OPENWAVE SYSTEMS INC - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________to______________

Commission file number: 001-16073

OPENWAVE SYSTEMS INC.
(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

94-3219054

(I.R.S. Employer Identification No.)

1400 Seaport Blvd.

Redwood City, California 94063

(Address of principal executive offices, including zip code)

(650) 480-8000

(Registrant’s telephone number, including area code)

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

Yes

As of October 31, 2002 there were 179,419,244 shares of the registrant’s Common Stock outstanding.

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2002 and June 30, 2002	3
	Condensed Consolidated Statements of Operations for the three months ended September 30, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	40

PART II. Other Information

Item 1.	Legal Proceedings	40
Item 2.	Changes in Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Submission of Matters to a vote of Security Holders	41
Item 5.	Other Information	41
Item 6.	Exhibits and Reports on Form 8-K	41

SIGNATURES		42

CERTIFICATIONS		42

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

			September 30, 2002			June 30, 2002

			(Unaudited)
Assets
Current Assets:
	Cash and cash equivalents		$	157,762		$	140,699
	Short-term investments			70,065			73,500
	Accounts receivable, net			111,495			96,571
	Prepaid and other current assets			11,443			9,917

		Total current assets		350,765			320,687
Property and equipment, net				78,200			77,559
Long-term investments, and restricted cash and investments				48,742			102,311
Deposits and other assets				13,373			10,976
Goodwill and other intangible assets, net				7,145			17,664

			$	498,225		$	529,197

Liabilities and Stockholders’ Equity
Current Liabilities:
	Accounts payable		$	8,528		$	4,926
	Accrued liabilities			55,776			48,442
	Accrued restructuring costs			39,985			5,751
	Deferred revenue			80,835			66,858

		Total current liabilities		185,124			125,977
	Accrued restructuring costs - long term			54,816			6,844
	Deferred rent obligations			2,917			3,480

		Total liabilities		242,857			136,301

Commitments and contingencies

Stockholders’ equity:
	Common stock			177			177
	Additional paid-in capital			2,755,129			2,757,317
	Deferred stock-based compensation			(4,187	)		(7,159	)
	Treasury stock			(38,087	)		(38,087	)
	Accumulated other comprehensive income			705			636
	Notes receivable from stockholders			(394	)		(557	)
	Accumulated deficit			(2,457,975	)		(2,319,431	)

		Total stockholders’ equity		255,368			392,896

			$	498,225		$	529,197

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

			Three Months Ended September 30,

			2002			2001

Revenues:
	License		$	39,744		$	88,285
	Maintenance and support services			17,926			19,196
	Professional services			8,178			10,300
	Project revenues			5,310			—

		Total revenues		71,158			117,781

Cost of revenues:
	License			2,409			4,220
	Maintenance and support services			8,442			7,827
	Professional services			5,866			6,520
	Project costs			4,821			—

		Total cost of revenues		21,538			18,567

		Gross profit		49,620			99,214

Operating Expenses:
	Research and development			32,298			38,409
	Sales and marketing			34,422			47,754
	General and administrative			13,977			18,422
	Restructuring and other costs			83,335			—
	Stock-based compensation*			772			4,986
	Amortization and impairment of goodwill and other intangible assets			8,209			159,017
	In-process research and development			400			—
	Merger, acquisition and integration-related costs			244			570

		Total operating expenses		173,657			269,158

		Operating loss		(124,037	)		(169,944	)
Interest income and other, net				2,287			3,470

		Loss before provision for income taxes and cumulative effect of change in accounting principle		(121,750	)		(166,474	)
Income taxes				2,247			3,977

		Loss before cumulative effect of change in accounting principle		(123,997	)		(170,451	)
Cumulative effect of change in accounting principle				(14,547	)		—

		Net loss	$	(138,544	)	$	(170,451	)

Basic and diluted net loss per share:
	Before cumulative effect of change in accounting principle		$	(0.70	)	$	(0.99	)
	Cumulative effect of change in accounting principle			(0.09	)		—

Basic and diluted net loss per share			$	(0.79	)	$	(0.99	)

Shares used in computing basic and diluted net loss per share				176,226			171,352

*Stock-based compensation by category
	Research and development		$	63		$	2,882
	Sales and marketing			122			212
	General and administrative			587			1,892

			$	772		$	4,986

See accompanying notes to the condensed consolidated financial statements

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

				Three Months Ended September 30,

				2002			2001

Cash flows from operating activities:
	Net loss			$	(138,544	)	$	(170,451	)
	Adjustments to reconcile net loss to net cash used for operating activities:
		Depreciation and amortization			10,574			167,348
		Stock-based compensation			772			4,986
		Loss on sale of property and equipment			—			138
		Write-down of nonmarketable equity securities			—			263
		Provision for doubtful accounts			900			5,500
		Impairment of goodwill			7,287			—
		Cumulative effect of change in accounting principle			14,547			—
		In-process research and development			400			—
		Changes in operating assets and liabilities:
			Accounts receivable		(11,891	)		14,118
			Prepaid expenses and other assets		(1,055	)		(3,226	)
			Accounts payable		2,969			(10,596	)
			Accrued liabilities		(187	)		9,316
			Accrued restructuring costs		81,019			—
			Deferred revenue		13,506			(22,522	)

			Net cash used for operating activities		(19,703	)		(5,126	)

Cash flows from investing activities:
	Purchases of property and equipment				(5,146	)		(10,648	)
	Restricted cash and investments				—			(1,649	)
	Acquisitions, net of cash acquired				(15,735	)		3,205
	Investment in nonmarketable equity securities				—			(2,000	)
	Purchases of short-term investments				—			(22,150	)
	Proceeds from sales and maturities of short-term investments				27,612			70,800
	Purchases of long-term investments				—			(39,277	)
	Proceeds from sales and maturities of long-term investments				30,012			—

			Net cash provided by (used for) investing activities..		36,743			(1,719	)

Cash flows from financing activities:
		Net proceeds from issuance of common stock, net			11			1,556
		Net proceeds from put warrants			—			10,460
		Repurchase of treasury stock			—			(1,300	)
		Repayment of notes receivable from stockholders			163			55
		Repayments of capital lease obligations and long-term debt			(151	)		(422	)

			Net cash provided by financing activities		23			10,349

Effect of exchange rate on cash and cash equivalents					—			137

Net increase in cash and cash equivalents					17,063			3,641
Cash and cash equivalents at beginning of period					140,699			161,987

Cash and cash equivalents at end of period				$	157,762		$	165,628

Supplemental disclosures of cash flow information:
Cash paid for income taxes				$	2,447		$	959

Cash paid for interest				$	10		$	121

	Noncash investing and financing activities:
	Common stock issued and options assumed in acquisition			$	—		$	96,260

	Deferred stock-based compensation			$	—		$	3,582

	Reversal of deferred stock-based compensation			$	2,223		$	—

	Reclass of deferred rent obligation to accrued restructuring costs			$	1,187		$	—

See accompanying notes to condensed consolidated financial statements.

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management (Management), the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2002 and June 30, 2002, and the results of operations for the three months ended September 30, 2002 and 2001, and cash flows for the three months ended September 30, 2002 and 2001. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

The preparation of condensed consolidated 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 disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain amounts in the condensed consolidated financial statements as of June 30, 2002 and for the three months ended September 30, 2001 have been reclassified to conform to the September 30, 2002 presentation.

(2) Recently Adopted Accounting Pronouncements

On July 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets”, and Statement of Financial Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets.”

SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144. The Company has determined that it is a single reporting unit, as contemplated by SFAS No. 142, and it will perform the required annual impairment tests in the third quarter of its fiscal year. In the first quarter of fiscal 2003, the Company completed its transitional goodwill impairment test required under SFAS No. 142, and the Company recognized a transitional goodwill impairment loss of $14.5 million as of July 1, 2002, which was recorded as the cumulative effect of change in accounting principle in the Company’s Condensed Consolidated Statements of Operations.

SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and Accounting Principles Board Opinion No. 30, “Reporting the Results of Operation-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 establishes a single accounting model for long-lived assets to be disposed of by sale, whether they were previously held and used or newly acquired, and it also broadens the presentation of discontinued operations to include more disposal transactions. The adoption of SFAS No. 144 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The effect of adopting SFAS No. 146 is not expected to have a material effect on the Company’s financial position or results of operations.

(3) Segment Information

The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (CEO). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance.

The Company has organized its operations based on a single operating segment: the development and delivery of applications, infrastructure software, client software and customer services for communication service providers and other customers. The disaggregated revenue information reviewed on a product category basis by the CEO includes Applications, Infrastructure Software, Client Software, Customer Services, and Project Revenues.

Applications enable end users to exchange electronic mail, facsimile, voice mail and multimedia messages from PC’s, wireline telephones and mobile devices. The Company’s applications also include, but are not limited to, e-mail and other messaging products.

Infrastructure Software contains the foundation software required to enable Internet connectivity to mobile devices and to build a rich set of applications for mobile users and includes, but is not limited to, Openwave Mobile Access Gateway, Openwave Location Products and Openwave Provisioning Manager.

Client Software primarily includes the Openwave Mobile Browser software, which is a microbrowser software that is designed and optimized for wireless devices.

Customer Services are services provided by the Company to customers to help them design, install, deploy, manage, maintain and support the Company’s software products and overall Internet implementations.

Finally, Project Revenues are fees derived from porting the Company’s software to a service partner’s hardware and software.

The disaggregated information reviewed on a product basis by the CEO is as follows:

			Three Months Ended September 30,

			2002		2001

			(in thousands)
Revenues
	Applications		$	15,246	$	44,541
	Infrastructure software			21,377		43,006
	Client software			3,121		738
	Customer services			26,104		29,496
	Project			5,310		—

		Total revenues	$	71,158	$	117,781

The Company markets its products primarily from its operations in the United States. International sales are made primarily to customers in Europe, Japan and Asia Pacific. Information regarding the Company’s revenues in different geographic regions is as follows:

			Three Months Ended September 30,

			2002		2001

			(in thousands)
Revenues
	Americas		$	36,232	$	41,907
	Europe, Middle East, Africa			9,885		31,776
	Japan and Asia Pacific			25,041		44,098

		Total revenues	$	71,158	$	117,781

Information regarding the Company’s revenues in different countries is as follows:

			Three Months Ended September 30,

			2002		2001

			(in thousands)
Revenues
	United States		$	24,915	$	34,197
	Japan			19,769		36,598
	Other foreign countries			26,474		46,986

		Total revenues	$	71,158	$	117,781

The Company’s long-lived assets residing in countries other than in the United States are insignificant.

Significant customer information is as follows:

	% Of Total Revenue Three Months Ended September 30,						% Accounts Receivable at September 30,

	2002			2001			2002

KDDI		18	%		26	%		14	%
Sprint		13	%		3	%		9	%

(4) Net Loss Per Share

Basic and diluted net loss per share is computed using the weighted-average number of outstanding shares of common stock excluding shares of restricted stock subject to repurchase as summarized below. The following potential shares of common stock have been excluded from the computation of diluted net loss per share for all periods presented because the effect would have been anti-dilutive:

	September 30,

	2002		2001

	(in thousands)
Shares issuable under stock options		55,555		17,513
Shares of restricted stock subject to repurchase		659		1,641
Shares issuable pursuant to warrants to purchase common stock		232		237

The weighted-average exercise price of stock options outstanding was $7.00 and $16.38 as of September 30, 2002 and 2001, respectively. The weighted-average purchase price of restricted stock subject to repurchase was $0.36 and

$0.56 as of September 30, 2002 and 2001, respectively. The weighted-average exercise price of warrants was $2.44 and $2.38 as of September 30, 2002 and 2001, respectively.

(5) Acquisition

In July 2002, the Company acquired 100% of the outstanding common shares of SignalSoft Corporation (SignalSoft) in a cash tender offer. SignalSoft applications enable wireless location-based services. The results of SignalSoft’s operations have been included in the condensed consolidated financial statements since the date of the acquisition. The Company completed the acquisition for $64.2 million in cash, of which the Company paid $2.26 for each outstanding share and fully vested stock option for a total of $58.6 million and $5.6 million in transaction accruals. The transaction accruals are comprised of $1.7 million in employee-related restructuring expenses, $1.9 million in facility costs, and $2.0 million for other expenses and commitments such as legal fees, insurance, and filing fees.

The net tangible assets of approximately $50.4 million are comprised of cash, cash equivalents and restricted cash of $45.8 million, accounts receivable of $3.9 million, fixed assets of $4.0 million, other assets of $2.9 million, offset by assumed liabilities of $6.2 million. Included in other assets is an investment in nonmarketable equity securities, carried at a cost basis of $1.9 million, whose fair value is currently being evaluated by Management, and the information required to assess the fair value of this investment is expected to be received during the quarter ending December 31, 2002. Should the fair value of this investment or other assets be determined to be not equal to the carrying value, the purchase price allocation will be adjusted accordingly.

Approximately $400,000 of the purchase price represents the fair value of the acquired in-process research and development projects that had not yet reached technological feasibility and had no alternative use. Accordingly, this amount was expensed in the Condensed Consolidated Statements of Operations for the three months ended September 30, 2002. The estimated fair value of these projects was based on their discounted cash flow model. Additionally, approximately $6.1 million of the purchase price was allocated to developed and core technology, trademark/tradename portfolio and customer contracts. The majority of these intangibles will amortize over 3 years. The remainder of the purchase price over the $50.4 million fair value of net tangible assets was allocated to goodwill in the amount of approximately $7.3 million.

(6) Asset Impairment and Other Intangible Assets and Equity Investments

Early in the quarter ended September 30, 2002, the Company completed an acquisition of a business, SignalSoft, for $64.2 million in cash. An independent valuation indicated approximately $7.3 million of the purchase price represented goodwill and was recorded as such. However, the significant decrease in the Company’s market capitalization through September 30, 2002, as well as its announcement during the quarter of a restructuring, triggered the requirement for an interim impairment analysis under SFAS No. 142 as of September 30, 2002. Upon completion of the recoverability test under SFAS No. 144, the Company determined that none of its long-lived assets have been impaired under SFAS No. 144. The Company has concluded it is a single reporting unit under SFAS No. 142 and the fair value of the reporting unit is approximated by market capitalization under SFAS No. 142. Considering the significant decrease in the Company’s market capitalization from the date of acquisition, all remaining goodwill, which consisted only of the goodwill from the recent acquisition of SignalSoft, was fully impaired. As a result, the Company recorded a $7.3 million impairment charge under “Amortization and impairment of goodwill and other intangible assets.”

After this impairment charge, the $7.1 million of intangible assets remaining on the Company’s balance sheet at September 30, 2002 consists of intangible assets related to the SignalSoft acquisition completed in July 2002 in the amount of $4.6 million and intangible assets related to the Ellipsus acquisition completed in May 2002 in the amount of $2.5 million.

The Company regularly performs an impairment assessment of its strategic equity investments. In performing an impairment assessment, Management considers the following factors, among others, in connection with the businesses in which investments have been made: the prices for recent equity transactions, the business’ current

solvency and its access to future capital. The Company had no impairment charges to nonmarketable equity securities during the quarter ended September 30, 2002, but recorded a $263,000 impairment of an investment during the three months ended September 30, 2001 within "Interest income and other, net" in the Company's Condensed Consolidated Statements of Operations. As of September 30, 2002, the remaining book value of the investments in nonmarketable equity securities was approximately $6.2 million.

(7) Balance Sheet Components

(a) Long-term investments, and restricted cash and investments

The Company classifies its entire long-term investments portion of long-term investments, and restricted cash and investments as available-for-sale and, accordingly, records them at fair value. The following summarizes the Company’s long-term investments and restricted cash and investments at fair value:

	September 30, 2002		June 30, 2002

	(in thousands)
Unrestricted investments (various maturities through year ending June 30, 2004)	$	25,842	$	79,962
Restricted cash and investments		22,900		22,349

	$	48,742	$	102,311

(b) Accounts Receivable, net

Accounts receivable, net consisted of the following:

		September 30, 2002			June 30, 2002

		(in thousands)
Accounts receivable		$	96,168		$	89,092
Unbilled accounts receivable			28,846			17,955
Allowance for doubtful accounts			(13,519	)		(10,476	)

	Accounts receivable, net	$	111,495		$	96,571

Unbilled accounts receivable represents amounts that have been partially or wholly recognized as revenue, but have not yet been billed because of contractual billing terms.

( c ) Goodwill and Other Intangible Assets, Net

The following table presents a rollforward of the goodwill and other intangibles, net:

	June 30, 2002 Balance		Acquisition⁽¹⁾		Amortization⁽²⁾			Cumulative Effect and Impairment⁽³⁾			September 30, 2002 Balance

	(in thousands)
Goodwill	$	14,547	$	7,287	$	—		$	(21,834	)	$	—
Intangibles:
Customer contracts		—		4,650		(1,100	)		—			3,550
Developed and core technology		3,117		1,200		(905	)		—			3,412
Trademarks		—		200		(17	)		—			183

	$	17,664	$	13,337	$	(2,022	)	$	(21,834	)	$	7,145

⁽¹⁾ Please see Note (5) Acquisitions for the discussion of the SignalSoft acquisition and Note (6) Asset Impairment and Other Intangible Assets and Equity Investments.

⁽²⁾ Customer contracts amortization in the amount of $1.1 million is included in “Cost of revenues: License” and the remaining $922,000 amortization is recorded within “Amortization and impairment of goodwill and other intangible assets” in the Company’s Condensed Consolidated Statements of Operations.

⁽³⁾ Includes $14.5 million of a cumulative effect of change in accounting principle with the adoption of SFAS No. 142 and $7.3 million of goodwill impairment recorded in “Amortization and impairment of goodwill and other intangible assets” in the Company’s Condensed Consolidated Statements of Operations. Please see Note (6) Asset Impairment and Other Intangible Assets and Equity Investments for further discussion.

Total amortization expense related to goodwill and other intangible assets is set forth in the table below:

		Three Months Ended September 30,

		2002			2001

		(in thousands)
Goodwill		$	—		$	(151,570	)
Intangibles:
	Customer contracts		(1,100	)		(50	)
	Developed and core technology		(905	)		(6,413	)
	Assembled workforce		—			(367	)
	Noncompete agreements		—			(617	)
	Trademarks		(17	)		—

		$	(2,022	)	$	(159,017	)

The following tables set forth the carrying amount of other intangible assets that will continue to be amortized:

		September 30, 2002

		Amortization Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

		(in thousands)
Intangibles:
	Customer contracts		0-3 yrs	$	4,650	$	(1,100	)	$	3,550
	Developed and core technology		3 yrs		4,396		(984	)		3,412
	Trademarks		3 yrs		200		(17	)		183

				$	9,246	$	(2,101	)	$	7,145

		June 30, 2002

		Amortization Life		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount

		(in thousands)
Goodwill			—	$	14,547	$	—		$	14,547
Intangibles:
	Developed and core technology		3 yrs		3,196		(79	)		3,117

				$	17,743	$	(79	)	$	17,664

The following table presents the estimated future amortization of the intangibles (in thousands):

Fiscal Year		Future Amortization

	2003	$	2,587
	2004		2,316
	2005		2,242

		$	7,145

The adjusted net income per share excluding amortization of goodwill, as if SFAS No. 142 was adopted as of July 1, 2001, is as follows:

		Three Months Ended September 30,

		2002			2001

		(in thousands)
Net loss		$	(138,544	)	$	(170,451	)
Add back:
	Amortization of goodwill and assembled workforce		—			151,937

Adjusted net loss		$	(138,544	)	$	(18,514	)

Basic and diluted net loss per share		$	(0.79	)	$	(0.99	)
Add back:
	Amortization of goodwill and assembled workforce		—			0.89

Adjusted basic and diluted net income per share		$	(0.79	)	$	(0.10	)

(d) Deferred Revenue

As of September 30 and June 30, 2002, the Company had deferred revenue of $80.8 million and $66.9 million, respectively. The components of deferred revenue are license fees, post contract support (PCS) and professional services. Deferred revenue results from amounts billed:

	•	prior to acceptance of product or service;
	•	for PCS prior to the time service is delivered;
	•	for subscriber licenses committed greater than subscribers activated for arrangements being recognized on a subscriber activation basis; and
	•	for license arrangements amortized over a specified future period due to the provision of unspecified future products.

Deferred revenue included in accounts receivable totaled $30.9 million and $16.4 million as of September 30, 2002 and June 30, 2002, respectively.

(e) Other Comprehensive Loss

Other comprehensive loss is comprised of net loss, unrealized gain on marketable securities, and foreign currency translation adjustments:

		Three Months Ended September 30,

		2002			2001

		(in thousands)
Net loss		$	(138,544	)	$	(170,451	)
Other comprehensive loss:
	Change in accumulated foreign currency translation adjustment		—			137
	Change in accumulated unrealized gain on marketable securities		69			1,121

Total comprehensive loss		$	(138,475	)	$	(169,193	)

The components of accumulated other comprehensive income, net of tax, are as follows:

	September 30, 2002			June 30, 2002

	(in thousands)
Unrealized gain on marketable securities	$	891		$	822
Cumulative translation adjustments		(186	)		(186	)

Accumulated other comprehensive income	$	705		$	636

(8) Commitments and Contingencies

A former employee commenced arbitration against the Company in February 2002 alleging various claims for misrepresentation in connection with his employment agreement and for tortious constructive discharge from his employment. The demand for arbitration asks for an award of damages in excess of $25 million. The arbitration

hearing is scheduled to commence on December 9, 2002. The Company believes the claims are without merit and intends to defend the arbitration vigorously.

Based upon certain publicly available information, on November 5, 2001, a purported securities fraud class action complaint was filed in the United States District Court for the Southern District of New York. The case is now captioned as In re Openwave Systems, Inc. (sic) Initial Public Offering Securities Litigation, Civ. No. 01-9744 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). On April 22, 2002, plaintiffs electronically served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased the Company’s common stock from June 11, 1999 through December 6, 2000. It names as defendants the Company; five of the Company’s present and former officers; and several investment banking firms that served as underwriters of the Company’s initial public offering and secondary public offering. The amended complaint alleges liability as to all defendants under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed. The Company is aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, the Company (and all other issuer defendants) moved to dismiss the respective complaints. That motion was heard November 1, 2002 and a decision is still pending. Based upon the Company’s current understanding of the facts, the Company believes that the complaint’s claims against the Company are without merit, intends to defend the case vigorously and does not believe that resolution of this matter will have a material adverse effect on the financial condition of the Company.

On May 3, 2002, the Company received notice of the pending filing of a purported shareholder derivative lawsuit titled Lefort v. Black et al. The case is now pending before the United States District Court, Northern District of California, No. C-02-2465 VRW. Plaintiff has moved to transfer the case to the United States District Court, Southern District of New York. That motion was heard on October 31, 2002 and a decision is still pending. The lawsuit purports to be filed on behalf of the Company, asserting claims against its officers and directors at the time of the Company’s initial public offering for breach of fiduciary duty to the Company, negligence and unjust enrichment. The plaintiff asserts that the alleged conduct injured the Company because the Company’s shares were not sold for as high a price in the IPO as they otherwise could have been. The Company is aware that similar allegations have been made in other derivative lawsuits involving issuers that also have been sued in the Southern District of New York securities class action cases. On July 12, 2002, the Company moved to dismiss the complaint. Subsequently, plaintiff made demand that the Board of Directors assert his purported claims. The parties have stipulated to take the motion off the calendar while the Board considers the demand. The Board of Directors has appointed a special committee to consider the demand. The Company does not believe that resolution of this matter will have a material adverse effect on the financial condition of the Company.

(9) Restructuring and Other Costs

As a result of the Company’s change in strategy and its desire to improve its cost structure and profitability, the Company has announced two separate restructuring plans.

The fiscal 2002 restructuring plan, which was announced during the quarter ended December 31, 2001, resulted in a decrease of the Company’s workforce by approximately 400 employees and total restructuring charges of $35.8 million, as well as an additional $1.9 million for assets related to the facility closings.

The fiscal 2003 restructuring plan, which was announced during the quarter ended September 30, 2002, is expected to result in a decrease of the Company’s workforce by approximately 500 employees, and the Company recorded total restructuring charges of $83.3 million as of September 30, 2002. The fiscal 2003 plan includes the consolidation of products within three core product groups: infrastructure, applications, and client products.

In connection with implementation of the restructuring plans, the Company’s restructuring charges covered the costs of severance, elimination and consolidation of excess facilities and related leasehold improvements and other restructuring-related charges.

The following table sets forth the restructuring activity through September 30, 2002 (in thousands):

		FY 02 Restructuring Plan									FY 03 Restructuring Plan
																		Total
		Facility			Severance			Other			Facility		Severance			Other		Reserve

Accrual balance as of June 30, 2002		$	11,860		$	692		$	43		$	—	$	—		$	—	$	12,595
Total charge for the quarter ended September 30, 2002												65,410		17,245			680		83,335
Amount utilized:
	Cash paid		(1,274	)		(213	)		(40	)		—		(789	)		—		(2,316	)
	Deferred rent obligation reclass		—			—			—			1,187		—			—		1,187

Accrual balance as of September 30, 2002		$	10,586		$	479		$	3		$	66,597	$	16,456		$	680	$	94,801

Facility costs under the fiscal 2003 plan represent: (a) $53.0 million in closure and downsizing costs of which $46.2 million related to offices in the Company’s headquarters in Redwood City, California, with the remaining $6.8 million related to offices in Asia Pacific, Europe, and North America that were consolidated or eliminated as part of the restructuring programs; and (b) $12.4 million in write-offs of leasehold improvements on the vacated facilities or planned vacated facilities. Closure and downsizing costs include payments required under lease contracts, less any applicable sublease income after the properties were abandoned, lease buyout costs, and restoration costs associated with certain lease arrangements. To determine the lease loss portion of the closure and downsizing costs, certain estimates were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms and (3) sublease rates, including common area charges. The lease loss is an estimate and represents the low end of the range and will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). The Company has estimated that the lease loss could be as much as $16.2 million higher if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to sublease the facility. The fiscal 2003 restructuring plan has 9 sites selected for downsizing during fiscal 2003 beginning in the fiscal quarter ending March 2003. Of the remaining $77.2 million accrual outstanding as of September 30, 2002, $6.8 million is expected to be paid and $12.4 million represents impaired leasehold improvements within the lease loss accrual which will be abandoned during fiscal 2003, with the remaining $58.0 million payable through various dates by November 2013.

Severance and employment-related charges consist primarily of severance, health benefits, other termination costs and legal costs as a result of the termination of employees. The fiscal 2003 restructuring plan is expected to result in the termination of approximately 500 employees, of which 46% are working in sales and marketing, 42% are working in research and development, 12% are working in general and administrative functions. The Company has estimated that the severance and employment-related charges could be higher should there be additional arbitration and legal lawsuits that have not been accrued. The accrual balance of $16.9 million as of September 30, 2002 is expected to be paid by June 30, 2003.

Other charges for the fiscal 2003 plan consist of fees associated with the consolidation of the Company’s data centers. The accrual balance of approximately $680,000 as of September 30, 2002 is expected to be paid by June 30, 2003.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-

looking statements are based upon current expectations and beliefs of Management and are subject to certain risks and uncertainties, including economic and market variables. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially include those set forth in the risks discussed below under the subheading “Risk Factors”. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this section below and in other documents the Company files from time to time with the U.S. Securities and Exchange Commission (SEC) including, but not limited to, the Company’s mostly recently filed annual report on Form 10-K for the fiscal year ended June 30, 2002 and any subsequently filed reports.

Overview

We are a leading provider of infrastructure software, applications and services that enable the convergence of the Internet and wireless and wireline communications. We were incorporated in Delaware in 1994. Our customers are communication service providers, including wireless and wireline carriers, Internet service providers (ISP’s) and broadband providers worldwide. Our Openwave® Services OS™ software suite enables telecommunication companies and wireless service providers to create and deploy new revenue-generating services while providing their subscribers with a rich personalized experience. The Services OS software suite is designed to provide carrier-class scalability and reliability and work with industry standards, such as WAP, XHTML, SyncML and VoiceXML.

Using our software, communication service providers can offer Internet services to their wireless and wireline subscribers, and wireless device manufacturers can turn their mass-market mobile phones and other wireless devices into mobile Internet devices. As of September 30, 2002, over 80 communication service providers have licensed our software, have commenced or announced commercial service or are in market or laboratory trials.

Communication service providers using our software can also provide their subscribers with a variety of messaging applications, including e-mail, mobile e-mail, mobile instant messaging (mobile IM), multi-media messaging service (MMS) and open voice mail. As of September 30, 2002, we had over 145 million licensed mailbox seats and over 30 wireline carriers that have each licensed over one million mailboxes.

Our microbrowser software, Openwave Mobile Browser, is designed to be embedded in wireless devices and to deliver the mobile Internet and the applications of the Services OS software through a graphical or textual user interface.

The majority of our sales have been to a limited number of customers and our sales are highly concentrated. Sales to KDDI accounted for approximately 18% and 26% of total revenue for the three months ended September 30, 2002 and 2001, respectively. Sales to Sprint and its related entities accounted for approximately 13% and 3% of total revenue for the three months ended September 30, 2002 and 2001, respectively. No other customers have accounted for 10% or more of total revenue for either the three months ended September 30, 2002 or 2001.

Recent Events

In July 2002, we acquired SignalSoft Corporation (SignalSoft), a leader in software applications for both commercial and emergency (E911) wireless location-based services headquartered in Boulder, Colorado, in a cash tender offer. Also during July 2002, John MacFarlane stepped down as Chief Technology Officer (CTO) and later resigned from the Board in October 2002. The role of CTO was jointly appointed to Thomas Reardon and Bruce Martin. Thomas Reardon was formerly CEO of Avogadro, Inc., a developer of instant messaging applications, which we acquired in July 2001, and Bruce Martin was formerly Vice President of Technology for the Company and has worked for the Company since 1995.

In October 2002, we consolidated our sales, services and support teams under the leadership of Allen Snyder, our new Senior Vice President Worldwide Customer Operations. As part of this consolidation, Mike Mulica was reassigned to a new role as Senior Vice President of Strategic Customer Development.

Also in October 2002, Kevin Kennedy, our Chief Operating Officer, replaced John MacFarlane on the Board of Directors. In the same month, Bernard Puckett was appointed chairman of the board, succeeding Don Listwin, our chief executive officer and president, who became vice chairman.

Critical Accounting Policies and Judgments

We believe that there are several accounting policies that are critical to understanding our business and prospects for our future performance, as these policies affect the reported amounts of revenue and other significant areas that involve management’s judgment and estimates. These significant accounting policies are:

	•	Revenue recognition
	•	Allowance for doubtful accounts
	•	Impairment assessment of goodwill and identifiable intangible assets
	•	Restructuring-related assessments

These policies, and our procedures related to these policies, are described in detail below. In addition, please refer to Note 1 of the notes to the consolidated financial statements for further discussion of our accounting policies.

Revenue Recognition

We recognize revenue in accordance with Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), as amended by Statement of Position 98-9, Modification of 97-2 “Software Revenue Recognition” With Respect to Certain Transactions, and generally recognize revenue when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable.

One of the critical judgments we make is the assessment that “collectibility is probable.” Our recognition of revenue is partly based on our assessment of the probability of collecting the related accounts receivable balance on a customer-by-customer basis. As a result, the timing or amount of revenue recognition may have been different if different assessments of the probability of collection had been made at the time the transactions were recorded in revenue.

Another critical judgment involves the “fixed or determinable” criterion. We consider payment terms within 12 months to be normal. Payment terms beyond 12 months from delivery are considered extended, and when greater than 20% of an arrangement fee is due beyond 12 months from delivery revenue is recognized when due and payable. In arrangements where fees are due at least 80% within one year or less from delivery, we consider the entire arrangement as “fixed or determinable.”

For certain arrangements, we are required to make estimates that affect the timing and amount of maintenance and support revenues we recognize under these arrangements. Specifically, certain arrangements permit the customer to pay us maintenance and support fees based only on the number of active subscribers using our software product, rather than the number of active subscribers to which the customer has committed to purchase under the license agreement. Such arrangements cause an implied maintenance and support obligation for us relating to unactivated subscribers. In these cases, we defer revenue equal to the Vendor Specific Objective Evidence (VSOE) of maintenance and support of the total commitment for the entire deployment period. In either case, this additional deferral of maintenance and support revenue results in a smaller amount of residual license revenues to be recognized upon delivery.

In addition, in certain other arrangements we recognize revenue based on information contained in subscriber reports provided by our customers. If we do not receive accurate subscriber reports by the end of the reporting period, we attempt to estimate the amount of revenue to be recognized in the period. If it is not estimable, no revenue is recognized until the subscriber report is received.

We use the percentage-of-completion method under SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” to recognize project revenue related to our porting service arrangement with a service partner. Following the percentage-of-completion method, we are required to make estimates that affect the timing and amount of revenue recognized in a particular period. Specifically, amounts recognized in revenue are calculated using the current cumulative cost and the total estimated cost to complete the project. The

percentage-of-completion method has inherent risk in that it is dependent upon estimates of ultimate costs and revenues, which are subject to the uncertainties in long-term contracts. We reduce the inherent risk relating to revenue and cost estimates in our percentage-of-completion model through corporate policy, approval and monitoring processes. Risks relating to the porting service delivery and other factors are considered in this estimation process. Cumulative revenues recognized may be less or greater than cumulative billings at any point in time during the contract’s term. The resulting difference is recognized as unbilled accounts receivable or deferred revenue. Additionally, we plan to recognize revenues from reseller license fees and other joint activities contemplated under this arrangement using the percentage-of-completion method over the term of our porting services work, because these revenue streams cannot be segmented from porting revenues for revenue recognition purposes. Reseller amounts will be classified as license revenue on the consolidated statement of operations, while classification of revenues from other joint activities will be based on the nature of the activity. If there are significant changes to the scope of the porting services project or our estimates of progress towards completion change significantly, the timing and amount of revenue could be materially affected.

Allowance for Doubtful Accounts

We regularly review the adequacy of our allowance for doubtful accounts after considering the size of the accounts receivable aging, the age of each invoice, each customer’s expected ability to pay and our collection history with each customer. We review any invoice greater than 60 days past due to determine if an allowance is appropriate based on the risk category. In addition, we maintain a general reserve for all invoices billed by applying a percentage based on each 30-day age category. For unbilled invoices we apply a percentage to the entire balance. In determining these percentages, we analyze our historical collection experience and current economic trends.

In calculating the general reserve, we first reduce the gross accounts receivable balance by any specific customer or transaction reserves. We then reduce any accounts receivable balances if the arrangements underlying the billed invoices are determined to have offsetting balances in deferred revenue. Finally, any remaining accounts receivable balance is reduced by any subsequent receipts that are received prior to the allowance calculation. The remaining balance is segregated into 30-day aged categories and a reserve percentage is applied to each category. If the historical data we use to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. However, historically the reserve has proven to be adequate.

Circumstances that have caused revisions to the allowance calculation have been primarily due to a deterioration of the telecommunications industry over the last two years, as well as significant downturns in industries such as the Internet service provider (ISP) industry. The contraction of the overall economy, and industries such as the ISP industry in particular, may result in more customers being placed in the specific account reserve category, thereby increasing our reserve estimate and negatively impacting operating results.

Impairment Assessments

In accordance with SFAS No. 142, we review the carrying amount of goodwill for impairment on an annual basis. Additionally, we perform an impairment assessment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value of goodwill and other intangible assets may not be recoverable. Significant changes in circumstances can be both internal to our strategic and financial direction, as well as changes to the competitive and economic landscape. Past changes in circumstances that were considered important for asset impairment include, but are not limited to, decrease in our market capitalization, contraction of the telecommunications industry, reduction or elimination of geographic economic growth, reductions in our forecasted growth and significant changes to operating costs.

As part of our impairment assessment, we examine products, customer base and geography. Based on these criteria, we determine which products we will continue to support and sell and, thereby, determine which assets will continue to have future strategic value and benefit. If indicators suggest the carrying value of our long-lived assets may not be recoverable, we complete an analysis of our long-lived assets under SFAS No. 144, using estimates of undiscounted cash flows in order to determine if any impairment of our fixed assets and other intangibles exists.

With the adoption of SFAS No. 142 on July 1, 2002, we have determined there is a single reporting unit for the purpose of goodwill impairment tests under SFAS No. 142. While we have selected the quarter ending March 31 as the period in which the required annual impairment test will be performed, interim impairment tests may be necessary if indicators suggest the carrying value of the goodwill may not be recoverable. For purposes of assessing the impairment of our goodwill, we estimate the value of the reporting unit using the quoted market price in the active market as the best evidence of fair value. This fair value is then compared to the carrying value of the reporting unit.

Early in the quarter ended September 30, 2002, we completed an acquisition of a business, SignalSoft, for $64.2 million in a cash tender offer. An independent valuation indicated approximately $7.3 million of the purchase price represented goodwill and was recorded as such. However, the significant decrease in our market capitalization through September 30, 2002, as well as the Company’s announcement during the quarter of a restructuring, triggered the requirement for an interim impairment analysis under SFAS No. 142 as of September 30, 2002. Upon completion of the recoverability test under SFAS No. 144, we determined that none of our long-lived assets have been impaired under SFAS No. 144. As we have concluded, the Company is a single reporting unit under SFAS No. 142, and the fair value of the reporting unit is approximated by market capitalization. Considering the significant decrease in our market capitalization from the date of acquisition, all remaining goodwill, which consisted only of the goodwill from the recent acquisition of SignalSoft, was fully impaired. As a result, we recorded a $7.3 million impairment charge under “Amortization and impairment of goodwill and other intangible assets.”

We regularly perform an impairment assessment of our investments in nonmarketable equity securities. In performing an impairment assessment, we consider the following factors, among others, in connection with the businesses in which investments have been made: the prices for recent equity transactions, the business’ current solvency and its access to future capital. We had no impairment charges to nonmarketable equity securities during the quarter ended September 30, 2002, but we recorded a $263,000 impairment of an investment during the quarter ended September 30, 2001 within "Interest income and other, net" in the Condensed Consolidated Statements of Operations. As of September 30, 2002, the remaining book value of the investments in nonmarketable equity securities was approximately $6.2 million.

Restructuring–related assessments

Our critical accounting policy and judgment as it relates to restructuring-related assessments includes our estimate of facility costs and severance-related costs. To determine the facility costs, which is the loss after the Company’s cost recovery efforts from subleasing a building, certain estimates were made related to the (1) time period over which the relevant building would remain vacant, (2) sublease terms and (3) sublease rates, including common area charges. The facility cost is an estimate representing the low end of the range and will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease or changes in actual sublease rates). We have estimated that the lease loss for the fiscal 2003 restructuring plan could be as much as $16.2 million higher if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to lease the facility. To determine the severance and employment-related charges, we have made certain estimates as they relate to severance benefits including the remaining time employees will be retained, the estimated severance period, as well as the estimated legal accruals. We have estimated that the severance and employment-related charges for the fiscal 2003 restructuring plan could be higher should there be additional arbitration and legal lawsuits that have not been accrued.

Results of Operations

Three Months ended September 30, 2001 and 2001

Revenues

We generate four different types of revenue. License revenues are primarily associated with the licensing of our software products to communication service providers and wireless device manufacturers; maintenance and support revenues are derived from providing support services to wireless device manufacturers and communication service

providers; professional services revenues are primarily a result of providing deployment and integration consulting services to communication service providers; and project revenues are derived from a porting services project. The following table presents selected revenue information for the three months ended September 30, 2002 and 2001, respectively:

			Three Months Ended September 30,
									Percent
			2002			2001			Change

			(in thousands)
Revenues
	License		$	39,744		$	88,285			(55.0	)%
	Maintenance and support services			17,926			19,196			(6.6	)%
	Professional services			8,178			10,300			(20.6	)%
	Project revenues			5,310			—			N/A

		Total Revenues	$	71,158		$	117,781			(39.6	)%

Percent of revenues
	License			55.8	%		75.0	%		(19.2	)%
	Maintenance and support services			25.2	%		16.3	%		8.9	%
	Professional services			11.5	%		8.7	%		2.8	%
	Project revenues			7.5	%		—			N/A

		Total Revenues		100.0	%		100.0	%

License Revenues

License revenues decreased 55.0% for the three months ended September 30, 2002 compared to the respective prior fiscal period. The decrease in license revenue was partly attributable to the economic downturn that significantly affected the telecommunications market, which resulted in a reduced number and value of new contracts and to a decrease in the subscriber adoption growth rate over the prior year period. In addition, increased competition, particularly in Europe, caused a further decline in license revenues.

Maintenance and Support Services Revenues

Maintenance and support services revenues decreased 6.6% for the three months ended September 30, 2002 compared to the respective prior year period. The decrease in maintenance and support services revenues was primarily a result of our inability to recognize revenue because Management determined that collectibility was less than probable for certain customers. See Critical Accounting Policies and Judgments – Revenue Recognition for a discussion of how we recognize our revenues.

Professional Services Revenues

Professional services revenues decreased 20.6% for the three months ended September 30, 2002 compared to the respective prior year period. The decrease in professional services revenue was primarily due to a decrease in the number of new commercial deployments of our technology.

Project Revenues

Project revenues, a new revenue category in the fourth quarter of fiscal year 2002, totaled $5.3 million for the quarter ended September 30, 2002 and represent amounts recognized under our porting services arrangement with a service partner. Project revenues represented 7.5% of total revenues for the quarter ended September 30, 2002.

Cost of Revenue

The following table presents cost of revenue as a percentage of related revenue type for the three months ended September 30, 2002 and 2001, respectively:

			Three Months Ended September 30,
									Percent
			2002			2001			Change

			(in thousands)
Cost of revenues
	License		$	2,409		$	4,220			(42.9	)%
	Maintenance and support			8,442			7,827			7.9	%
	Professional services			5,866			6,520			(10.0	)%
	Project costs			4,821			—			N/A

		Total cost of revenues	$	21,538		$	18,567			16.0	%

Cost as a percent of related revenues
	License			6.1	%		4.8	%		1.3	%
	Maintenance and support			47.1	%		40.8	%		6.3	%
	Professional services			71.7	%		63.3	%		8.4	%
	Project costs			90.8	%		—			N/A
Gross margin per related revenue
	License			93.9	%		95.2	%		(1.3	)%
	Maintenance and support			52.9	%		59.2	%		(6.3	)%
	Professional services			28.3	%		36.7	%		(8.4	)%
	Project revenues			9.2	%		0.0	%		9.2	%
Total Gross Margin				69.7	%		84.2	%		(14.5	)%

Cost of License Revenues

Cost of license revenues consists primarily of third-party license and related support fees, as well as amortization of acquisition-related customer contract intangibles. The decrease in cost of license revenue during the quarter ended September 30, 2002, as compared to the prior respective fiscal period, was primarily a result of the cost of exiting our Applications Service Provider business, offset by $1.1 million of amortization of contract intangibles related to our acquisition of SignalSoft. We anticipate that the cost of license revenues will vary as a percentage of related revenues over the next year.

Cost of Maintenance and Support Services Revenues

Cost of maintenance and support services revenues consists of compensation and related overhead costs for personnel engaged in support and training services to wireless device manufacturers and communication service providers. The increase in costs for the quarter ended September 30, 2002, as compared to the respective prior fiscal period, was primarily comprised of an average employee increase from 199 employees in September 2001 to 217 employees in September 2002 as a result of the employees added from the SignalSoft acquisition. We anticipate that the cost of maintenance and support services will remain relatively constant as a percentage of related revenues over the next year.

Cost of Professional Services Revenues

Cost of professional services revenues consists of compensation and independent consultant costs for personnel engaged in performing professional services and related overhead. Cost of professional services revenues decreased during the quarter ended September 30, 2002, as compared to the respective prior fiscal period, primarily due to a decrease in the work performed as a result of a decrease in the number of new commercial launches of our technology. We anticipate that the cost of professional services revenues will remain relatively constant as a percentage of related revenues over the next year.

Cost of Project Revenues

The cost of project revenues, a new cost category in the fourth quarter of fiscal year 2002, includes direct costs incurred in the performance of porting services for a service partner and totaled $4.8 million for the quarter ended September 30, 2002. As a percent of related revenue, costs of project revenues represented 90.8%. We anticipate that the cost of project revenues will moderately decrease in absolute dollars but will remain relatively constant as a percentage of project revenues over the next year.

Operating Expenses

The following table represents operating expenses for the three and nine months ended September 30, 2002 and 2001, respectively:

			Three Months Ended September 30,
									Percent
			2002			2001			Change

			(in thousands)
Operating Expenses:
	Research and development		$	32,298		$	38,409			(15.9	)%
	Sales and marketing			34,422			47,754			(27.9	)%
	General and administrative			13,977			18,422			(24.1	)%
	Restructuring and other costs			83,335			—			N/A
	Stock-based compensation			772			4,986			(84.5	)%
	Amortization of goodwill and other intangible assets			922			159,017			(99.4	)%
	Impairment of goodwill			7,287			—			N/A
	In-process research and development			400			—			N/A
	Merger, acquisition and integration-related costs			244			570			(57.2	)%

		Total Operating Expenses	$	173,657		$	269,158			(35.5	)%

Percent Revenues:
	Research and development			45.4	%		32.6	%		12.8	%
	Sales and marketing			48.4	%		40.5	%		7.9	%
	General and administrative			19.6	%		15.6	%		4.0	%

Research and Development Expenses

Research and development expenses consist primarily of compensation and related costs for research and development personnel. The decrease in research and development expenses during the quarter ended September 30, 2002, as compared to the respective prior fiscal period, was due to the decrease in average headcount from 847 in September 2001 to 791 in September 2002 associated with our restructuring program. In addition, the research and development costs were reduced by the transition of certain employees to departments associated with project revenues. We anticipate that our research and development expenses in the coming year will decrease in absolute dollars.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, travel expenses, public relations, promotional materials, redeployed professional service employees and trade show exhibit expenses. The decrease in sales and marketing expenses during the quarter ended September 30, 2002, as compared to the respective prior fiscal period, was primarily due to an average decrease in headcount from 923 in September 2001 to 699 in September 2002 associated with our restructuring programs. We anticipate that our sales and marketing expenses in the coming year will decrease in absolute dollars.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses, bad debt expense, accounting, legal and administrative expenses, professional service fees and other general corporate expenses. The decrease in general and administrative expenses during the quarter ended September 30, 2002, as compared to the respective prior fiscal period, was primarily attributable to a decrease in bad debt expense from $5.5 million in the quarter ended September 30, 2001, an amount necessitated by further deterioration of the economy and the accounts receivable, to $900,000 in the quarter ended September 30, 2002. The $4.6 million decrease is related to the following factors: reduction in the overall accounts receivable balance, a lack of significant further deterioration in our accounts receivable and the application of a change in methodology for the provision for doubtful accounts calculation related to the reduction of invoice balances by amounts included in deferred revenue. We anticipate that our general and administrative expenses in the coming year will decrease in absolute dollars.

Restructuring and Other Costs

As a result of our change in strategy and our desire to improve our cost structure, we announced a new restructuring plan and recorded restructuring and other charges of $83.3 million. The fiscal 2003 restructuring plan, which was announced during the quarter ended September 30, 2002, is expected to result in a decrease of our workforce of approximately 500 employees. The fiscal 2003 plan includes the consolidation of products within three core product groups: infrastructure, applications and client products. In connection with the implementation of the restructuring plan, our restructuring charges covered the costs of severance, consolidation of excess facilities and related leasehold improvements and other restructuring-related charges. The fiscal 2003 restructuring plan included facility costs of $65.4 million, severance and employment-related charges of $17.2 million, and other restructuring-related costs of $680,000. These and other actions are expected to result in quarterly total cost reductions of approximately $25 to $30 million, of which $5 million was realized during the quarter ended September 30, 2002, with the remaining reductions to commence in the quarter ended December 31, 2002 and to be largely completed by June 30, 2003.

The following table summarizes the future payments on the remaining restructuring liabilities:

Year ending June 30,	Cash Paid		Non-cash *		Total

	(in thousands)
2003	$	24,397	$	12,399	$	36,796
2004		9,877		—		9,877
2005		9,332		—		9,332
2006		5,518		—		5,518
2007		5,494		—		5,494
Thereafter		27,784		—		27,784

	$	82,402	$	12,399	$	94,801

* represents impaired leasehold improvements within the lease accrual.

Stock-Based Compensation

			Three Months Ended September 30,
							Percent
			2002		2001		Change

			(in thousands)
Stock-based compensation by category:
	Research and development		$	63	$	2,882		(97.8	)%
	Sales and marketing			122		212		(42.5	)%
	General and administrative			587		1,892		(69.0	)%

		Total stock-based compensation	$	772	$	4,986		(84.5	)%

All stock-based compensation is being amortized in a manner consistent with Financial Accounting Standards Board Interpretation No. 28 (FIN No. 28), Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Stock-based compensation consisted of continued amortization of the deferred stock-based compensation related to acquisitions, as well as compensation expense recognized on warrants, options issued to nonemployees and restricted stock granted to executives at exercise prices below the current fair value of the Company’s stock. During the three months ended September 30, 2002, we reversed $1.1 million of research and development stock-based compensation as a result of a change in the estimate of the time period over which the employees would vest in the stock options, as the employees were identified for termination related to the restructuring in the quarter ended September 30, 2002. Excluding the reversal, stock-based compensation decreased by $3.1 million during the three months ended September 30, 2002, as compared to the prior period, primarily due to continued amortization of deferred stock-based compensation. We expect our overall stock-based compensation to moderately decrease during the quarter ended December 31, 2002.

Amortization and Impairment of Goodwill and Intangible Assets, In-process Research and Development, and Cumulative Effect of Change in Accounting Principle

		Three Months Ended September 30,

		2002		2001

		(in thousands)
Amortization of goodwill and intangible assets (a)		$	922	$	159,017
Amortization of acquisition-related contract intangibles (a)			1,100		—
In-process research and development (b)			400
Impairment of goodwill and intangible assets (c)			7,287		—
Cumulative effect of change in accounting principle (c)			14,547		—

	Total amortization and impairment of goodwill and intangible assets	$	24,256	$	159,017

(a) The decrease in amortization of goodwill and intangible assets of $157.0 million was due primarily to the impairment of goodwill and other intangibles during the quarters ended December 31, 2001 and June 30, 2002, as well as the adoption of SFAS 142. In addition, the amortization of acquisition-related contract intangibles in the amount of $1.1 million was a result of the acquisition of SignalSoft and was recorded within "Cost of revenues: License" in the Condensed Consolidated Statements of Operations.

(b) In-process research and development represents the fair value of the acquired in-process research and development projects that had not yet reached technological feasibility and had no alternative use. Accordingly, this amount was expensed when we acquired SignalSoft and we reflected it in our Condensed Consolidated Statement of Operations for the three months ended September 30, 2002.

(c) During the quarter ended September 30, 2002, we adopted SFAS No. 142 and recognized a transitional impairment of $14.5 million, which was reported as a Cumulative effect of change in accounting principle, and we impaired the goodwill of SignalSoft of $7.3 million, which was recorded in operating expenses. See Critical Accounting Policies and Judgments – Impairment Assessments for further discussion.

Merger, Acquisition and Integration-related Costs

As a result of the SignalSoft acquisition, we recorded, during the three months ended September 30, 2002, merger and integration costs in the amount of $244,000 related to retention bonuses for employees and other costs incurred solely as a result of the integration. Merger costs for the three months ended September 30, 2001 in the amount of $570,000 related to additional costs incurred in our Software.com merger, which was primarily completed during the fiscal year ended June 30, 2001. We expect to incur integration costs based upon retention bonuses of SignalSoft employees of approximately $250,000 during the quarter ended December 31, 2002.

Interest Income and Other, Net

Interest and other income totaled $2.3 million and $3.5 million for the quarters ended September 30, 2002 and 2001, respectively. The decrease for the September 2002 quarter, as compared to the September 2001 quarter, was primarily due to a decrease in the quarterly average cash equivalents and investments of $93.4 million and a decrease in the quarterly average interest rates from 3.6% to 2.9%. We anticipate that our interest and other income will decline during the quarter ended December 31, 2002 due to declining interest rates and lower average balances invested.

Income Taxes

Income tax expense totaled $2.2 million and $4.0 million for the quarters ended September 30, 2002 and 2001, respectively. Income taxes in all periods presented consisted primarily of foreign withholding and foreign income taxes. Foreign withholding taxes fluctuate from quarter to quarter based on both the geographical mix of our revenue, as well as the timing of the revenue recognized. We expect to incur withholding and foreign corporate income taxes on an ongoing basis of approximately 4% to 6% of revenues.

In light of our recent history of operating losses, we recorded a valuation allowance for substantially all of our net deferred tax assets, as we are presently unable to conclude that it is more likely than not that the deferred tax assets in excess of deferred tax liabilities will be realized.

Liquidity and Capital Resources

The following table presents selected financial information and statistics for the fiscal three months ended and as of September 30, 2002 and 2001, respectively:

			As of September 30,
							Percent
			2002		2001		Change

			(in thousands)
Working capital			$	165,641	$	309,484		(46.5	)%
Cash and cash investments:
	Cash and cash equivalents			157,762		165,628		(4.7	)%
	Short-term investments			70,065		138,127		(49.3	)%
	Long-term investments			25,842		61,300		(57.8	)%
	Restricted cash and investments			22,900		22,349		—

		Total cash and cash investments	$	276,569	$	387,404		(28.6	)%

	Three months Ended September 30,

	2002			2001

Cash used for operating activities	$	(19,703	)	$	(5,126	)
Cash provided by (used for) investing activities	$	36,743		$	(1,719	)
Cash provided by financing activities	$	23		$	10,349

Working capital as of September 30, 2002 was 46.5% lower than at September 30, 2001 primarily due to cash used to fund operations, as well as an increase in accrued liabilities due to the restructuring. Excluding restricted cash and investments, we expect to have between $215 million to $225 million of cash, cash equivalents, and short- and long-term investments as of December 31, 2002.

The negative cash flows used for operating activities during the three months ended September 30, 2002, excluding cash paid for restructuring, totaled $17.4 million and related primarily to the net loss for the period adjusted for noncash items. The negative cash flows used for operating activities during the three months ended September 30, 2001 is related to the net loss for the period adjusted for noncash items combined with a decrease in deferred revenue during the period. We expect to use operational cash flows, excluding cash paid for restructuring costs, of $17.0 million to $22.0 million during the quarter ended December 31, 2002. Additionally, we expect to pay approximately $10.0 million to $12.0 million of restructuring-related costs during the quarter ended December 31, 2002. Also, see Restructuring and other costs for expected cash outlay of restructuring related costs during the year ended June 30, 2003 and thereafter.

The positive cash flows generated from investing activities during the three months ended September 30, 2002 were attributed to the proceeds from sales and maturities of short- and long-term investments of approximately $57.6 million, offset by $15.7 million of expenditures related to the acquisitions of SignalSoft and Ellipsus and purchases of property and equipment of approximately $5.2 million. The negative cash flows generated from investing activities during the three months ended September 30, 2001 primarily related to net proceeds of short- and long-term investments of approximately $9.4 million offset by purchases of property, plant and equipment. We expect

that cash flows used for investing activities will be approximately $2.0 million to $5.0 million in capital and other expenditures during the quarter ended December 31, 2002.

The positive cash flows provided by financing activities during the three months ended September 30, 2001 primarily reflected proceeds from put warrants of $10.5 million and the issuance of common stock of $1.6 million. We expect that cash flows provided by financing activities will be negligible for the quarter ended December 31, 2002.

We obtained a majority of our cash and investments from prior public offerings. Except for the joint venture commitment and the lease commitments discussed in the Annual Report on Form 10-K for the year ended June 30, 2002, we do not have any off-balance-sheet arrangements and are currently not dependent on debt financing. All contractual obligations and commercial commitments have been reflected in the financial statements.

We believe that our current cash, cash equivalents and short-term investments, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or debt securities, obtain a credit facility or sell certain assets. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and additional financing may not be available in amounts or on terms acceptable to us. If additional financing is necessary and we are unable to obtain the additional financing, we may be required to reduce the scope of our planned product development and marketing efforts, which could harm our business, financial condition and operating results.

Risk Factors

We operate in a rapidly changing environment that involves a number of uncertainties, some of which are beyond our control, that will affect our future results and business and may cause our actual results to differ from those currently expected. Therefore, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

In addition to the other information in this report, the following factors should be considered carefully in evaluating our business and prospects.

We have a history of losses and we may not achieve or maintain profitability.

We have incurred losses since our inception, including a loss of approximately $138.5 million during the three months ended September 30, 2002. As of September 30, 2002, we had an accumulated deficit of approximately $2.5 billion. We expect to have net losses and negative cash flow for at least the next 6 to 12 months. We expect to continue to spend significant amounts to develop or enhance our products, services and technologies and to enhance sales and operational capabilities. We will need to generate increases in revenue as well as reduce costs to achieve profitability. We face a number of risks encountered by wireless telecommunications and Internet software industries to achieve this goal, including:

•	our need for communication service providers to launch, maintain, and market commercial services utilizing our products;

•	our substantial dependence on products with only limited market acceptance to date;

•	our need to introduce reliable and robust products that meet the demanding needs of communication service providers and wireless device manufacturers;

•	our dependence on a limited number of customers;

•	our ability to anticipate and respond to market competition;

•	our ability to affect key product transitions or upgrades;

•	our dependence upon key personnel;

•	the announcement or introduction of new or enhanced products or services by our competitors;

•	adverse customer reaction to technical difficulties or “bugs” in our software;

•	adverse customer reaction to our current stock price or financial condition;

•	the growth rate and performance of wireless networks in general and of wireless communications in particular;

•	the rate of growth in end user purchases of data-enabled wireless devices, use of our products, and the growth of wireless data networks generally;

•	the volume of sales by our distribution partners and resellers;

•	our strategic partners resources dedicated to selling our products and services;

•	our pricing policies and those of our competitors;

•	our goodwill and/or intangibles may become impaired;

•	the high debt burdens of our customers; and

•	our customers’ willingness to incur the costs necessary to buy third-party hardware and software required to use our software products and any related price concessions on our product that our customers demand as a result.

Our business strategy may not be successful, and we may not successfully address these risks.

We may not be successful in obtaining subscriber reports from all of our customers.

Although our customers are contractually obligated to provide subscriber reports, we are sometimes unable to obtain subscriber reports as of the end of the reporting period. To mitigate this reporting risk we assist customers by providing a mechanized measurement tool, installing the measurement tool and customizing that tool where appropriate. However, we cannot assure we will obtain all subscriber reports in a timely manner which could have an impact in recording revenue.

Our operating results are subject to significant fluctuations, and this may cause our stock price to decline further.

Our stock price has experienced significant volatility, including a significant drop in our stock price. Factors that may lead to significant fluctuation or declines in our stock price include, but are not limited to:

•	acquisitions or strategic alliances by us or our competitors;

•	changes in estimates or our financial performance or changes in recommendations by securities analysts;

•	changes in financial performance of competitors and other companies in our industry;

•	delays in market acceptance or implementation by our customers of our products and services;

•	changes in demand by our customers for additional products and services;

•	our lengthy sales and implementation cycles;

•	our concentrated target market and the potentially substantial effect on total revenues that may result from the gain or loss of business from each incremental customer;

•	introduction of new products or services by us or our competitors;

•	delays in developing and introducing new products and services;

•	changes in our pricing policies or those of our competitors or customers;

•	changes in our mix of domestic and international sales;

•	risks inherent in international operations;

•	changes in our mix of license, professional services, maintenance and support services and project revenues;

•	changes in accounting standards, including standards relating to revenue recognition, business combinations and stock-based compensation;

•	disputes or litigation with other parties;

•	potential slowdowns or quality deficiencies in the introduction of new telecommunication networks or improved wireless devices;

•	general industry factors, including a slowdown in capital spending or growth in the telecommunications industry, either temporary or otherwise; and

•	general political and economic factors, including a further economic slowdown or recession.

We expect that the market price of our common stock also will fluctuate in the future as a result of variations in our operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, we currently have little visibility into the timing of our customers purchasing decisions, which may accentuate swings in our stock price.

Most of our expenses, such as compensation for current employees and lease payments for facilities and equipment, are relatively fixed. In addition, our expense levels are based, in part, on our expectations regarding future revenues. As a result, any shortfall in revenues relative to our expectations could cause significant changes in our operating results from period to period. Due to the foregoing factors, we believe period-to-period comparisons of our revenue levels and operating results are of limited use. You should not rely on these comparisons and operating results for any particular period to predict our future performance.

Our common stock may be subject to delisting from the Nasdaq National Market.

Our common stock trades on the Nasdaq National Market (“Nasdaq”). In order to maintain listing on Nasdaq, it is required, among other things, that our common stock has a minimum bid price of $1.00. The Nasdaq requirements further state that a deficiency will exist if such minimum bid price remains below $1.00 for a period of 30 consecutive business days. Nasdaq’s rules provide that after receipt of such notice, a listed company is entitled to a 90-day period in which to regain compliance and avoid a possible delisting of its securities from Nasdaq. By letter dated October 15, 2002 from Nasdaq, we were notified that we did not meet the listing criteria for continued listing on Nasdaq on that date due to a failure to meet Nasdaq’s minimum bid price requirement. Subsequently, we received notification from Nasdaq, by letter dated November 7, 2002, that we had regained compliance with Nasdaq listing requirements as our common stock had a closing bid price at $1.00 per share or greater for at least 10 consecutive trading days. There can be no assurance that the trading price of our common stock will continue to meet the minimum bid price requirement of Nasdaq, and, in the future, our common stock could be subject to delisting. If our common stock were to be delisted from trading on the Nasdaq National Market and were neither re-listed thereon

nor listed for trading on the Nasdaq Small Cap Market or other recognized securities exchange, trading, if any, in the common stock may continue to be conducted on the OTC Bulletin Board or in the non-Nasdaq over-the-counter market. Delisting could result in limited release of the market price of the common stock and limited news coverage of our company and services and could restrict investors’ interest in our common stock and materially adversely affect the trading market and prices for our common stock and our ability to issue additional securities or to secure additional financing.

Our success depends on continued acceptance of our products and services by communication service providers, their subscribers, and by wireless device manufacturers.

Our future success depends on our ability to increase revenues from sales of our software and services to communication service providers and other customers. This dependence is exacerbated by the relatively small number of communication service providers and other customers worldwide whose willingness to purchase our products is critical to our success. To date, only a limited number of communication service providers and other customers have implemented and deployed services based on our products. Furthermore, we are dependent upon our customers having growth in subscriber adoption for additional purchases. Some of our customers have purchased license seats exceeding their current needs and may not have additional purchases, if any, until they utilize all of their current purchased licenses. We cannot assure you that communication service providers and other partners will widely deploy or successfully market services based on our products, or that large numbers of subscribers will use these services.

The market for the delivery of Internet-based services is rapidly evolving, and we may not be able to adequately address this market.

The market for the delivery of Internet-based services is rapidly evolving. As a result, the life cycle of our products is difficult to estimate. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes or evolving industry standards on a timely basis, in which case our business would suffer. In addition, we cannot predict the rate of adoption by wireless subscribers of these services or the price they will be willing to pay for these services. As a result, it is extremely difficult to predict the pricing of these services and the future size and growth rate of this market.

Our communication service provider customers face implementation and support challenges in introducing Internet-based services, which may slow their rate of adoption or implementation of the services our products enable. Historically, communication service providers have been relatively slow to implement new complex services such as Internet-based services. In addition, communication service providers may encounter greater customer service demands to support Internet-based services via wireless devices than they do for their traditional voice services. We have limited or no control over the pace at which communication service providers implement these new services. The failure of communication service providers to introduce and support services utilizing our products in a timely and effective manner could harm our business.

We rely on sales to a small number of customers, and the failure to retain these customers or add new customers may harm our business.

To date, a significant portion of our revenues in any particular period has been attributable to a limited number of customers, comprised primarily of communication service providers. Sales to KDDI and its related entities accounted for approximately 18% and 26% of total revenue for the three months ended September 30, 2002 and 2001, respectively. Sales to Sprint and its related entities accounted for approximately 13% and 3% of total revenue for the three months ended September 30, 2002 and 2001, respectively. We cannot assure you that either of these customers will continue to generate significant revenues for us.

We believe that we will continue to rely upon a limited number of customers for a significant portion of our revenues from each period for the foreseeable future, and any failure by us to capture a significant share of these customers could materially harm our business. We believe that the telecommunications industry is entering a period

of consolidation. To the extent that our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

Furthermore, with the consolidation of the Internet specifically in the area of Internet service providers (ISPs), future growth in sales to ISPs has declined and may continue to decline.

If wireless devices are not widely adopted for mobile delivery of Internet-based services, our business could suffer.

We have focused a significant amount of our efforts on mass-market wireless devices as the principal means of delivery of Internet-based services using our products. If wireless devices are not widely adopted for mobile delivery of Internet-based services, our business will suffer materially. Mobile individuals currently use many competing products, such as portable computers, to remotely access the Internet and e-mail. These products generally are designed for the visual presentation of data, while, until recently, wireless devices historically have been limited in this regard. In addition, the development and proliferation of many types of competing products capable of the mobile delivery of Internet-based service in a rapidly evolving industry represents a significant risk to a primary standard emerging. If mobile individuals do not adopt mobile phones or other wireless devices containing our browser or compatible browser as a means of accessing Internet-based services, our business will suffer materially.

Our business depends on continued growth in use and improvement of the Internet and customers ability to operate their systems effectively.

The infrastructure, products and services necessary to maintain and expand the Internet may not be developed, and the Internet may not continue to be a viable medium for secure and reliable personal and business communication, in which case our business, financial condition and operating results would be harmed. Because we are in the business of providing Internet infrastructure software, our future success depends on the continued expansion of, and reliance of consumers and businesses on, the Internet for communications and other services. The Internet may not be able to support an increased number of users or an increase in the volume of data transmitted over it. As a result, the performance or reliability of the Internet in response to increased demands will require timely improvement of the high speed modems and other communications equipment that form the Internet’s infrastructure. The Internet has, in the past, experienced temporary outages and delays as a result of damage to portions of its infrastructure. The effectiveness of the Internet may also decline due to delays in the development or adoption of new technical standards and protocols designed to support increased levels of activity and due to the transmission of computer viruses.

In addition to problems that may affect the Internet as a whole, our customers have in the past experienced some interruptions in providing their Internet-related services, including services related to our software products. We believe that these interruptions will continue to occur from time to time. Our revenues depend substantially upon the number of subscribers who use the services provided by our customers. Our business may suffer if our customers experience frequent or long system interruptions that result in the unavailability or reduced performance of their systems or networks or reduce their ability to provide services to their subscribers.

In addition, to increase the growth in use and improvement of the Internet requires that handset or other wireless device manufacturers produce new handsets that contain updated software and functionality that is compatible with our software. There can be no assurance that handset or wireless device manufactures will produce enough handsets, meet delivery dates, or produce devices that work properly and are not subject to a high level of recalls. In addition, there can be no assurance that consumers will purchase handsets or wireless devices that contain updated software and functionality that is compatible with our software.

Our business depends on continued investment and improvement in communication networks and our customers’ ability to operate their systems effectively.

Many of our customers and other communication service providers have made major investments in 2.5 generation and 3rd generation (“2.5 G” and “3G”) networks that are intended to support more complex applications and to provide end users with a more satisfying user experience. If communication service providers delay their deployment of 2.5G and 3G networks or fail to roll such networks out successfully, there could be less demand for our products and services and our business could suffer. In addition, if communication service providers fail to continue to make investments in their networks or at a slower pace in the future, there may be less demand for our products and services and our business could suffer.

Our restructuring of operations may not achieve the results we intend and may harm our business.

In October 2001 and again in September 2002, we initiated plans to streamline operations and reduce expenses, which included cuts in discretionary spending, reductions in capital expenditures, reductions in the work force and consolidation of certain office locations, as well as other steps to reduce expenses. In connection with the restructurings, we were required to make certain product and product development tradeoffs with limited information regarding the future demand for our various products. There can be no assurance that in connection with the restructurings we decided to pursue the correct product offerings to take advantage of future market opportunities. Furthermore, the implementation of our restructuring plans has placed, and may continue to place, a significant strain on our managerial, operational, financial, employee and other resources. Additionally, the restructurings may negatively affect our employee turnover as well as recruiting and retention of important employees. It is possible that these reductions could impair our marketing, sales and customer support efforts or alter our product development plans. If we experience difficulties in carrying out the restructuring plans, our expenses could increase more quickly than we expect. If we find that our planned restructurings do not achieve our objectives, it may be necessary to implement further reduction of our expenses, to perform additional reductions in our headcount, or to undertake additional restructurings of our business.

We may be unable to successfully integrate acquisitions of other businesses and technologies into our business or achieve the expected benefits of such acquisitions or business combinations.

To date, we have acquired or combined with numerous companies and technologies and may acquire additional companies or technologies or enter into additional business combinations in the future. We may not be able to successfully assimilate the personnel, operations and customers of these businesses or integrate their technology with our existing technology, products and services. Additionally, we may fail to achieve the anticipated synergies from such acquisitions, including product integration, marketing, product development, distribution and other operating synergies.

Entering into any business combination entails many risks, any of which could materially harm our business, including:

•	diversion of management’s attention from other business concerns;

•	failure to assimilate the acquired or combined businesses or technologies with pre-existing businesses and technologies;

•	potential loss of key employees from either our pre-existing business or the acquired or merged business;

•	impact of any negative customer relationships acquired;

•	dilution of our existing stockholders as a result of issuing equity securities; and

•	assumption of liabilities of the acquired or merged company, business, or technology.

We may not be able to identify future suitable acquisition or business combination candidates, and even if we do identify suitable candidates, we may not be able to make these transactions on commercially acceptable terms, or at all. If we do acquire companies, businesses, or technologies or combine with other companies, we may not be able

to realize the benefits we expected to achieve at the time of entering into the transaction. As a result, we may incur unexpected integration and product development expenses which could harm our results of operations. Further, we may have to utilize cash reserves, incur debt or issue equity securities to pay for any future acquisitions, the issuance of which could be dilutive to our existing stockholders.

We may not be successful in forming strategic alliances with other companies.

Our business is becoming increasingly dependent on forming strategic alliances with other companies, and we may not be able to form such alliances that are important to ensure that our products are compatible with third-party products, to enable us to license our software into potential new customers and markets and to enable us to continue to enter into new license agreements with our existing customers. There can be no assurance that we will identify the best alliances for our business or that we will be able to maintain existing relationships with other companies or enter into new alliances with other companies on acceptable terms or at all. The failure to maintain or establish successful strategic alliances could have a material adverse effect on our business or financial results.

We may not be successful in our strategic investments.

We have made, and in the future, we may continue to make strategic investments in other companies. These investments have been made in, and future investments will likely be made in, immature businesses with unproven track records and technologies. Such investments have a high degree of risk, with the possibility that we may lose the total amount of our investments. We may not be able to identify suitable investment candidates, and, even if we do, we may not be able to make those investments on acceptable terms, or at all. In addition, even if we make investments, we may not gain strategic benefits from those investments, and, therefore, we may need to record an impairment charge to write-off the strategic investments to our operations. There can be no assurance that we may not experience future material impairment charges with respect to our existing or future strategic investments.

Our sales cycle is long and our stock price could decline if sales are delayed or cancelled.

Fluctuations in our operating performance are exacerbated by our sales cycle, which is lengthy, typically between six months and twelve months, and unpredictable. Many factors outside our control add to the lengthy education and customer approval process for our products. We spend a substantial amount of time educating customers regarding the use and benefits of our products, and they, in turn, spend a substantial amount of time performing internal reviews and obtaining capital expenditure approvals before purchasing our products. Further, the emerging and evolving nature of the market for Internet-based services via wireless devices may lead prospective customers to postpone their purchasing decisions. In addition, any continued future slowdown in capital spending in the communications industry, such as the most recent slowdown, will likely lead existing and prospective customers to postpone or delay their purchasing decisions. Any delay in sales of our products could cause our operating results to vary significantly from projected results, which could cause our stock price to decline.

We are exposed to the credit risk of some of our customers and to credit exposures in weakened markets.

Since the cost of developing new technology is high, there are many companies that are experiencing difficulties in obtaining the necessary financing to continue in business. A portion of our sales are derived through customers who tend to have access to more limited financial resources than others and, therefore, represent potential sources of increased credit risk. In addition, under current market conditions it has become increasingly difficult for telecommunication and technology companies, such as our existing and potential new customers, to obtain the necessary financing to continue in business. Although we have programs in place to monitor and mitigate the credit risk associated with our existing customers, there can be no assurance that such programs will be effective in reducing our credit risk. We also continue to monitor increased credit exposures from weakened financial conditions in certain geographic regions, and the impact that such conditions may have on the worldwide economy. We have recently experienced losses due to customers failing to meet their obligations, primarily as a result of the weakened

financial state of the wireless and telecommunications industry. Future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition.

If widespread integration of browser technology does not occur in wireless devices, our business could suffer.

All of our agreements with wireless device manufacturers are nonexclusive, so they may choose to embed a browser other than ours in their wireless devices. We may not succeed in maintaining and developing relationships with wireless device manufacturers, and any arrangements may be terminated early or not renewed at expiration. In addition, wireless device manufacturers may not produce products using our browser in a timely manner, in sufficient quantities, or with sufficient quality, if at all.

The market for our products and services is highly competitive.

The market for our products and services is highly competitive. The widespread adoption of open industry standards may make it easier for new market entrants and existing competitors to introduce products that compete with our software products. In addition, a number of our competitors, including Nokia, have announced or are expected to announce enhanced features and functionality both as proprietary extensions to the WAP standard and in the area of messaging platforms. Furthermore, some service providers, such as NTT DoCoMo, have introduced or may introduce services based on proprietary wireless protocols that are not compliant with industry specifications. Finally, infrastructure providers like Nokia may leverage installed technology and/or wireless device sales to sell end-to-end solutions.

We expect that we will compete primarily on the basis of quality, breadth of product and service offerings, functionality, price and time to market. Our current and potential competitors include the following:

•		wireless equipment manufacturers, such as Ericsson, Nokia, Siemens, Motorola, Qualcomm and Nortel;

•		wireless messaging software providers, such as Comverse, Nokia, and Ericsson;

•		systems integrators, such as CMG, Logica and Siemens;

•		software companies, such as Microsoft, iPlanet, a Sun/Netscape alliance, Hewlett-Packard, 7.24 Solutions, and Critical Path;

•		service providers, such as E-Commerce Solutions and InfoSpace;

•		browser competitors, such as Nokia, Access, AU Systems and Microsoft;

•		location product competitors, such as Ericsson, Nokia, Telecommunications Systems, Intrado, Motorola and Siemens;

•		communication service providers, such as NTT DoCoMo; and

•		providers of Internet software applications and content, electronic messaging applications and personal information management software solutions.

Microsoft has announced its intention to introduce products and services that may compete directly with many of our products. In addition, Microsoft has made available its Windows CE-based operating systems for wireless devices, including voice enabled PDA’s and wireless telephones. Microsoft is delivering its own browser, called Mobile Explorer, for these devices.

Nokia markets a WAP server to communication service providers, corporate customers and content providers. This brings Nokia into direct and indirect competition with us. Nokia’s corporate WAP server is designed to enable wireless device subscribers to directly access applications and services provided by these customers, rather than

through gateways provided by communication service providers’ WAP servers. If Nokia’s WAP server is widely adopted by corporate customers and content providers, it could undermine the need for communication service providers to purchase WAP servers. Nokia also competes directly with us in the area of messaging, offering end-to-end solutions, based on its proprietary smart messaging protocol and on MMS, to communication service providers.

Many of our existing competitors, as well as potential competitors, have substantially greater financial, technical, marketing and distribution resources than we do.

Our software products may contain defects or errors, and shipments of our software may be delayed.

The software we develop is complex and must meet the stringent technical requirements of our customers. We must develop our products quickly to keep pace with the rapidly changing Internet software and telecommunications markets. Software products and services as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new versions are released. We have in the past experienced delays in releasing some versions of our products until software problems were corrected. Our products may not be free from errors or defects after commercial shipments have begun, which could result in the rejection of our products and damage to our reputation, as well as lost revenues, diverted development resources and increased service and warranty costs, any of which could harm our business.

We depend on recruiting and retaining key management and technical personnel with telecommunications and Internet software experience.

Because of the technical nature of our products and the dynamic market in which we compete, our performance depends on attracting and retaining key employees. In particular, our future success depends in part on the continued services of many of our current executive officers and other key employees. Competition for qualified personnel in the telecommunications, Internet software and Internet messaging industries is significant. We believe that there are only a limited number of persons with the requisite skills to serve in many key positions, and it is difficult to hire and retain these persons. Furthermore it may become more difficult to hire and retain key persons as a result of our past restructuring, any future restructurings, and as a result our past stock performance. Competitors and others have in the past, and may in the future, attempt to recruit our employees.

We may fail to support our operations.

To succeed in the implementation of our business strategy, we must rapidly execute our sales strategy and further develop products and expand service capabilities, while managing anticipated growth by implementing effective planning and operating processes. If we fail to manage effectively, our business could suffer. To manage, we must:

•		successfully manage the business with fewer employees due to the restructuring plans;

•		continue to implement and improve our operational, financial and management information systems;

•		hire, train and retain qualified personnel, especially as the business climate improves;

•		continue to expand and upgrade core technologies;

•		effectively manage multiple relationships with various communication service providers, wireless device manufacturers, content providers, applications developers and other partners and third parties; and

•		successfully integrate the businesses of our acquired companies.

Our systems, procedures and controls may not be adequate to support our operations, and our management may not be able to achieve the rapid execution necessary to exploit the market for our products and services.

Our success, particularly in international markets, depends in part on our ability to maintain and expand our distribution channels.

Our success depends in part on our ability to increase sales of our products and services through value-added resellers and systems integrators and to expand our indirect distribution channels. If we are unable to maintain the relationships that we have with our existing distribution partners, increase revenues derived from sales through our indirect distribution channels, or increase the number of distribution partners with whom we have relationships, then we may not be able to increase our revenues or achieve profitability.

We expect that many communication service providers, especially in international markets will require that our products and support services are supplied through value-added resellers and systems integrators. Thus, we expect that a significant portion of sales will be made through value-added resellers and systems integrators, and the success of our operations will depend on our ability to maintain productive relationships with value-added resellers and systems integrators.

In addition, our agreements with our distribution partners generally do not restrict the sale by them of products and services that are competitive with our products and services, and each of our partners generally can cease marketing our products and services at their option and, in some circumstances, with little notice and with little or no penalty.

We depend on others to provide content and develop applications for wireless devices.

In order to increase the value to customers of our product platform and encourage subscriber demand for Internet-based services via wireless devices, we must successfully promote the development of Internet-based applications and content for this market. If content providers and application developers fail to create sufficient applications and content for Internet-based services via wireless devices, our business could suffer materially. Our success in motivating content providers and application developers to create and support content and applications that subscribers find useful and compelling will depend, in part, on our ability to develop a customer base of communication service providers and wireless device manufacturers large enough to justify significant and continued investments in these endeavors. In addition, we depend on the wireless device manufacturers to provide quality user-friendly handsets that enable the wireless Internet.

If we are unable to continue to successfully integrate our products with third-party technology, such as communication service providers’ systems, our business could suffer.

Our products are integrated with communication service providers’ systems and wireless devices. If we are unable to continue to successfully integrate our platform products with these third-party technologies, our business could suffer. For example, if, as a result of technology enhancements or upgrades of these systems or devices, we are unable to integrate our products with these systems or devices, we could be required to redesign our software products. Moreover, many communication service providers use legacy, or custom-made, systems for their general network management software. Legacy systems and certain custom-made systems are typically very difficult to integrate with new server software. We may not be able to redesign our products or develop redesigned products that achieve market acceptance.

An interruption in the supply of software that we license from third parties could cause a decline in product sales.

We license technology that is incorporated into our products from third parties. Any significant interruption in the supply of any licensed software could cause a decline in product sales, unless and until we are able to replace the functionality provided by this licensed software. We also depend on these third parties to deliver and support reliable products, enhance their current products, develop new products on a timely and cost-effective basis, and respond to emerging industry standards and other technological changes. The failure of these third parties to meet these criteria could harm our business.

Our intellectual property or proprietary rights could be misappropriated, which could force us to become involved in expensive and time-consuming litigation.

Our ability to compete and continue to provide technological innovation is substantially dependent upon internally-developed technology. We rely on a combination of patent, copyright, and trade secrets to protect our technology, although we believe that other factors such as the technological and creative skills of our personnel, new product developments, frequent product and feature enhancements and reliable product support and maintenance are more essential to maintaining a technology leadership position. We rely on trademark law to protect the value of our corporate brand and reputation.

We generally enter into confidentiality and nondisclosure agreements with our employees, consultants, prospective customers, licensees and corporate partners. In addition, we control access to and distribution of our software, documentation and other proprietary information. Except for our browser product and certain limited escrow arrangements with respect to some of our other products, we generally do not provide customers with access to the source code for our products. Despite our efforts to protect our intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Effectively policing the unauthorized use of our products and trademarks is time consuming and costly, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology or trademarks, 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 our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products.

We attempt to avoid infringing known proprietary rights of third parties in our product development efforts. However, we do not regularly conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties. Because patent applications in the United States are not publicly disclosed until the patent is issued, applications may have been filed which relate to our software products. In addition, our competitors and other companies as well as research and academic institutions have conducted research for many years in the electronic messaging field, and this research could lead to the filing of further patent applications. If we were to discover that our products violated or potentially violated third-party proprietary rights, we might not be able to obtain licenses in which case we might not be able to continue offering those products without substantial reengineering. Any reengineering effort may not be successful, nor can we be certain that any licenses would be available on commercially reasonable terms.

Substantial litigation regarding intellectual property rights exists in the software industry, and we expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of software products in different industry segments overlaps. 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 us to enter into royalty or licensing agreements. Any royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. A successful claim of infringement against us and our failure or inability to license the infringed or similar technology could have a material adverse effect on our business, financial condition and results of operations.

International sale of product licenses is an important part of our strategy, and this expansion carries specific risks.

International sale of product licenses and services accounted for 65% of our total revenues for the three months ended September 30, 2002. Risks inherent in conducting business internationally include:

•		failure by us and/or third parties to develop localized content and applications that are used with our products;

37


•		fluctuations in currency exchange rates;

•		any imposition of currency exchange controls;

•		unexpected changes in regulatory requirements applicable to the Internet or our business;

•		difficulties and costs of staffing and managing international operations;

•		differing technology standards and pace of adoption;

•		export restrictions on encryption and other technologies;

•		difficulties in collecting accounts receivable and longer collection periods;

•		seasonable variations in customer buying patterns or electronic messaging usage;

•		political instability, acts of terrorism or war;

•		economic downturns;

•		potentially adverse tax consequences;

•		reduced protection for intellectual property rights in certain countries;

•		costs of localizing our products for foreign markets;

•		contractual provisions governed by foreign laws; and

•		the burden of complying with complex and changing regulatory requirements.

Any of these factors could harm our international operations and, consequently, our business, financial condition and operating results.

The security provided by our products could be breached, in which case our reputation, business, financial condition and operating results could suffer.

The occurrence or perception of security breaches could harm our business, financial condition and operating results. A fundamental requirement for online communications is the secure transmission of confidential information over the Internet. Third parties may attempt to breach the security provided by our products, or the security of our customers’ internal systems. If they are successful, they could obtain confidential information about our customers’ end users, including their passwords, financial account information, credit card numbers or other personal information. Our customers or their end users may file suits against us for any breach in security. Even if we are not held liable, a security breach could result in costly litigation and harm our reputation. The perception of security risks, whether or not valid, could inhibit market acceptance of our products. Despite our implementation of security measures, our software is vulnerable to computer viruses, electronic break-ins, intentional overloading of servers and other sabotage, and similar disruptions, which could lead to interruptions, delays, or loss of data. We may be required to expend significant capital and other resources to license encryption or other technologies to protect against security breaches or to alleviate problems caused by these breaches. In addition, our customers might decide to stop using or licensing our software if their end users experience security breaches.

Future governmental regulation of the Internet could limit our ability to conduct our business.

Although there are currently few laws and regulations directly applicable to the Internet and commercial messaging, a number of laws have been proposed involving the Internet, including laws addressing user privacy, pricing, content, copyrights, distribution, antitrust and characteristics and quality of products and services. Further, the growth and development of the market for online messaging or location products may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies, including us, that conduct such businesses. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services, which would decrease the demand for our services and could increase our cost of doing business or otherwise harm our business, financial condition and operating results. Moreover, the applicability of existing laws governing property ownership, sales and other taxes, libel and personal privacy to the Internet is uncertain and may take years to resolve.

Our stock price may be volatile, exposing us to expensive and time-consuming securities class action litigation.

The stock market in general, and the stock prices of Internet-related companies in particular, has recently experienced sharp declines and extreme volatility, which has often been unrelated to the operating performance of any particular company or companies. If market or industry-based fluctuations continue, our stock price could decline below current levels regardless of our actual operating performance. If a large number of shares of our stock relative to the trading volume of our stock are sold in a short period of time, our stock price may decline rapidly. In the past, securities class action litigation has often been brought against companies following periods of sharp declines or volatility in their stock prices. We have experienced sharp declines and volatility in our stock price. Based upon publicly available information, a purported securities class action complaint has been filed against us, along with numerous other companies, in the U.S. District Court for the Southern District of New York and is described under Part II, Item 1. Legal Proceedings. We may in the future be the target of similar or other class action litigation. Securities litigation could result in substantial costs and divert management’s time and resources, which could harm our business, financial condition and operating results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We manage our foreign currency exchange rate risk by entering into contracts to sell or buy foreign currency at the time a foreign currency receivable or payable is generated. When the foreign currency asset or liability is extinguished, the contract is liquidated, and the resulting gain or loss on the contract mitigates the exchange rate risk of the associated asset or liability. As of September 30, 2002, we had no foreign currency contracts outstanding.

We operate internationally and thus are exposed to potentially adverse movements in foreign currency rate changes. We have entered into foreign exchange forward contracts to reduce our exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a nonfunctional currency. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on our operating results. These contracts require us to exchange currencies at rates agreed upon at the inception of the contracts. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange forward contracts. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from changes in currency exchange rates. We do not designate our foreign exchange forward contracts as hedges and, accordingly, we adjust these instruments to fair value through earnings in the period of change in their fair value.

The following is a chart of the principal amounts of short-term investments, long-term investments, and restricted investments by expected maturity:

			Expected maturity date for the year ending June 30,											Cost Value		Fair Value

														September 30, 2002		September 30, 2002

			2003			2004		2005		2006		2007		Total		Total

			(in thousands)
Corporate Bonds			$	64,022		$	10,254	$	—	$	—	$	—	$	74,276	$	74,857
Federal Agencies				24,562			15,172		—		—		—		39,734		40,044

	Total		$	88,584		$	25,426	$	—	$	—	$	—	$	114,010	$	114,901

		Weighted-average interest rate		2.88	%

With respect to the above investments, we are exposed to market risks for changes in interest rates. We place our investments with high credit quality issuers that have a rating by Moody’s of A1 or higher and Standard & Poors of P-1 or higher, and, by policy, limit the amount of the credit exposure to any one issuer.

Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents; all investments with maturities of three months through one year are classified as available-for-sale and considered to be short-term investments; all investments with maturities of greater than one year and less than two years are classified as available-for-sale and considered to be long-term investments. We do not purchase investments with a maturity date greater than two years from the date of purchase.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Openwave (including our consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.

(b) Changes in internal controls

Since the Evaluation Date there has not been any significant changes in our internal controls or in other factors that could significantly affect such controls.

PART II Other Information

Item 1. Legal Proceedings

A former employee commenced an arbitration against us in February 2002 alleging various claims for misrepresentation in connection with his employment agreement and for tortious constructive discharge from his employment. The demand for arbitration asks for an award of damages in excess of $25 million. The arbitration hearing is scheduled to commence on December 9, 2002. We believe the claims are without merit and we intend to defend the arbitration vigorously.

predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed. We are aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, we (and all other issuer defendants) moved to dismiss the respective complaints. That motion was heard on November 1, 2002 and a decision is still pending. Based upon our current understanding of the facts, we believe that the complaint’s claims against the Company are without merit, we intend to defend the case vigorously and we do not believe that resolution of this matter will have a material adverse effect on our financial condition.

On May 3, 2002, we received notice of the pending filing of a purported shareholder derivative lawsuit titled Lefort v. Black et al. The case is now pending before the United States District Court, Northern District of California, No. C-02-2465 VRW. Plaintiff has moved to transfer the case to the United States District Court, Southern District of New York. That motion was heard October 31, 2002 and a decision is still pending. The lawsuit purports to be filed on behalf of the Company , asserting claims against its officers and directors at the time of the Company’s initial public offering for breach of fiduciary duty to the Company, negligence and unjust enrichment. The plaintiff asserts that the alleged conduct injured the Company because its shares were not sold for as high a price in the IPO as they otherwise could have been. We are aware that similar allegations have been made in other derivative lawsuits involving issuers that also have been sued in the Southern District of New York securities class action cases. On July 12, 2002, we moved to dismiss the complaint. Subsequently, plaintiff made demand that the Board of Directors assert his purported claims. The parties have stipulated to take the motion off the calendar while the Board considers the demand. The Board of Directors has appointed a special committee to consider the demand. We do not believe that resolution of this matter will have a material adverse effect on its financial condition.

Item 2. Changes in Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

Exhibit Number		Description

10.37		Restated Transition Employment Agreement by and between the Company and Michael Mulica.

99.1		Certificate of Openwave Systems Inc. Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On October 1, 2002, we filed a Current Report on Form 8-K to report that we issued a press release, dated September 30, 2002, entitled “Openwave Reaffirms September 2002 Quarter Outlook and Accelerates Restructuring Plan.”

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: November 14, 2002

	OPENWAVE SYSTEMS INC.

	By:	/s/ ALAN BLACK

		Alan Black Senior Vice President, Corporate Affairs and Chief Financial Officer

CERTIFICATIONS

I, Donald Listwin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Openwave Systems Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

	/s/ DONALD LISTWIN

	Donald Listwin Vice Chairman, President and Chief Executive Officer

I, Alan Black, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Openwave Systems Inc.;

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002

	/s/ ALAN BLACK

	Alan Black Senior Vice President, Corporate Affairs and Chief Financial Officer