results for the interim periods. The results of operations for the three-month
and six-month periods ended July 31, 2004 are not necessarily indicative of the
results to be expected for the full year.

RECLASSIFICATIONS - Certain prior period amounts have been reclassified
to conform to the manner of presentation in the current year.

STOCK-BASED EMPLOYEE COMPENSATION - The Company accounts for stock
options under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, no stock-based employee
compensation cost is reflected in net income for any periods, as all options
granted have an exercise price at least equal to the market value of the
underlying common stock on the date of grant.

The Company estimated the fair value of employee stock options
utilizing the Black-Scholes option valuation model, using appropriate
assumptions, as required under accounting principles generally accepted in the
United States of America. The Black-Scholes model was developed for use in
estimating the fair value of traded options and does not consider the non-traded
nature of employee stock options, vesting and trading restrictions, lack of
transferability or the ability of employees to forfeit the options prior to
expiry. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of the Company's employee stock options.


5

The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation for all periods:




SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,

2003 2004 2003 2004
---- ---- ---- ----


Net income, as reported $ 2,254 $ 6,179 $ 1,273 $ 3,994

Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (2,238) (2,272) (1,188) (1,143)
-------- -------- -------- --------

Pro forma net income $ 16 $ 3,907 $ 85 $ 2,851
======== ======== ======== ========
Earnings per share:

Basic - as reported $ 0.05 $ 0.15 $ 0.03 $ 0.09
Basic - pro forma $ 0.00 $ 0.09 $ 0.00 $ 0.07

Diluted - as reported $ 0.05 $ 0.14 $ 0.03 $ 0.09
Diluted - pro forma $ 0.00 $ 0.09 $ 0.00 $ 0.07



COMPREHENSIVE INCOME - For the six-month periods ended July 31, 2003
and 2004, total comprehensive income was approximately $0.9 million and $5.8
million, respectively and for the three-month periods ended July 31, 2003 and
2004 was approximately $0.1 million and $3.8 million, respectively. The elements
of comprehensive income include net income, unrealized gains/losses on available
for sale securities, and foreign currency translation adjustments.


6

EARNINGS PER SHARE - For the six-month and three-month periods ended
July 31, 2003 and 2004, the computation of basic earnings per share is based on
the weighted average number of outstanding common shares. Diluted earnings per
share further assumes the issuance of common shares for all dilutive potential
common shares outstanding (consisting entirely of stock options). The shares
used in the computations are as follows:

SIX MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
2003 2004 2003 2004
(In thousands)

Basic 41,673 42,295 41,764 42,380
Diluted 42,984 43,549 43,258 43,575


RELATED PARTY TRANSACTIONS - The Company sells products and provides
services to other subsidiaries of CTI. For the six-month periods ended July 31,
2003 and 2004, sales to related parties were approximately $1.8 million and $2.7
million, respectively, and for the three-month periods ended July 31, 2003 and
2004 were approximately $0.8 million and $1.7 million, respectively.

As of July 31, 2004, amounts due from subsidiaries of CTI was
approximately $1.1 million.

The Company has a corporate services agreement with CTI. Under this
agreement, CTI provides the Company various administrative and consulting
services. The Company has agreed to pay to CTI a quarterly fee of $150,000,
payable in arrears at the end of each fiscal quarter, in consideration for all
services provided by CTI during such fiscal quarter. The Company was charged
$300,000 and $150,000, respectively, in each of the six-month and three-month
periods ended July 31, 2003 and 2004 for services provided by CTI. In addition,
the Company has agreed to reimburse CTI for any out-of-pocket expenses incurred,
if any, by CTI in providing the services. The agreement is currently in effect
until January 31, 2005 and extends for additional twelve-month periods unless
terminated by either party.



7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


INTRODUCTION

Ulticom designs, develops, markets, licenses, and supports service enabling
signaling software for wireline, wireless, and Internet communications. These
products are sold through a direct sales force to network equipment
manufacturers, application developers, and service providers who include the
Company's products within their products. Signalware sales consist of software
licenses, interface boards, training, and support revenues. In certain limited
circumstances, the Company sells Signalware development services under fixed-fee
arrangements with its customers. New customers begin development of applications
and services by purchasing the appropriate Signalware development kit, which
includes a development software license, an interface board, cables, training, a
one-year development maintenance plan, and documentation. At deployment, the
customer generally purchases one or more deployment licenses, additional
interface boards and an annual deployment maintenance and support plan, which is
typically renewed annually for the life of the installation.

As explained in greater detail in "Certain Trends and Uncertainties", the
Company is operating within the telecommunication industry that has been
experiencing a challenging capital spending environment, although there is some
evidence of recent improvement. Overall, the Company has achieved year over year
and sequential growth in revenue and operating income during the six-month and
three-month periods ended July 31, 2004.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to the critical accounting policies and
estimates as disclosed in the Annual Report on Form 10-K for the year ended
January 31, 2004.


RESULTS OF OPERATIONS

Summary of Results

Consolidated results of operations in dollars and as a percentage of sales for
each of the six-months and three-month periods ended July 31, 2003 and 2004 were
as follows:


8




Six Months ended
(in thousands, except percentages)
(Unaudited)

July 31, % of July 31, % of %
2003 sales 2004 sales Variance variance


Sales $18,563 100% $29,276 100% $10,713 58%
Cost of sales 5,512 30% 7,037 24% 1,525 28%
-------- -------- -------- -------- -------- --------
Gross profit 13,051 70% 22,239 76% 9,188 70%

Operating expenses:
Research and development 4,608 25% 5,345 18% 737 16%
Selling, general and administrative 7,444 40% 8,942 31% 1,498 20%
Workforce reduction and restructuring
credit (233) (1)% - - 233 (100)%
-------- -------- -------- -------- -------- --------
Income from operations 1,232 6% 7,952 27% 6,720 545%

Interest and other income, net 2,182 12% 1,134 4% (1,048) (48)%
-------- -------- -------- -------- -------- --------

Income before income tax provision 3,414 18% 9,086 31% 5,672 166%
Income tax provision 1,160 6% 2,907 10% 1,747 151%
-------- -------- -------- -------- -------- --------

Net income $ 2,254 12% $ 6,179 21% $ 3,925 174%
======== ======== ======== ======== ======== =========

Effective tax rate 34% 32%
======== ========

** TABLE CONTINUED **



Three Months ended
(in thousands, except percentages)
(Unaudited)

July 31, % of July 31, % of %
2003 sales 2004 sales Variance variance


Sales $ 9,434 100% $16,087 100% $ 6,653 71%
Cost of sales 2,745 29% 3,541 22% 796 29%
-------- -------- -------- -------- -------- --------
Gross profit 6,689 71% 12,546 78% 5,857 88%

Operating expenses:
Research and development 2,346 25% 2,568 16% 222 9%
Selling, general and administrative 3,721 39% 4,666 29% 945 25%
Workforce reduction and restructuring
credit (233) (2)% - - 233 (100)%
-------- -------- -------- -------- -------- --------
Income from operations 855 9% 5,312 33% 4,457 521%

Interest and other income, net 1,073 11% 652 4% (421) (39)%
-------- -------- -------- -------- -------- --------

Income before income tax provision 1,928 20% 5,964 37% 4,036 209%
Income tax provision 655 7% 1,970 12% 1,315 201%
-------- -------- -------- -------- -------- --------

Net income $ 1,273 13% $ 3,994 25% $ 2,721 214%
======== ======== ======== ======== ======== ========

Effective tax rate 34% 33%
======== ========

** TABLE COMPLETE **

9

SIX-MONTH AND THREE-MONTH PERIODS ENDED JULY 31, 2004 COMPARED WITH
SIX-MONTH AND THREE-MONTH PERIODS ENDED JULY 31, 2003

Sales. Sales for the six-month and three-month periods ended July 31,
2004 increased by approximately $10.7 million, or approximately 58%, and
approximately $6.7 million, or approximately 71%, to approximately $29.3 million
and approximately $16.1 million, respectively, when compared with the six-month
and three-month periods ended July 31, 2003. The increase was due primarily to a
higher volume of sales and deployments of our Signalware products. Sales to
international customers represented approximately 78% and 74% respectively, of
sales for the six-month and three-month periods ended July 31, 2004 and
approximately 71% and 67%, respectively, of sales in the six-month and
three-month periods ended July 31, 2003.

Cost of Sales. Cost of sales for the six-month period ended July 31,
2004 increased to approximately $7.0 million, an increase of approximately $1.5
million, or approximately 28%, when compared with the six-month period ended
July 31, 2003. This increase is primarily attributable to increased material and
production costs of approximately $1.0 million and personnel-related and other
costs of approximately $0.5 million when compared to the corresponding 2003
period. Gross margins (expressed as a percentage of sales) increased to
approximately 76% for the six-month period ended July 31, 2004 from
approximately 70% in the corresponding 2003 period. Cost of sales for the
three-month period ended July 31, 2004 increased to approximately $3.5 million,
an increase of approximately $0.8 million, or approximately 29%, when compared
with the three-month period ended July 31, 2003. This increase is primarily
attributable to increased material and production costs of approximately $0.6
million and personnel-related costs of approximately $0.2 million when compared
to the three-month period ended July 31, 2003. Gross margins increased to
approximately 78% for the three-month period ended July 31, 2004 from
approximately 71% in the corresponding 2003 period.

Research and Development. Research and development expenses for the
six-month period ended July 31, 2004 increased to approximately $5.3 million, an
increase of approximately $0.7 million, or approximately 16%, and as a
percentage of sales, decreased to approximately 18% from approximately 25% when
compared with the corresponding 2003 period. The dollar increase is primarily
attributable to higher personnel-related costs of approximately $0.7 million
when compared with the corresponding 2003 period. Research and development
expenses for the three-month period ended July 31, 2004 increased to
approximately $2.6 million, an increase of approximately $0.2 million, or
approximately 9%, and as a percentage of sales, decreased to approximately 16%
from approximately 25% for the corresponding 2003 period. The dollar increase is
primarily attributable to higher personnel-related costs of approximately $0.2
million when compared with the corresponding 2003 period.

Selling, General and Administrative. Selling, general and
administrative expenses for the six-month period ended July 31, 2004 increased
to approximately $8.9 million, an increase of approximately $1.5 million, or
approximately 20%, and as a percentage of sales decreased from approximately 40%
to approximately 31% when compared with the corresponding 2003 period. The
dollar increase is primarily attributable to increases of approximately $1.0
million in personnel-related costs, approximately $0.3 million in professional
fees and approximately $0.2 million in travel expenses when compared with the
corresponding 2003 period. Selling, general and administrative expenses for the
three-month period ended July 31, 2004 increased to approximately $4.7 million,
an increase of approximately $0.9 million, or approximately 25%, and as a
percentage of sales decreased from approximately 39% to approximately 29% when
compared with the corresponding 2003 period. The dollar increase is primarily
attributable to increases of approximately $0.5 million in personnel-related
costs and approximately $0.4 million in professional fees when compared with the
corresponding 2003 period.


10

Interest and Other Income, net. Interest and other income, net for the
six-month period ended July 31, 2004 decreased to approximately $1.1 million, a
decrease of approximately $1.0 million, or approximately 48% when compared with
the corresponding 2003 period. The dollar decrease is a result of lower interest
income earned on the Company's cash investments of approximately $0.6 million,
primarily as a result of a shift towards investing in lower yielding, tax
efficient investments. The Company recognized realized losses from investments
and foreign currency holdings of approximately $0.5 million and approximately
$0.1 million, respectively, an increase of approximately $0.2 million and
approximately $0.2 million, respectively, when compared with the corresponding
2003 period. Interest and other income, net for the three-month period ended
July 31, 2004 decreased to approximately $0.7 million, a decrease of
approximately $0.4 million, or approximately 39%, when compared with the
corresponding 2003 period. The dollar decrease is a result of lower interest
income earned on the Company's cash investments of approximately $0.4 million,
primarily as a result of a shift towards investing in lower yielding, tax
efficient investments when compared with the corresponding 2003 period.

Income Tax Provision. Provision for income taxes for the six-month
period ended July 31, 2004 increased to approximately $2.9 million, an increase
of approximately $1.8 million, or approximately 151% when compared with the
six-month period ended July 31, 2004. Provision for income taxes for the
three-month period ended July 31, 2004 increased to approximately $2.0 million,
an increase of approximately $1.3 million, or approximately 201%, when compared
with the three-month period ended July 31, 2003. The Company's overall effective
tax rate was approximately 32% and 33%, respectively, in the six-month and
three-month periods ended July 31, 2004 and approximately 34% for the six-month
and three-month periods ending July 31, 2003.

Net Income. Net income for the six-month period ending July 31, 2004
increased to approximately $6.2 million, an increase of approximately $3.9
million, or approximately 174% when compared with the corresponding 2003 period.
Net income for the three-month period ending July 31, 2004 increased to
approximately $4.0 million, an increase of approximately $2.7 million, or
approximately 214%, when compared with corresponding 2003 period. As a
percentage of sales, net income was approximately 21% and 25%, respectively, in
the six-month and three-month periods ended July 31, 2004 and approximately 12%
and 13%, respectively, in the six-month and three-month periods ended July 31,
2003. The changes are primarily attributable to the factors described above.

LIQUIDITY AND CAPITAL RESOURCES

The Company had working capital at July 31, 2004 and January 31, 2004
of approximately $233.4 million and $225.4 million, respectively. At July 31,
2004 and January 31, 2004, the Company had cash and cash equivalents and
short-term investments of approximately $234.4 million and $224.5 million,
respectively.


11

Operations for the six-month periods ending July 31, 2004 and 2003,
after adjustment for non-cash items, provided cash of approximately $6.1 million
and $3.2 million, respectively. During such periods, other changes in operating
assets and liabilities provided (used) cash of approximately $3.1 million and
$(3.6) million, respectively.

Investing activities for the six-month periods ended July 31, 2004 and
2003 provided (used) cash of approximately $51.0 million and $(10.7) million,
respectively. These amounts include (i) purchases of property and equipment of
approximately $(0.5) million and $(0.5) million, respectively; and (ii) net
maturities and sales (purchases) of investments, of approximately $51.6 million
and $(10.2) million, respectively.

Financing activities for the six-month periods ended July 31, 2004 and
2003 provided cash of approximately $1.2 million and $1.4 million, respectively,
related to proceeds from the issuance of common stock in connection with the
exercise of stock options and employee stock purchase plan.

Although there are no present understandings, commitments or agreements
with respect to acquisitions of other businesses, products or technologies, the
Company may in the future consider such transactions, which may require
additional debt or equity financing. The issuance of debt or equity securities
could be expected to have a dilutive impact on the Company's shareholders, and
there can be no assurance as to whether or when any acquired business would
contribute positive operating results commensurate with the associated
investment.

The Company may pursue acquisitions of businesses, products or
technologies in the future to expand its business and the products or services
it offers. Any material acquisition could result in a decrease in working
capital depending upon the amount, timing, and nature of the consideration paid.

The Company believes that its existing cash balances will be sufficient
to meet anticipated cash needs for working capital, capital expenditures, and
other activities for the foreseeable future. Thereafter, if current sources are
not sufficient to meet the Company's needs, it may seek additional debt or
equity financing.


CERTAIN TRENDS AND UNCERTAINTIES

The Company derives substantially all of its revenue from the
telecommunications industry, which is experiencing a challenging capital
spending environment. Although the capital spending environment has improved and
the Company's revenues have increased in recent quarters, the Company
experienced significant revenue declines from historical peak revenue levels,
and if capital spending and technology purchasing by the Company's customers
does not continue to improve or if they decline, revenue may stagnate or
decrease, and the Company's operating results may be adversely affected. For
these reasons and the risk factors outlined below, it has been and continues to
be very difficult for the Company to accurately forecast future revenues and
operating results.

The Company's business is dependent on the strength of the
telecommunications industry. The telecommunications industry, including the
Company, has been negatively affected by, among other factors, the high costs
and large debt positions incurred by communication service providers to expand
capacity and enable the provisioning of future services (and the corresponding


12

risks associated with the development, marketing, and adoption of these services
as discussed below), including the cost of acquisitions of licenses to provide
future broadband services and reductions in actual and projected revenues and
deterioration in actual and projected operating results. Accordingly, these
entities have significantly reduced their actual and planned expenditures to
expand their networks and delayed and reduced the deployment of services. A
number of communication service providers have indicated the existence of
conditions of excess capacity in certain markets and have delayed the planned
introduction of new services. The Company's sales to equipment manufacturers and
application developers who supply the telecommunications industry are adversely
affected by the slowdown of infrastructure purchases by communication service
providers and by declines in technology expenditures. The continuation and/or
exacerbation of these trends may have an adverse effect on the Company's future
results. In addition to loss of revenue, weakness in the telecommunications
industry has affected and will continue to affect the Company's business by
increasing the risks of credit or business failures of suppliers, customers or
distributors, by delays and defaults in customer or distributor payments, and by
price reductions instituted by competitors to retain or acquire market share.

The Company's current plan of operations is predicated, in part, on a
recovery in expenditures by equipment manufacturers, application developers and
communication service providers. In the absence of such recovery, the Company
would experience deterioration in its operating results, and may determine to
modify its plan for future operations accordingly, which may include, among
other things, additional reductions in its workforce.

The Company intends to continue to make significant investment in its
business, and to examine opportunities for growth through acquisitions of
businesses, products or technologies and other strategic investments. These
activities may involve significant expenditures and obligations that cannot
readily be curtailed or reduced if anticipated growth in demand for the
associated products does not materialize or is delayed. The impact of these
decisions on future profitability cannot be predicted with assurance, and the
Company's commitment to growth may increase its vulnerability to downturns in
its markets, technology changes and shifts in competitive conditions. The
Company also may not be able to identify suitable merger or acquisition
candidates, and even if the Company does identify suitable candidates, it may
not be able to make these transactions on commercially acceptable terms, or at
all. If the Company does make acquisitions, it may not be able to successfully
incorporate the personnel, operations and customers of these companies into the
Company's business. In addition, the Company may fail to achieve the anticipated
synergies from the combined businesses, including marketing, product
integration, distribution, product development and other synergies. The
integration process may further strain the Company's existing financial and
managerial controls and reporting systems and procedures. This may result in the
diversion of management and financial resources from the Company's core business
objectives. In addition, an acquisition or merger may require the Company to
utilize cash reserves, incur debt or issue equity securities, which may result
in a dilution of existing shareholders, and the Company may be negatively
impacted by the assumption of liabilities of the merged or acquired company. Due
to rapidly changing market conditions, the Company may find the value of its
acquired technologies and related intangible assets, such as goodwill as
recorded in the Company's financial statements, to be impaired, resulting in
charges to operations. The Company may also fail to retain the acquired or
merged company's key employees and customers.


13

The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 and related Interpretations, which
provide that any compensation expense relative to employee stock options be
measured based on the intrinsic value of the stock options. As a result, when
options are priced at or above the fair market value of the underlying stock on
the date of grant, as is the Company's practice, the Company incurs no
compensation expense. However, the Financial Accounting Standards Board has
proposed in its exposure draft entitled "Share-Based Payment, an amendment of
FASB Statements No 123 and 95" new accounting requirements that, if adopted,
would cause the Company to record compensation expense for all employee stock
option grants. Any such expense, although it would not affect the Company's cash
flows, could have a material impact on the Company's results of operations.

The telecommunications industry is subject to rapid technological
change. The introduction of new technologies in the telecommunications market,
including the delay in the adoption of such new technologies, and new
alternatives for the delivery of services are having, and can be expected to
continue to have, a profound effect on competitive conditions in the market and
the success of market participants, including the Company. The Company's success
will depend on the ability to correctly anticipate technological trends, to
react quickly and effectively to such trends and to enhance its existing product
line and to introduce new products on a timely and cost-effective basis. As a
result, the life cycle of the Company's product line is difficult to estimate.
In addition, changing industry and market conditions may dictate strategic
decisions to restructure some business units and discontinue others.
Discontinuing a business unit or product line may result in the Company
recording accrued liabilities for special charges, such as costs associated with
a reduction in workforce. These strategic decisions could result in changes to
determinations regarding a product's useful life and the recoverability of the
carrying basis of certain assets.

The Company's products involve sophisticated technology that perform
critical functions to highly demanding standards. There can be no assurance that
the Company's current or future products will not develop operational problems,
which could have a material adverse effect on the Company. The Company offers
complex products that may contain undetected defects or errors, particularly
when first introduced or as new versions are released. The Company may not
discover such defects or errors until after a product has been released and used
by the customer. Significant costs may be incurred to correct undetected defects
or errors in the Company's products and these defects or errors could result in
future lost sales. In addition, defects or errors in the Company's products may
result in product liability claims, which could cause adverse publicity and
impair their market acceptance.

The telecommunications industry continues to undergo significant change
as a result of deregulation and privatization worldwide, reducing restrictions
on competition in the industry. Unforeseen changes in the regulatory environment
also may have an impact on the Company's revenues and/or costs in any given part
of the world. The Company believes that existing competitors will continue to
present substantial competition, and that other companies, many with
considerably greater financial, marketing and sales resources than the Company,
may enter the markets for the Company's products. In addition, the Company may
lose sales to companies operating in regions such as India and China as a result
of pricing competition because of their lower operating costs. Moreover, as the
Company enters into new markets as a result of its own research and development
efforts or acquisitions, it is likely to encounter new competitors.

The Company's products are dependent upon their ability to operate on
new and existing hardware and operating systems of other companies. Any
modifications to the Company's software needed to adapt to these hardware and
operating systems may prove to be costly, time-consuming and may not be
successful. Undetected defects could result in lost sales, adverse publicity and
other claims against the Company. The Company's new product offerings may not
properly integrate into existing platforms and the failure of new product
offerings to be accepted by the market could have a material adverse effect on
the Company's business, results of operations, and financial condition.


14

The Company's current products are designed to support signaling system
#7 ("SS7"). If future networks do not utilize this signaling system and the
Company is unable to adapt its products to work with other appropriate signaling
protocols, its products will become less competitive or obsolete. A reduction in
the demand for these products could adversely affect the Company's business and
operating results.

The Company has made and continues to make significant investments in
the areas of sales and marketing, and research and development. The Company's
research and development activities include ongoing significant investment in
the development of additional features and functionality for its products,
including products based on emerging open standards for Internet protocols that
facilitate the convergence of voice and data networks. The success of these
initiatives will be dependent upon, among other things, the emergence of a
market for these types of products and their acceptance by existing and new
customers. The Company believes that expenditures on these initiatives are
necessary to enhance its products in order to remain competitive, provide future
growth opportunities and to maintain the Company's presence in the market. The
Company's product initiatives reflect the Company's continuing analysis of the
future demand for new products and services, and the Company from time to time
is required to reprioritize or otherwise modify its product plans based on such
analysis. The Company's business may be adversely affected by its failure to
correctly anticipate the emergence of a market demand for certain products or
services, or delays or changes in the evolution of market opportunities. If a
sufficient market does not emerge for new or enhanced products developed by the
Company, or the Company is not successful in marketing such products, the
Company's continued growth could be adversely affected and its investment in
those products may be lost.

Historically, a limited number of customers have contributed a
significant percentage of the Company's revenues. The Company anticipates that
its operating results in any given period will continue to depend significantly
upon revenues from a small number of customers. The deferral or loss of one or
more significant orders from any of these customers could have a material
adverse effect on the Company's business and operating results.

Geopolitical, economic and military conditions could directly affect
the Company's operations. The outbreak of severe acute respiratory syndrome
("SARS") curtailed travel to and from certain countries (primarily in the
Asia-Pacific region). Restrictions on travel to and from these and other regions
on account of additional incidents of SARS could have a material adverse effect
on the Company's business, results of operations, and financial condition. The
continued threat of terrorism and heightened security and military action in
response to this threat, or any future acts of terrorism, may cause further
disruptions to the Company's business. To the extent that such disruptions
result in delays or cancellations of customer orders, or the manufacture or
shipment of the Company's products, the Company's business, operating results
and financial condition could be materially and adversely affected. The United
States military involvement in overseas operations including, for example, the
war with Iraq, could have a material adverse effect on the Company's business,
results of operations, and financial condition.


15

The Company currently derives a majority of its total sales from
customers outside of the United States. International transactions involve
particular risks, including political decisions affecting tariffs and trade
conditions, rapid and unforeseen changes in economic conditions in individual
countries, difficulty in enforcing intellectual property rights, turbulence in
foreign currency and credit markets, and increased costs resulting from lack of
proximity to the customer. Recent world events may have an adverse effect on the
Company's international transactions, including political and economic
instability in certain countries in which the Company currently transacts
business and may transact business in the future.

International sales are predominately denominated in United States
dollars and the Company has not been exposed to material fluctuations in foreign
currency exchange rates related to sales. However, the Company expects that in
future periods, a greater portion of international sales may be denominated in
currencies other than the United States dollar, which could expose it to losses
and gains on foreign currency transactions. The Company does have certain
expenses denominated in foreign currency. From time to time, the Company may
choose to limit its exposure by utilizing hedging strategies. There can be no
assurance that any such hedging strategies that the Company undertakes would be
successful in avoiding exchange rate losses.

In order to increase the Company's revenues, the Company will need to
attract additional customers on an ongoing basis. In addition, since the
Company's products have long sales cycles that typically range from six to
twelve months, the Company's ability to forecast the timing and amount for
specific sales is limited. The loss or deferral of one or more significant sales
could have a material adverse effect on the Company's operating results in any
fiscal quarter, especially if there are significant sales and marketing expenses
associated with the deferred or lost sales. The Company's software products are
primarily sold to equipment manufacturers and application developers, who
integrate its products with their products and sell them to communications
service providers. The success of the Company's business and operating results
is dependent upon its channel and marketing relationships with these
manufacturers and developers and the successful development and deployment of
their products. If the Company cannot successfully establish channel and
marketing relationships with leading equipment manufacturers and application
developers or maintain these relationships on favorable terms, or the Company's
sales channels are affected by economic weakness, the Company's business and
operating results may be adversely affected.

Because the Company relies on a limited number of independent
manufacturers to produce boards for its products, if these manufacturers
experience financial, operational or other difficulties, the Company may
experience disruptions to its product supply. The Company may not be able to
find alternate manufacturers that meet its requirements and existing or
alternative sources for boards may not continue to be available at favorable
prices. The Company also relies on a limited number of suppliers for its board
components and it does not have any long-term supply agreements. Thus, if there
is a shortage of supply for these components, the Company may experience an
interruption in its product supply.

The Company's success is dependent on recruiting and retaining key
management and highly skilled technical, managerial, sales, and marketing
personnel. The Company's ability to attract and retain employees also may be
affected by cost control actions, including reductions in the Company's
workforce and the associated reorganization of operations.


16

The occurrence or perception of security breaches within the Company
could harm the Company's business, financial condition and operating results.
While the Company implements sophisticated security measures, third parties may
attempt to breach the Company's security through computer viruses, electronic
break-ins and other disruptions. If successful, confidential information,
including passwords, financial information, or other personal information may be
improperly obtained and the Company may be subject to lawsuits and other
liability. Even if the Company is not held liable, a security breach could harm
the Company's reputation, and even the perception of security risks, whether or
not valid, could inhibit market acceptance of the Company's products.

While the Company generally requires employees, independent contractors
and consultants to execute non-competition and confidentiality agreements, the
Company's intellectual property or proprietary rights could be infringed or
misappropriated, which could result in expensive and protracted litigation. The
Company relies on a combination of patent, copyright, trade secret and trademark
law to protect its technology. Despite the Company's efforts to protect its
intellectual property and proprietary rights, unauthorized parties may attempt
to copy or otherwise obtain and use its products or technology. Effectively
policing the unauthorized use of the Company's products is time-consuming and
costly, and there can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, particularly in foreign countries
where in many instances the local laws or legal systems do not offer the same
level of protection as in the United States.

If others claim that the Company's products infringe their intellectual
property rights, the Company may be forced to seek expensive licenses,
reengineer its products, engage in expensive and time-consuming litigation or
stop marketing its products. The Company attempts to avoid infringing known
proprietary rights of third parties in its product development efforts. The
Company does not regularly conduct comprehensive patent searches to determine
whether the technology used in its products infringes patents held by third
parties. There are many issued patents as well as patent applications in the
fields in which the Company is engaged. Because patent applications in the
United States are not publicly disclosed until the patent is issued,
applications may have been filed which relate to the Company's software and
products. If the Company were to discover that its products violated or
potentially violated third-party proprietary rights, it might not be able to
obtain licenses to continue offering those products without substantial
reengineering. Any reengineering effort may not be successful, nor can the
Company be certain that any licenses would be available on commercially
reasonable terms.

Substantial litigation regarding intellectual property rights exists in
the telecommunications industry, and the Company expects that its products may
be increasingly subject to third-party infringement claims as the number of
competitors in its industry segments grows and the functionality of software
products in different industry segments overlaps. In addition, the Company has
agreed to indemnify customers in certain situations should it be determined that
its products infringe on the proprietary rights of third parties. Any
third-party infringement claims could be time consuming to defend, result in
costly litigation, divert management's attention and resources, cause product
and service delays or require the Company to enter into royalty or licensing
agreements. Any royalty or licensing arrangements, if required, may not be
available on terms acceptable to the Company, if at all. A successful claim of
infringement against the Company and its failure or inability to license the
infringed or similar technology could have a material adverse effect on its
business, financial condition and results of operations.


17

The Company holds a large proportion of its net assets in cash
equivalents and short-term investments. Such investments subject the Company to
the risks inherent in the capital markets generally, and to the performance of
other businesses over which it has no direct control. Given the relatively high
proportion of the Company's liquid assets relative to its overall size, the
results of its operations are materially affected by the results of the
Company's capital management and investment activities and the risks associated
with those activities. In addition, reduction in prevailing interest rates due
to economic conditions or government policies has had and may continue to have
an adverse impact on the Company's results of operations.

CTI beneficially owns a majority of the Company's outstanding shares of
common stock. Consequently, CTI effectively controls the outcome of all matters
submitted for stockholder action, including the composition of the Company's
board of directors and the approval of significant corporate transactions.
Through its representation on the Company's board of directors, CTI has a
controlling influence on the Company's management, direction and policies,
including the ability to appoint and remove officers. As a result, CTI may cause
the Company to take actions that may not be aligned with the Company's interests
or those of its other stockholders. For example, CTI may prevent or delay any
transaction involving a change in control of the Company or in which the
Company's stockholders might receive a premium over the prevailing market price
for their shares.

The Company benefited from the rise in the public trading price of its
shares in various ways, including its ability to use equity incentive
arrangements as a means of attracting and retaining the highly qualified
employees necessary for its business and its ability to raise capital on
relatively attractive conditions. The decline in the price of the Company's
shares, and the overall decline in equity prices generally, and in the shares of
technology companies in particular, can be expected to make it more difficult
for the Company to rely on equity incentive arrangements as a means to recruit
and retain talented employees.

The Company's operating results have fluctuated in the past and may do
so in the future. The trading price of the Company's shares has been affected by
the factors disclosed herein as well as prevailing economic and financial trends
and conditions in the public securities markets. Share prices of companies in
technology-related industries, such as the Company, tend to exhibit a high
degree of volatility, which at times is unrelated to the operating performance
of a company. The announcement of financial results that fall short of the
results anticipated by the public markets could have an immediate and
significant negative effect on the trading price of the Company's shares in any
given period. Such shortfalls may result from events that are beyond the
Company's immediate control, can be unpredictable and, since a significant
proportion of the Company's sales during each fiscal quarter tend to occur in
the latter stages of the quarter, may not be discernible until the end of a
financial reporting period. These factors may contribute to the volatility of
the trading value of its shares regardless of the Company's long-term prospects.
The trading price of the Company's shares may also be affected by developments,
including reported financial results and fluctuations in trading prices of the
shares of other publicly-held companies in the telecommunications industry in
general, and the Company's business segment in particular, which may not have
any direct relationship with the Company's business or prospects.

The Company's board of directors' ability to designate and issue up to
10,000,000 shares of undesignated stock and to change the designations, numbers,
relative rights, preferences, and limitations of any authorized but unissued
shares of preferred stock adversely could affect the voting power of the holders
of common stock, and could have the effect of making it more difficult for a
person to acquire, or could discourage a person from seeking to acquire, control
of the Company. If this occurs, investors could lose the opportunity to receive
a premium on the sale of their shares in a change of control transaction.


18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Refer to Item 7A in the Company's Annual Report on Form 10-K for a
discussion about the Company's exposure to market risks.


ITEM 4. CONTROLS AND PROCEDURES.

(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), as of July 31, 2004. Based on their evaluation, the Company's principal
executive and principal financial officers concluded that the Company's
disclosure controls and procedures were effective as of July 31, 2004.

(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that occurred during the Company's fiscal quarter ended July 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.



19

PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

At the Company's annual meeting of shareholders held on June 14, 2004,
for which proxies were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended, the following matters were voted upon by
shareholders:

1. The election of nine directors to serve as the Board of Directors of
the Company until the next annual meeting of shareholders and the election of
their qualified successors.

2. A proposal to ratify the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2005.

The nominees for directors were elected based upon the following votes:

Nominee Votes For Votes Withheld

Kobi Alexander 38,911,921 2,793,282

Paul Baker 39,416,491 2,288,712

Michael J. Chill 41,553,244 151,959

Ron Hiram 41,445,204 259,999

Yaacov Koren 38,314,473 3,390,730

David Kreinberg 39,416,491 2,288,712

Rex A. McWilliams 38,170,119 3,535,084

Shawn K. Osborne 39,413,706 2,291,497

Paul L. Robinson 39,406,678 2,298,525


The ratification of the engagement of Deloitte & Touche LLP as
independent auditors of the Company for the year ending January 31, 2005 was
approved as follows:

41,070,428 Votes for Approval

628,665 Votes Against

6,120 Abstentions



20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibit Index.
-------------

31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Rule 13a-14(b) of the Exchange
Act and 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002


(b) Reports on Form 8-K.
-------------------

During the second quarter of 2004, the Company furnished a report on
Form 8-K dated June 2, 2004, reporting under Items 7 and 12 that on June 2,
2004, the Company issued a press release announcing its financial results for
the fiscal quarter ended April 30, 2004.



21

SIGNATURES


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


ULTICOM, INC.


Dated: September 9, 2004 /s/ Shawn K. Osborne
-----------------------------------
Shawn K. Osborne
President and Chief Executive
Officer



Dated: September 9, 2004 /s/ Mark A. Kissman
-----------------------------------
Mark A. Kissman
Vice President of Finance and
Chief Financial Officer



22