OPENWAVE SYSTEMS INC - 10-Q Quarterly Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

As of April 30, 2004, there were 64,278,658 shares of the registrant’s Common Stock outstanding.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 Openwave Systems Inc.’s (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 March 31, 2004 and June 30, 2003, and the results of operations for the three and nine months ended March 31, 2004 and 2003, and cash flows for the nine months ended March 31, 2004 and 2003. 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, 2003.

On October 21, 2003, the Company completed a one-for-three reverse split of its common stock. All share and per share data in the financial statements presented herein have been updated to reflect this change. Additionally, certain amounts in the condensed consolidated financial statements as of June 30, 2003 and the three and nine months ended March 31, 2003 have been reclassified to conform to the presentation as of and for the quarter ended March 31, 2004.

The preparation of the 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 for the full fiscal year or any future period could differ from those estimates.

The Company’s four primary revenue categories are comprised of license, maintenance and support services, professional services and project revenues. As described in Note 4, “Geographic, Segment and Significant Customer Information,” the disaggregated revenue information reviewed on a product category by the CEO includes the licensing of the Company’s application software and related maintenance and support services; the licensing of client software and related maintenance and support services; the licensing of infrastructure software and related maintenance and support services; customer services; and project revenues, which include porting services with partners. The Company licenses its application software and infrastructure software products primarily to communication service providers through its direct sales force and channel partners. The Company licenses its client software products primarily to wireless device manufacturers through its direct sales force. As part of its license arrangements with communication service providers, the Company offers new version coverage, which is an optional program that grants licensees the right to receive minor and major version releases of the product made during the applicable new version coverage term. Customers receive error and bug fix releases as part of their license maintenance and support arrangements.

The Company recognizes revenue in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, “Modification of SOP No. 97-2 Software Revenue Recognition, With Respect to Certain Transactions,” and generally recognizes revenue when all of the following criteria are met as set forth in paragraph 8 of SOP No. 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. The Company defines each of the four criteria above as follows:

Persuasive evidence of an arrangement exists. The Company’s customary practice is to have a written contract, which is signed by both the customer and the Company, or a purchase order from those customers that have previously negotiated a standard license arrangement with the Company.

Delivery has occurred. The Company’s software may be either physically or electronically delivered to the customer. For those products that are delivered physically, the Company’s standard transfer terms are freight on board (FOB) shipping point. For an electronic delivery of software, delivery is considered to have occurred when the customer has been provided with the access codes that allow the customer to take immediate possession of the software on its hardware. If undelivered products or services exist in an arrangement that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered. If the Company’s contracts include customer specified acceptance criteria

that the Company has not reliably satisfied at the time of delivery of its software, delivery, for purposes of license, new version coverage, and maintenance and support, revenue recognition, occurs when such acceptance criteria is satisfied assuming that all other revenue recognition criteria have been met; for purposes of professional services revenue recognition in multiple element arrangements with customer specified acceptance criteria, delivery occurs without regard to such specified customer acceptance criteria and revenue will be recognized on the professional services element as services are performed assuming that all other revenue recognition criteria have been met.

The fee is fixed or determinable. The Company’s communication service provider customers generally pay a per subscriber fee or a fee for pre-purchased capacity usage of the Company’s products, which is negotiated at the outset of an arrangement. In these arrangements, the communication service provider generally licenses the right to activate a specified minimum number of its subscribers to use the Company’s software products. Arrangement fees are generally due within one year or less from delivery. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable, and revenue from such arrangements is recognized as payments become due, assuming all other revenue recognition criteria have been met. As the communication service providers activate customers beyond the minimum number specified in the arrangement, additional per-subscriber fees become due.

Collectibility is probable. Collectibility is assessed on a customer-by-customer basis. The Company typically sells to customers for whom there is a history of successful collection. New and existing customers go through an ongoing credit review process, which evaluates the customers’ financial positions, their historical payment history, and ultimately their ability to pay. If it is determined prior to revenue recognition that the collection of an arrangement fee is not probable, arrangement revenue is deferred and recognized at the time collection becomes probable, which is generally upon receipt of cash.

The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Under the residual method, revenue is recognized in a multiple element arrangement when Company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one of the delivered elements in the arrangement. The Company allocates revenue to each undelivered element in a multiple element arrangement based on its respective fair value. The Company’s determination of the fair value of each element in a multi-element arrangement is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. In its multiple-element arrangements for perpetual software licenses, assuming all other revenue recognition criteria are met and the Company has VSOE for all undelivered elements, the Company recognizes revenue as follows: license revenue is recognized upon delivery using the residual method in accordance with SOP No. 98-9; revenue from new version coverage and maintenance and support services is recognized ratably over the period the element is provided; and, revenue from professional services is recognized as services are performed. New version coverage revenue is classified as license revenue in the Company’s Condensed Consolidated Statements of Operations.

For its new version coverage and maintenance and support services elements, the Company has determined that it has sufficient VSOE to allocate revenue to these elements when a substantive renewal rate exists in the arrangement. For its multiple-element arrangements where a substantive renewal rate does not exist for its new version coverage and/or maintenance and support elements, the Company has determined that it does not have sufficient VSOE to allocate revenue to these undelivered elements. In this case, provided that these elements are the only remaining undelivered elements in the arrangement, arrangement fees are recognized ratably over the period that maintenance and support and/or new version covered is provided, assuming all other revenue recognition criteria are satisfied.

Arrangements that include professional services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When services are not considered essential, the revenue allocable to the services is recognized separately from the software, provided VSOE of fair value exists for the services. If the Company provides professional services that are considered essential to the functionality of the software products, both the software product revenue and service revenue are recognized under contract accounting in accordance with the provisions of SOP No. 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” Revenues from these arrangements are recognized under the percentage of completion method based on the ratio of direct labor hours incurred to date to total projected labor costs except in limited circumstances where completion status cannot be reasonably estimated, in which case the completed contract method is used.

For arrangements where services are not essential to the functionality of the software, the Company’s software products are typically fully functional upon delivery and do not require significant modification or alteration. In these arrangements, customers typically purchase professional services from the Company to facilitate the adoption of the Company’s technology, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are generally billed separately and independently from professional services, which are generally billed on a time-and-materials or milestone-achieved basis. Occasionally, the Company bills one flat fee for licenses and services. For time-and-materials contracts, the Company recognizes revenue as the services are performed. For fixed-fee arrangements, the

Company recognizes revenue as the agreed upon activities are proportionately performed. On these fixed fee professional service arrangements, the Company generally measures progress to completion based on the ratio of hours incurred to total estimated project hours, an input method. If, however, the fixed fee arrangements include substantive customer specified progress milestones, the Company recognizes revenue as such progress milestones are achieved, an output method, as the Company believes this is a more accurate measure of revenue recognition. The Company believes it is able to reasonably estimate, track, and project the status of completion of a project, and considers customer acceptance as the Company’s criteria for substantial completion.

The Company also licenses its client software to wireless device manufacturers through its direct sales force and certain third parties. These license arrangements generally give the customer rights to receive product releases for porting to an unlimited unspecified number of devices for a specified period. In addition, the Company provides technical support services and compliance verification. In these arrangements, all arrangement fees are generally recognized ratably over the contract period, assuming all revenue criteria are satisfied.

The Company also enters into certain perpetual license arrangements where the license revenue is not recognized upon delivery, but rather is recognized as follows, assuming that all other revenue recognition criteria have been met:

During the year ended June 30, 2002, the Company entered into a significant contract with a service partner, under which the Company has been porting its software to the service partner’s hardware/software platform in exchange for a predetermined reimbursement rate; the partner resells the Company’s products and engages in other joint activities. The Company recognizes porting services revenues from this contract as project revenues in the Company’s Consolidated Statements of Operations as the agreed upon activities are performed. With the adoption of Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” the Company separates the reseller and porting activities related to the project and recognizes reseller revenues separately as they are earned. 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. In accounting for project revenue the Company recognizes revenue as the services are proportionally performed.

Cost of license revenues is primarily comprised of third-party license and related support fees and amortization of purchased technology and contract intangibles. Cost of maintenance and support services revenues consists of compensation and related overhead costs for personnel engaged in training and support services to communication service providers and wireless device manufacturers. Cost of professional services revenues includes compensation and independent consultant costs for personnel engaged in delivering professional services and related overhead costs. Cost of project revenues includes direct costs incurred in the performance of development services under the arrangement. Cost of project revenues does not include certain sales-related activities required under the arrangement, which are classified as sales and marketing expense.

In April 2004, the Financial Accounting Standards Board (FASB) issued Staff Position No. FAS 129-1, “Disclosure Requirements under FASB Statement No. 129, Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities.” The adoption of FAS 129-1 did not have a material impact on the Company’s consolidated financial position or results of operations. See note 7(e).

In July 2003, the Emerging Issues Task Force (EITF) issued EITF 03-1: “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The adoption of EITF 03-1 did not have a material impact on the Company’s consolidated financial position or results of operations.

The Company’s Chief Executive Officer (CEO) is the chief operating decision maker for the Company. 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 application software and services, infrastructure software and services, client software and services, and customer services for communication service providers, mobile device manufacturers and other customers. The disaggregated revenue information reviewed on a product category basis by the CEO includes application software and services, infrastructure software and services, client software and services, customer services and project revenues.

The disaggregated information reviewed on a product basis by the CEO for the three and nine months ended March 31, 2004 and 2003 is as follows (in thousands):

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

The Company’s long-lived assets residing in countries other than the United States are not significant and therefore have not been disclosed.

The Company filed a certificate of amendment to its amended and restated certificate of incorporation to effect a 1 for 3 reverse split of its common stock, effective on October 21, 2003. On the effective date, each three shares of the Company’s outstanding common stock automatically converted into one share of common stock. All share and per share amounts have been restated for all periods presented to reflect this reverse stock split.

Basic and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Per Share,” for all periods presented. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted average number of shares of common stock outstanding during the period, less shares subject to repurchase.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

The Company excludes potentially dilutive securities from its diluted net loss per share computation when their effect would be anti-dilutive to the net loss per share computation. The weighted-average number of stock option shares that were outstanding but were not included in the computation of diluted earnings per share because their effect was anti-dilutive, or would have been anti-dilutive had the Company reported net income from continuing operations during the period, are as follows for the three months and nine months ended March 31, 2004 and 2003 (in thousands, except per share amounts):

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” the Company has elected to follow Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock-based awards to employees. Accordingly, compensation cost for stock options and restricted stock grants is measured as the excess, if any, of the market price of the Company’s common stock at the date of grant over the exercise price. Warrants issued to non-employees are accounted for using the fair value method of accounting as prescribed by SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Compensation costs are amortized in a manner consistent with Financial Accounting Standards Board Interpretation (FIN) No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” The Company currently uses the Black-Scholes option pricing model to value options and warrants granted to non-employees.

If the fair value based method had been applied in measuring employee stock-based compensation expense, the pro forma effect on net loss and net loss per share would have been as follows (in thousands, except per share amounts):

The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with no expected dividends and the following weighted-average assumptions:

The weighted-average fair value estimated at the date of grant for restricted stock grants and stock options granted was:

On April 29, 2003, the Company commenced a voluntary stock option exchange program available to certain employees. Only employees who had received options to purchase 10,000 shares or more of common stock granted on or after September 13, 2002 were eligible to participate. All of these employees had been excluded from the March 13, 2003 stock exchange program pursuant to its terms (see discussion of the March 13, 2003 plan below). The following employees were also not eligible: the Company’s CEO, and vice-president level employees or higher who had executed a severance agreement or a transition agreement and had been notified that their jobs would be eliminated. Non-employee members of the Board of Directors were also not eligible to participate. Under the program, eligible employees had the opportunity to surrender previously granted outstanding stock options in exchange for an equal or lesser number of replacement options to be granted at a future date no sooner than December 5, 2003. Options to acquire a total of 2.1 million shares of the Company’s common stock were eligible to be exchanged under the program. As a result of this April 29, 2003 stock option exchange program, options to acquire

approximately 521,000 shares of the Company’s common stock were accepted for exchange, and the Company was obligated to grant replacement options to acquire a maximum of approximately 155,000 shares of the Company’s common stock. On December 5, 2003, the Company granted the replacement options to acquire approximately 155,000 shares of the Company’s common stock. The exercise price of the replacement options was $11.62 per share, which was equal to the market value of the Company’s common stock on the date of grant.

On February 17, 2003, the Company announced a voluntary stock option exchange program that commenced March 13, 2003 for certain employees. The following employees were not eligible: the Company’s CEO, vice-president level employees or higher who had executed a severance agreement or a transition agreement and had been notified that their jobs would be eliminated, employees based in Switzerland and employees who received 10,000 or more options on or after September 13, 2002. Non-employee members of the Board of Directors were not eligible to participate. Under the program, eligible employees had the opportunity to surrender previously granted outstanding stock options in exchange for an equal or lesser number of replacement options to be granted at a future date to be determined by the Compensation Committee of the Board of Directors which was required by the terms of the exchange to be on or between October 25 and November 24, 2003. Options to acquire a total of 12.8 million shares of the Company’s common stock were eligible to be exchanged under the program and 7.0 million shares of the Company’s common stock were accepted for exchange. On October 27, 2003, the Company granted the replacement options to acquire approximately 3.6 million shares of the Company’s common stock. The exercise price of the replacement options was $12.66 per share, which was equal to the market value of the Company’s common stock on the date of grant.

The exchange programs are designed to comply with FIN No. 44 “Accounting for Certain Transactions Involving Stock Compensation,” and the Company did not incur any compensation charges as a result of these stock option exchange programs.

In January 2004, the Compensation Committee of the Board of Directors granted approximately 100,000 restricted shares of the Company’s common stock to the CEO and certain executive officers and key employees of the Company. The restricted grants were made based upon meeting certain financial performance goals previously set by the Compensation Committee and vest over a three-year period in equal monthly installments from the date of grant through January 2007. The Company recorded approximately $1.6 million of deferred stock-based compensation on the date of grant related to the issuance of restricted shares.

In October 2003, the Compensation Committee of the Board of Directors granted approximately 100,000 restricted shares of the Company’s common stock to the CEO and certain executive officers of the Company. The Company recorded approximately $1.3 million of deferred stock-based compensation on the date of grant related to the issuance of restricted shares. The restricted shares vest monthly over a period of three years from the date of grant through October 2006.

The Company has selected the three months ending March 31 as the period in which the required annual impairment test will be performed under SFAS No. 142. During the quarter ended March 31, 2004, the Company completed the annual impairment test and determined that there was no impairment necessary.

The significant decrease in the Company’s market capitalization through September 30, 2002, as well as its announcement during the quarter ended September 30, 2002 of a restructuring, triggered the requirement for an impairment analysis of the Company’s goodwill and long-lived assets under SFAS No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Upon completion of the recoverability test under SFAS No. 144, the Company determined that none of its long-lived assets were impaired. The Company concluded it has 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 the Company’s market capitalization from the date of the SignalSoft acquisition, all remaining goodwill attributable to the SignalSoft acquisition as of September 30, 2002 was determined to be fully impaired in the amount of $7.3 million. During the quarter ended December 31, 2002, the Company recorded additional SignalSoft goodwill of $758,000 related to the finalization of the purchase price allocation, which was fully impaired that same quarter. During the nine months ended March 31, 2003 the Company fully impaired SignalSoft goodwill in the amount of $8.0 million and is recorded under “Amortization and impairment of goodwill and other intangible assets” in the Company’s Condensed Consolidated Statements of Operations.

Upon adoption of SFAS No. 142 on July 1, 2002, the Company assessed whether goodwill recorded in connection with the acquisition of Ellipsus was impaired. The Company completed step 2 of SFAS No. 142’s transitional goodwill impairment test during the quarter ended December 31, 2002 and recognized a $14.5 million goodwill impairment charge, which was recorded as a “Cumulative effect of change in accounting principle” in the Company’s Condensed Consolidated Statements of Operations.

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 implicit valuation of the business in connection with recently completed financing or similar transactions, the business’ current solvency and its access to future capital. The Company recorded $1.9 million and $3.9 million in impairment charges to nonmarketable equity securities related to the impairment of certain of its investments during the three and nine months ended March 31, 2003, respectively. These impairment charges are recorded within “Write-down of non-marketable equity securities” in the Company’s Condensed Consolidated Statements of Operations. As of March 31, 2004, the remaining book value of the investments in nonmarketable equity securities was approximately $1.1 million within “Deposits and other assets” in the Company’s Condensed Consolidated Balance Sheets.

The following summarizes the Company’s long-term investments and restricted cash and investments (in thousands):

The Company is required to maintain collateralized letters of credit for certain facility leases. The collateral comprised cash equivalents and investments in federal agencies and corporate bonds at June 30, 2003 and certificates of deposit at March 31, 2004. These funds have been classified as restricted cash. The aggregate balance of the collateral was $22.3 million and $17.5 million at June 30, 2003 and March 31, 2004, respectively.

As part of the Company’s Convertible Subordinated Notes, issued on September 9, 2003, see Note 7(e), the Company was required to purchase U.S. government securities sufficient to provide payment for the initial six interest payments totaling $12.1 million. These funds have been classified as restricted cash, the balance of which was $10.1 million at March 31, 2004.

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

Total amortization related to intangible assets is set forth in the table below (in thousands):

Included within “Cost of revenues – License” on the Condensed Consolidated Statement of Operations is amortization related to customer contracts and developed and core technology that totals approximately $0.6 million and $0.7 million for the three months and $2.4 million and $3.3 million for the nine months ended March 31, 2004 and 2003, respectively.

The following tables set forth the carrying amount of intangible assets, net (in thousands):

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

At March 31, 2004 and June 30, 2003, the Company had deferred revenues of $70.8 million and $73.8 million, respectively. Deferred revenues are comprised of license fees, new version coverage and maintenance and support elements and professional services. Deferred revenues represent amounts billed:

Amounts in accounts receivable that have offsetting balances in deferred revenue aggregated approximately $28.8 million and $33.0 million at March 31, 2004 and June 30, 2003, respectively.

On September 9, 2003, the Company issued $150.0 million aggregate principal amount of its 2 ¾% Convertible Subordinated Notes (the Notes) due September 9, 2008 to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, resulting in net proceeds to the Company of approximately $145.7 million. The Notes are recorded on the Company’s Condensed Consolidated Balance Sheet net of a discount of $4.1 million, which is being amortized over five years under the effective interest rate method. Approximately $0.5 million of the discount has been amortized during the nine months ended March 31, 2004. The Company used approximately $12.1 million of the net proceeds to purchase a portfolio of U.S. government securities that has been pledged to secure the payment of the first six scheduled semi-annual interest payments on the Notes. The Notes are otherwise unsecured obligations. The pledged securities have been recorded as restricted cash within the Company’s Condensed Consolidated Balance Sheet at March 31, 2004.

Each note is convertible at any time at the option of the holder thereof. The Notes are convertible at a conversion price of $18.396 per share, which is equal to a conversion rate of 54.3596 shares per $1,000 principal amount of Notes. The conversion rate may be adjusted upon the occurrence of specified events, including payment of certain dividends or other distributions of cash, stock or other assets to holders of our common stock, certain stock splits or combinations, issuances of certain rights or warrants to purchase our common stock and purchases of our common stock pursuant to certain tender or exchange offers, each in accordance with the terms of the indenture governing the Notes (the “Indenture”), but will not be adjusted for accrued interest. The Company may redeem some or all of the Notes for cash at any time on or after September 9, 2006 in accordance with the Indenture if the price of the Company’s common stock exceeds a specified threshold. In addition, the Company has the right to voluntarily reduce the conversion price for specified periods as provided in the Indenture.

In addition, upon specified change in control events relating to the Company, each holder may require the Company to purchase all or a portion of its Notes, as provided in the Indenture. Upon such an event, the Company will have the option to pay the purchase price in cash or, subject to certain conditions, shares of its common stock.

The Notes are subordinated to the Company’s future senior indebtedness and effectively subordinated to all indebtedness and other liabilities of the Company’s subsidiaries. The Company incurred approximately $0.9 million in debt issuance costs which are recorded in “Deposits and other assets” on the Company’s Condensed Consolidated Balance Sheet. The Company is amortizing the debt issuance costs over the life of the Notes using the effective interest method. Consequently, during the nine months ended March 31, 2004, the Company amortized approximately $0.1 million of debt issuance costs.

In addition, on October 7, 2003, the Company filed a registration statement on Form S-3 (Registration No. 333-109547) with respect to the resale of the Notes and the shares of common stock issuable upon conversion of the Notes. The registration statement became effective on March 17, 2004.

The components of accumulated other comprehensive income are as follows (in thousands):

Comprehensive loss is comprised of net loss, change in unrealized gain on marketable securities and change in accumulated foreign currency translation adjustments (in thousands):

IPO securities class action. IPO securities class action. 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. 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.). It is brought purportedly on behalf of all persons who purchased the Company’s common stock from June 11, 1999 through December 6, 2000. The defendants are the Company and five of its present or former officers (the “Openwave Defendants”), and several investment banking firms that served as underwriters of the Company’s initial public offering and secondary public offering. Three of the individual defendants were dismissed without prejudice, subject to a tolling of the statute of limitations. The complaint alleges liability 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 statements 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. Similar allegations were made in over 300 other lawsuits challenging public offerings conducted in 1999 and 2000, and the cases were consolidated for pretrial purposes.

The Company has accepted a settlement proposal presented to all issuer defendants. Plaintiffs will dismiss and release all claims against the Openwave Defendants, in exchange for a contingent payment by the insurance companies responsible for insuring the issuers, and for the assignment or surrender of control of certain claims the Company may have against the underwriters. The Openwave Defendants will not be required to make any cash payment in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds the amount of insurance coverage, a circumstance which the Company does not believe will occur. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to or opt out of the settlement. In Management’s view, a loss is not probable or estimable. Therefore no amount has been accrued as of March 31, 2004.

Commercial Dispute. A reseller of the Company, Intrado Inc., commenced arbitration proceedings against the Company on August 11, 2003 alleging breach of contract in connection with the performance of certain software and services. The demand for arbitration does not include a specific demand for damages. The Company also has asserted arbitration counterclaims alleging that Intrado used the Company’s technology to develop a competing service. Although the arbitration is in its preliminary stages, the Company believes the claims are without merit, the Company intends to defend the arbitration vigorously, and the Company does not believe that the resolution of this matter will have a material adverse effect on its financial position. In Management’s view, a loss is not probable or estimable. Therefore no amount has been accrued as of March 31, 2004.

As a result of the Company’s change in strategy and its desire to improve its cost structure, the Company announced three separate restructurings during the years ended June 30, 2003 and 2002. These restructurings included the fiscal 2003 fourth quarter restructuring (FY2003 Q4 Restructuring), the fiscal 2003 first quarter restructuring (FY2003 Q1 Restructuring), and the fiscal 2002 restructuring (FY2002 Restructuring).

The following table sets forth the restructuring activity through March 31, 2004 (in thousands):

Note (1) Total charges for the September 30, 2003 quarter does not include $738,000 of impairment on fixed assets as represented on the Company’s Condensed Consolidated Statements of Operations for the nine months ended March 31, 2004.

Note (2) Total charges for the March 31, 2004 quarter include $75,000 of impairment of fixed assets as represented on the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2004.

Facility costs represent the closure and downsizing costs of facilities that were consolidated or eliminated due to the restructurings. 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: (1) the 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 will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). Since June 30, 2001, 18 sites have been vacated and 8 sites have been selected for downsizing. In addition to the lease contracts accruals, facility’s costs include the impairment of leasehold improvements and furniture and fixtures on the vacated facilities or planned vacated facilities, and accordingly are reclassified against property and equipment.

Severance and employment-related charges consist primarily of severance, health benefits, other termination costs and legal costs as a result of the termination of approximately 400, 480, and 200 employees during the FY2002, FY 2003 Q1, and FY 2003 Q4 Restructuring plans, respectively.

Other charges consist of fees resulting from the impairment of certain acquired software as a result of the related restructuring, termination costs of certain software license arrangements and other fees.

The FY2003 Q4 Restructuring was announced during the three months ended June 30, 2003 and included further reductions in operating expenses in order to better align the Company’s overall costs structure with current revenues. These reductions included a decrease in Company workforce of approximately 200 employees. The Company completed a majority of these reductions by December 31, 2003. In connection with the implementation of the restructuring plan, during the nine months ended March 31, 2004, the Company incurred an additional $0.5 million in facilities charges, $1.1 million in severance and $75,000 in fixed asset impairment charges to bring the total restructuring cost to approximately $10.3 million. The restructuring costs included facility and equipment costs of $1.8 million, severance and employment related charges of $6.7 million, and other restructuring related costs of $1.8 million. The remaining accrual as of March 31, 2004 of $1.3 million consists of $0.7 million we expect to pay during the fourth quarter of fiscal year 2004 and $0.6 million we expect to pay on various dates through June 2008.

The FY2003 Q1 Restructuring was announced during the three months ended September 30, 2002 and included the consolidation of products within three core product groups: application software and services, infrastructure software and services, and client software and services. This restructuring plan resulted in a decrease in the Company’s workforce of approximately 480 employees as of June 30, 2003. In connection with the implementation of this restructuring plan, the Company reversed approximately $0.1 million as a result of changes in certain estimates during the nine months ended March 31, 2004 to bring the total restructuring costs to approximately $82.2 million in charges. The restructuring costs included facility and equipment costs of $64.2 million, severance and employment related charges of $17.7 million, and other restructuring related costs of $0.3 million. This restructuring effort lead to approximately $25 to $30 million in cost reductions in total cost savings, of which approximately 26% was realized in cost of revenues, 40% in research and development departments, 23% in sales and marketing departments and 11% in the general and administrative departments. The remaining accrual as of March 31, 2004 is $44.4 million, of which $1.9 million will be paid during the fourth quarter of fiscal year 2004 and $42.5 million will be paid on various dates through April 2013.

The FY 2002 Restructuring was announced during the three months ended December 30, 2001 as a result of Company’s desire to improve its cost structure and profitability. This 2002 restructuring plan resulted in a decrease in the Company’s workforce of approximately 400 employees during the fiscal year-ended June 30, 2002. In connection with the implementation of the restructuring plan, the Company incurred an additional $0.7 million in charges primarily as a result of changes in the estimates of sublease income during the nine months ended March 31, 2004 to bring the total restructuring charge to $38.6 million in restructuring costs and an additional $1.9 million in accelerated depreciation charges related to the planned closing of certain facilities under the restructuring plan. The restructuring costs included facility and equipment costs of $25.5 million, severance and employment-related charges of $10.3 million and other restructuring-related charges of $2.8 million. The restructuring effort led to $25 to $30 million in quarterly cost savings, of which approximately 10% was realized in cost of revenues, 35% was realized in the research and development departments, 30% in the sales and marketing departments and 25% in the general and administrative departments. The remaining accrual as of March 31, 2004 of $6.8 million consists of $1.1 million, which we expect to pay during the fourth quarter of fiscal year 2004, and $5.7 million to be paid on various dates through 2012.

On May 10, 2004, the Company announced that it had entered into an agreement to acquire all outstanding shares of Magic4 Limited, a private company incorporated in the United Kingdom, for a total purchase price of approximately $82.6 million, or $75 million net of cash on hand at Magic4. The purchase price will be paid with a combination of cash and stock, with the exact proportion to be determined by Openwave prior to closing. The transaction is expected to close in July 2004 and is subject to customary closing conditions.

In addition to historical information, this quarterly report 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 speak only as of the date of this quarterly report and are based upon current expectations and beliefs of our 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. Forward-looking statements include, among other things, the information and expectations concerning our future financial performance and potential or expected growth in our markets and markets in which we expect to compete,

business strategy, projected plans and objectives, anticipated cost savings from restructurings and our estimates with respect to future operating results, including, without limitation, earnings, cash flow and revenue. 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 which could cause actual results to differ materially include those set forth in the risks discussed below under the subheading “Risk Factors” under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report. 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 any subsequently filed reports.

We are a leading independent provider of open standards software products and services for the communications industry. Our customers are communication service providers, including wireless and wireline operators, and wireless device manufacturers worldwide. Our device software products consist of a number of applications such as messaging clients and phone browsers, as well as a platform for enabling data capable mass-market phones. Our mobile software products, including service enablers and gateways, provide the underlying infrastructure to enable data services such as multi-media messaging, content and information services, media and game downloads, location services, and mobile device management. Our wireline software products consist of email, IP-based voicemail and anti-abuse solutions (i.e. anti-spam and anti-virus) to enable rich communications services for broadband and ISP operators.

As one of the early innovators in mobile data and messaging services, we have been a pioneer in the convergence of the Internet and mobile communications. In 1993, we developed our first e-mail messaging server. In 1995, we developed our initial technology that enables the delivery of mobile data services to mobile phones. In 1996, we introduced and deployed our first gateway and browser products. Last year, we launched new products, including our WAP2 Gateway and Openwave phone software tools Version 7 (V7), designed to bring a better user experience to mobile data applications that emphasize advanced graphics and multi-media messages on color handsets. We also introduced Email Mx 6.0, our next generation email and messaging platform.

The demand for software to launch services such as picture messaging, downloading ringtones, XHMTL browsing and location services has started to gain momentum, which we believe will benefit Openwave. However, the industry must help drive usage of these services to help operators and in turn companies like Openwave increase transaction-based revenues. Openwave’s deep industry experience and relationships with wireless and wireline operators and leading handset manufacturers place us in a unique position to view the market, its challenges and opportunities. Openwave has a team of professionals who work with customers and partners around the world at any stage of developing and implementing services to help identify ways to distinguish and enhance services. Examples include identifying which services are relevant to subscribers, marketing the right services to fuel adoption and sharing best practices.

On the wireline side of our business where we sell email, anti-spam and anti-virus products according to a recent study, broadband global subscribers grew to 101 million in the quarter ended December 31, 2003, up from 89 million in the quarter ended September 30, 2003, led by the addition of 9 million subscribers in DSL,.

We expect growth in broadband and mobile data to continue throughout the year with a greater emphasis on improving the user experience for data services, both on mobile phones and PC email. However, market successes and design wins will not immediately translate into revenue for Openwave. The markets in which we sell are highly competitive and we may experience heavy pricing pressure from competitors who may be short term focused because they are in a financially unstable condition or from competitors who place a primary emphasis on selling other hardware, software or services.

Openwave’s mission is to help customers perfect their user experience for mobile data and wireline services to attract subscribers, build brands and create subscriber loyalty. Openwave delivers this value in three core areas:

We deliver this value through products and technologies, which we refer to as “our IP,” deep industry experience and knowledge which we refer to as “our IQ,” and services and partnerships with operators and manufacturers to continuously innovate and deliver differentiated services to subscribers.

We are aggressively working with customers to help them grow their business by driving mobile data usage, delivering an integrated messaging experience and protecting their users against spam and viruses. As such we expect to compete and grow our business in products and partnerships in the areas of services, phone software, infrastructure software and messaging software such as multimedia, IP-voice mail, email, and messaging anti-abuse software. We are focused on delivering IP-based open standards solutions that are compliant with 3GPP, OMA and other relevant standards bodies. Our product development is focused on the following: client software, value-added services solutions for mobile infrastructure and messaging applications built around a flexible messaging platform. Our unique competitive advantage is that we can deliver a complete offering from the client to the server along with services, whereas our competitors have one of these pieces as their key strength and advantage.

We were incorporated in 1994 as a Delaware corporation and completed our initial public offering in 1999. Our principal executive offices are located at 1400 Seaport Boulevard, Redwood City, CA 94063. Our telephone number is (650) 480-8000. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 of the Securities Exchange Act of 1934, as amended, are available free of charge through our website at www.openwave.com, as soon as reasonably practicable after we file or furnish such material with the SEC. Information contained on our website is not incorporated by reference into this report.

On April 27, 2004, we announced that Ken Denman, chairman of the board and chief executive officer of iPass, was appointed to the Board of Directors. Mr. Denman has more than 20 years of experience in the telecommunications and IT industries and has lead iPass through ten quarters of continuous growth, overseeing that company’s move into wireless and broadband.

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:

These policies, and our procedures related to these policies, are described in detail below. In addition, please refer to the Notes to Condensed Consolidated Financial Statements for further discussion of our accounting policies.

We recognize revenue in accordance with Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-9, “Modification of 97-2Software 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 No. 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 that we make is the assessment that “collectibility is probable.” Our recognition of revenue is 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. In cases where collectibility is not deemed probable, revenue is recognized at the time collection becomes probable, which is generally upon receipt of cash.

Another critical judgment that we make involves the “fixed or determinable” criterion. We consider payment terms where arrangement fees are due within 12 months from delivery to be normal. Payment terms beyond 12 months from delivery are considered extended and not fixed or determinable. For arrangements with extended payment terms arrangement fee revenues are recognized when fees become due, assuming all other revenue recognition criteria have met. In arrangements where fees are due within one year or less from delivery, we consider the entire arrangement fee as “fixed or determinable.”

For contracts accounted for under SOP No. 81-1, we believe we are able to reasonably estimate, track, and project the status of completion of a project, and therefore use the percentage of completion method as our primary method for recognizing revenue as recommended under SOP No. 81-1. We also consider customer acceptance our criteria for substantial completion.

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 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 estimated life of the software. This additional deferral of maintenance and support revenue results in a smaller amount of residual license revenues to be recognized upon delivery.

During the year ended June 30, 2002, we entered into a significant contract with a service partner, under which we have been porting our software to the service partner’s hardware/software platform in exchange for a predetermined reimbursement rate; the partner resells our products and engages in other joint activities. We recognize porting services revenues from this contract as project revenues in our Consolidated Statement of Operations as the services are performed. With our adoption of Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” during the quarter ended December 31, 2002, we separate the reseller and porting activities related to the project and will recognize reseller revenues separately as they are earned. 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.

In certain arrangements we recognize revenue based on information contained in license usage reports provided by our customers. If such reports are not received in a timely manner, we estimate the revenue based on historical reporting trends, if possible.

We maintain an allowance for doubtful accounts for estimated losses resulting from the anticipated non-payment of contractual obligations to us.

The total allowance for doubtful accounts is comprised of a specific reserve and a general reserve. 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 all customer receivables to determine if a specific reserve is needed, based on our knowledge of the customer’s ability to pay. If the financial condition of a customer were to deteriorate, resulting in an impairment of their ability to make payments, a specific allowance would be made. When a customer is specifically identified as uncollectible, the total customer receivable is reduced by the customer’s deferred revenue balance resulting in the net specific identified reserve, and we discontinue recognition of revenue from that arrangement. In addition, we maintain a general reserve for all other receivables not included in the specific reserve by applying various specific percentages of projected uncollectible receivables to the various aging categories. In determining these percentages, we analyze our historical collection experience and current economic trends, as well as determine the average deferred revenue and subsequent collections that are related to accounts receivable.

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.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets,” 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, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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 three months 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 our market capitalization as the best evidence of fair value. This fair value is then compared to the carrying value of the reporting unit. During the quarter ended March 31, 2004, the we completed the annual impairment test and determined that there was no impairment necessary.

We regularly perform an impairment assessment of our 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 implicit valuation of the business indicated by recently completed financing or similar transactions, the business’ current solvency and its access to future capital. As of March 31, 2004, the remaining book value of the investments in nonmarketable equity securities was approximately $1.1 million and is recorded within “Deposits and other assets” in our Consolidated Balance Sheets.

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 consist of the loss after our cost recovery efforts from subleasing a building, certain estimates were made related to: (1) the time period over which the relevant building would remain vacant, (2) sublease terms and (3) sublease rates, including common area charges. These estimates 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 and fiscal 2002 restructuring plans could be as much as $25.0 million higher if facilities operating lease rental rates continue to decrease in the applicable markets or if no suitable tenant is found 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 probable number of employees to be terminated and an estimate of the amount to be paid to each terminated employee in accordance with SFAS No. 112, ‘Employers’ Accounting for Postemployment Benefits.”

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 majority of our revenues have been derived from sales to a limited number of customers and our sales are highly concentrated. Significant customers during the three months and nine months ended March 31, 2004 and 2003 include KDDI and Sprint. Sales to KDDI accounted for 5% and 7% of total revenues during the three months ended March 31, 2004 and 2003, respectively, and 5% and 12% of total revenues during the nine months ended March 31, 2004 and 2003, respectively. Sales to Sprint accounted for 7% and 14% of total revenues during the three months ended March 31, 2004 and 2003, respectively, and 5% and 14% of total revenues during the nine months ended March 31, 2004 and 2003, respectively.

The following table presents selected revenue information for the three and nine months ended March 31, 2004 and 2003, respectively (in thousands):

License revenues increased 9.8% for the three months but decreased 1.9% for the nine months ended March 31, 2004, respectively, compared to the respective prior year periods. The overall decrease for the nine months ended March 31, 2004, was partially attributed to the economic downturn that significantly affected the telecommunications market, which resulted in a reduced number and value of new contracts and increased competition. The increase quarter over quarter resulted primarily from an increase in subscriber growth in the March quarter and acceptance of our product upgrades.

Maintenance and support services revenues increased 11.0% and 11.9% for the three and nine months ended March 31, 2004, respectively, compared to the respective prior year periods. The increase is consistent with the growth in the subscriber base of our customers and our ability to maintain contractual renewal rates of existing customer agreements.

Professional services revenues increased 192.9% and 76.5% for the three and nine months ended March 31, 2004, respectively, compared to the respective prior year periods. The increase was primarily due to an increase in the number of custom and extended solutions projects we have engaged in as well as an increase in services provided in relation to our products upgrades on our existing technology and other value-added services to our customers.

Project revenues decreased 83.8% and 43.2% for the three and nine months ended March 31, 2004, respectively, compared to the respective prior year periods and represent amounts recognized under our porting services arrangement with a service partner. At this time the porting project is substantially complete. As we complete the final milestones on this project, we anticipate significantly reduced project revenues going forward.

The following table presents cost of revenues as a percentage of related revenue type for the three and nine months ended March 31, 2004 and 2003, respectively (in thousands):

Cost of license revenues consists of third-party license and related support fees as well as amortization of customer contract and relationship intangibles related to prior acquisitions.

Cost of license revenues during the nine months ended March 31, 2004, as compared to the respective prior year period, was relatively flat with overall increases in royalty costs associated with anti-virus and anti-spam products totaling $1.2 million for which revenue was recognized in the current period, offset by a $0.9 million decrease in amortization of acquisition-related intangibles, and $0.3 million of lower depreciation and other costs. During the respective periods, margins remained relatively flat.

Cost of license revenues during the three months ended March 31, 2004, as compared to the respective prior year period, was relatively flat with $0.1 million increase in royalty costs associated with anti-virus and anti-spam products offset by slight decreases in other costs.

Cost of maintenance and support services revenues consists of compensation and related overhead costs for personnel engaged in training and support services to wireless device manufacturers and communication service providers.

The decrease in costs of maintenance and support service revenues during the nine months ended March 31, 2004, as compared to the respective prior year period resulted from a decrease in labor, overhead, and other employee costs due to a decrease in our average headcount of 33 employees as a result of our realignment and restructuring efforts. This, along with an increase in revenues due to increased subscriber growth, is responsible for increased margins in this category.

Cost of maintenance and support service revenues during the three months ended March 31, 2004, as compared to the respective prior year period, remained relatively flat with no significant variances as a result of headcount remaining relatively flat.

Cost of professional services revenues consists of compensation and independent consultant costs for personnel engaged in performing professional services and related overhead.

Professional services costs increased by $10.3 million for the nine months ended March 31, 2004 as compared to the respective prior year period. During the FY2003 Q1 restructuring, which took place late in the first quarter of fiscal 2003, we reorganized the professional services departments and sales and marketing departments and focused the activities of the professional services staff more specifically towards consulting activities and away from selling activities. Therefore, during the nine months ended March 31, 2003, a larger portion of the costs were allocated to sales and marketing operations as compared to the nine months ended March 31, 2004, increasing the variance between the two respective periods by approximately $2.5 million. Increased demand for our products resulted in an increase of $4.4 million in subcontractor costs, $1.7 million in total travel charges, an increased utilization of the services of our research and development group resulting in $1.9 million in cross-charges, and an increase in other employee related charges of $0.5 million. These charges were offset by an increase of $0.7 million in deferred charges on professional services, which will be expensed in the future as revenue is recognized. Professional services gross margin increased by 9% for the nine months ended March 31, 2004, compared to the respective prior year period primarily due to the prior year having more expenses incurred on projects where revenue is not recognized until the customer payment is received, offset by the realignment of the sales force as discussed above.

Professional services costs increased by $5.5 million for the three months ended March 31, 2004 as compared to the respective prior year period. The increased demand for our products resulted in an increase of $2.9 million in sub-contractor costs, $1.3 million in total travel charges, an increase in the utilization of the services of our research and development group resulting in $1.4 million in cross charges, and $0.8 million in other employee related charges. These increases were offset by an increase of $0.9 million in deferred charges on professional services, which will be expensed in accordance with revenue recognized.

Professional services gross margin increased by 41% for the three months ended March 31, 2004, compared to the respective prior year period primarily due to the timing of revenue recognition on multiple-element arrangements.

The cost of project revenues includes direct costs incurred in the performance of porting services for an arrangement with a service partner.

Cost of Project revenues for the three and nine months ended March 31, 2004 decreased by 82.4% and 63.9%, respectively, as compared with the same periods last year. As the porting project nears completion, we are dedicating fewer resources in this area, resulting in lower costs and revenues with this project. The current year nine month period was impacted by the recognition of revenue in the September quarter 2003 as a result of our ability to reach certain project milestones, which had previously been deferred. Without the impact of this event, margins would have remained relatively flat.

We have reduced costs and expenses to better align our resources with revenue opportunities anticipated in the current information technology market. In the fiscal year ended June 30, 2003, we announced two separate restructurings that reduced our workforce by approximately 14% and 24%, respectively. The reduced costs associated with the restructurings were primarily recognized during the latter part of fiscal 2003. Therefore, average overall headcount decreased by 216 and 408 people during the three and nine months ended March 31, 2004 compared to the three and nine months ended March 31, 2003. In addition to the restructurings, we also reduced variable costs across the company as a result of enhancing discretionary spending controls. The impact of these cost-cutting measures resulted in an overall decrease of 9.2% and 42.7% for the three and nine month periods ended March 31, 2004 as compared to 2003, respectively.

The following table represents operating expenses for the three and nine months ended March 31, 2004 and 2003, respectively (in thousands):

Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development. We believe that investments in research and development are critical to remain competitive in the market place and are directly related to continued timely development of new and enhanced products. While we continue to focus our attention on research and development, we undertook initiatives during our restructuring efforts to redistribute some of our research and development work offshore as well as increase our utilization of other outside consultants.

As a result of our restructuring efforts, average research and development headcount decreased by 171 employees for the nine months ended March 31, 2004, compared to the respective prior year period. The decrease in the headcount resulted in a $13.0 million decrease in salaries and other salary-related costs for the prior year comparative period. We also incurred lower bonuses of $0.8 million as a result lower headcount in the current period and we had additional retention bonuses charged during the prior year period due to acquisitions. In addition, there were lower overall telecommunication charges of $0.8 million due to the renegotiation of our agreements with outside vendors and other cost saving measures, offset by other increases of $0.8 million. Depreciation costs decreased by $2.4 million for the current period as compared to the prior year fiscal period as a result of lower overall headcount and continues to decrease as existing assets become fully depreciated. Allocation costs also decreased by $6.2 million during the current year period, as compared to the respective prior fiscal period due to a $4.4 million decrease in costs allocated in as a result of lower headcount and overhead from restructuring efforts as well as lower depreciation and IT costs, and an increase in allocated costs out primarily to the Professional Services organization of $1.8 million for services provided on extended and custom solutions projects. The overall decrease was partially offset by an increase in our dependence on contractors leading to a $2.0 million increase in contingent workers expense due primarily to the use of contractors as a short term solution to meet customer commitments and an overall decrease in the allocation of certain employee expenses out to other departments of $5.1 million in the nine months ended March 31, 2004, compared to the respective prior year period and are comprised primarily of those costs associated with project revenues.

As a result of our restructuring efforts, average research and development headcount decreased by 116 employees for the three months ended March 31, 2004, as compared to the respective prior year period. The decrease in the headcount resulted in a $2.6 million decrease in salaries and other salary-related costs for the comparative periods. Depreciation costs decreased by $0.9 million for the current year period as compared to the prior year fiscal period as a result of lower overall headcount and continues to decrease as existing assets become fully depreciated. Allocation costs also decreased by $2.7 million, during the current year period, as compared to the respective prior year fiscal period due to a $1.1 million decrease in costs allocated in as a result of lower headcount and overhead from restructuring efforts as well as lower depreciation and IT costs, and an increase in allocated costs out to the Professional Services organization of $1.6 million for services provided on extended and custom solutions projects. The overall decrease was partially offset by an increase in our dependence on contractors leading to a $0.6 million increase in contingent workers expense due primarily to use of contractors as a short term solution to meet customer commitments and an overall increase in the allocation of certain employee expenses out to other departments of $2.0 million in the three months ended March 31, 2004, compared to the respective prior year period and are comprised primarily of those costs associated with project revenues.

Sales and marketing expenses include salary and benefit expenses, sales commissions, travel expenses, and related facility costs for our sales and marketing personnel. Sales and marketing expenses also include the costs of trade shows, public relations, promotional materials, redeployed professional service employees and other market development programs.

As a result of our restructuring efforts, average sales and marketing headcount decreased by 142 employees for the nine months ended March 31, 2004, as compared to the respective prior year period, resulting in a $12.2 million decrease in salaries and other salary-related costs. In addition, we had lower bonus costs of $0.8 million, as compared to the prior respective period. Additional cost savings efforts lead to an overall decrease in marketing expenses by $0.4 million, and lower depreciation expense of $0.6 million, for the current year period as compared to the respective prior year period. Finally, during the current period, as compared to the prior year period, we also reduced our overall telecom and connectivity costs by $1.3 million, and had lower travel and entertainment costs of $2.5 million due to lower overall headcount. Overall decreases in allocations for the current year period as compared with the prior year respective period were comprised of decreases in allocated consulting costs of $2.9 million primarily related to reductions in allocated professional service costs as a result of our restructuring efforts to focus that group’s work more specifically on consulting activities as opposed to other development functions, as discussed within Cost of Professional Services Revenues. Additionally, overall overhead allocations decreased by $3.4 million as a result of overall lower headcount and other cost savings efforts. The overall decrease was partially offset by an increase in Commissions expense for the current year period as compared to the prior fiscal year period. Commissions increased by $6.7 million, as a result of changes in the sales compensation plans and the meeting of key sales objectives. Other increases for the same comparative periods included $0.4 million for contingent workers resulting from increased work on process related and other operational improvements and $0.7 million for professional fees primarily as a result of increases for outside services relating to the marketing communications for new product offerings and corporate sales training.

As a result of our restructuring efforts, average sales and marketing headcount decreased by 75 employees for the three months ended March 31, 2004, compared to the respective prior year period, resulting in a $1.6 million decrease in salaries and other salary-related costs. In addition, we had lower bonus costs of $0.6 million as compared to the prior respective period. Additional savings from our cost saving efforts lead to an overall decrease in marketing expenses by $0.3 million and lower depreciation expense of $0.3 million for the three months ended March 31, 2004 as compared to the respective prior year period. We also had other overall decreases of $0.8 million as a result of lower headcount and other cost savings efforts. The overall decrease was partially offset by an increase in Commissions expense for the three months ended March 31, 2004 as compared to the prior fiscal year period. Commissions increased by $0.9 million as a result of changes in the sales compensation plans and the meeting of key sales objectives. Other increases for the same comparative periods included $0.6 million and for contingent workers resulting from increased work on process related and other operational improvements and $0.5 million for professional fees primarily as a result of increases for outside services relating to the marketing communications for new product offerings and corporate sales training.

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and related facility costs for our finance, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for doubtful accounts, and expenses associated with computer equipment and software used in administration of the business.

As a result of our restructuring efforts, average general and administrative headcount decreased by 44 employees for the nine months ended March 31, 2004, as compared to the respective prior year period. The decrease in headcount resulted in a $3.5 million decrease in salaries and other salary-related costs for the year compared to the prior fiscal period. Bonus costs also decreased by $2.6 million as a result of not reaching certain incentive targets in the current period and the reduction in executive retention bonuses paid in the prior year period. We recognized additional savings from restructuring efforts leading to a decrease in employee staffing and recruiting costs of $0.8 million, lower facilities costs of $3.6 million, and a reduction in costs for outside service costs of $1.7 million, primarily relating to reduction in IT and facilities outside service providers and maintenance contracts, which were renegotiated as part of the overall cost savings effort. Depreciation costs decreased by $5.0 million for the current year period as a result of lower overall headcount and continues to decrease as existing assets become fully depreciated. The provision for doubtful accounts also decreased by $6.3 million as a result of improved cash collections and the collection of several accounts that had previously been written off. We also had a decrease in our dependence on contractors leading to a decrease in outside consulting costs of $0.9 million, lower overall travel and entertainment of $0.6 million and lower telecom and connectivity costs of $1.8 million primarily a result of our restructuring and costs cutting efforts. The overall decrease was

partially offset by an increase in the cost variance as a result of a decrease in allocations out to other departments and other costs. Reduction in allocations out to other departments and other costs of $14.5 million, related primarily to lower facility costs of $8.9 million, lower overall IT costs of $2.8 million as a result of our overall restructuring and cost cutting efforts. In addition we had an increase in allocated costs into G&A of $0.6 million, which relate primarily to increased support from IT for financial systems upgrades, enhancements and dedicated support. Other expenses overall also decreased by $2.2 million related to other cost cutting efforts.

As a result of our restructuring efforts, average general and administrative headcount decreased by 25 employees for the three months ended March 31, 2004, respectively, compared to the respective prior year period. The decrease in headcount resulted in a $0.6 million decrease in salaries and other salary-related costs for the year compared to the prior fiscal period. Bonus costs also decreased by $2.0 million as a result the reduction in executive retention bonuses paid in the prior year period. We recognized additional savings from restructuring efforts leading to a decrease in employee staffing and recruiting costs of $0.3 million, lower facilities costs of $0.3 million, and a reduction in costs for outside service costs of $0.5 million primarily relating to reduction in IT and facilities outside service providers and maintenance contracts, which were renegotiated as part of the overall cost savings effort. Depreciation costs decreased by $1.3 million for the current year period as a result of lower overall headcount and continues to decrease as existing assets become fully depreciated. The provision for doubtful accounts also decreased by $1.0 million as a result of improved cash collections and the collection of several accounts that had previously been written off. The overall decrease was partially offset by a decrease in allocations out to other departments and other costs. The reduction in allocations out to other departments and other costs of $4.3 million related primarily to lower facility costs of $1.6 million lower overall IT costs of $0.9 million as a result of our overall restructuring and cost cutting efforts. In addition we had an increase in allocated costs into G&A of $0.5 million, and lower other expenses of $1.3 million related to our other cost cutting efforts.

As a result of our change in strategy and our desire to improve our cost structure, we announced three separate restructurings during the years ended June 30, 2003 and 2002. (See also Restructuring-related assessments under Critical Accounting Policies.) These restructurings included the fiscal year 2003 fourth quarter restructuring (FY2003 Q4 Restructuring), the fiscal year 2003 first quarter restructuring (FY2003 Q1 Restructuring), and the fiscal year 2002 restructuring (FY2002 Restructuring.)

Restructuring and other charges totaled $0.7 million for the three months ended March 31, 2004 and $3.0 million and $83.2 million for the nine months ended March 31, 2004 and 2003, respectively.

Restructuring charges and other related costs of $3.0 million for the nine months ended March 31, 2004 related primarily to additional costs associated with the FY2003 Q4 Restructuring initiated in the June 2003. Costs for the nine months ended March 31, 2004 related primarily to facility and severance costs of approximately $1.6 million and $0.6 million, respectively, and other related costs of $0.8 million primarily related to the impairment of fixed assets.

Restructuring charges for the three months ended March 31, 2004 were $0.7 million and primarily resulted from changes in the estimates of sublease income.

The following table summarizes the future payments on the remaining restructuring liabilities, net of estimated sub-lease income (in thousands):

All stock-based compensation is being amortized in a manner consistent with Financial Accounting Standards Board Interpretation (FIN) No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” Stock-based compensation consists of continued amortization of the deferred stock-based compensation related to acquisitions, as well as options issued to non-employees and restricted stock granted to executives and other employees at exercise prices below the current fair value of our stock. The following table summarizes stock-based compensation by category (in thousands):

During the three and nine months ended March 31, 2003, we reversed approximately $0.5 million and $1.7 million in research and development stock-based compensation related to employees who have left the Company. Excluding the reversal, total stock-based compensation decreased approximately $0.3 million and $2.1 million during the three and nine months ended March 31, 2004, as compared to the respective prior year period due to continued amortization of deferred stock-based compensation.

Amortization and Impairment of Goodwill and Intangible Assets and In-process Research and Development

The following table presents the total amortization and impairment of goodwill and intangible assets (in thousands):

The decrease in amortization and impairment of goodwill and other intangible assets for the three and nine months ended March 31, 2004, as compared to the respective prior fiscal periods, was primarily due to the impairment of goodwill. Prior to our adoption of SFAS No. 142 on July 1, 2002, we were amortizing goodwill and other intangible assets on a straight-line basis over a three- to five-year period. Due to a decline in our market capitalization, we performed an impairment analysis during the three months ended September 30, 2002 and impaired $7.3 million of goodwill related to the SignalSoft acquisition. During the quarter ended December 31, 2002, we recorded additional SignalSoft goodwill of $0.8 million related to the finalization of the purchase price allocation, which was fully impaired during the same quarter. The impairment of the SignalSoft goodwill resulted in impairment charges of $8.0 million for the nine months ended March 31, 2003 under “Amortization and impairment of goodwill and other intangible assets” in our Condensed Consolidated Statement of Operations.

In addition to the discussion above regarding the impairment of goodwill and intangible assets, see “Critical Accounting Policies and Judgments – Impairment Assessments” for further discussion.

As a result of the SignalSoft acquisition, we recorded merger, acquisition and integration-related costs in the amount of $0.4 million for the nine months ended March 31, 2003 relating to retention bonuses for employees and other costs incurred solely as a result of the integration.

Interest income and other, net totaled approximately $1.2 million and $1.4 million for the three months ended March 31, 2004 and 2003, respectively, and totaled $3.4 million and $5.1 million for nine months ended March 31, 2004 and 2003, respectively. Although our overall cash and investments balance increased from $242.5 million at March 31, 2003 to $345.9 million at March 31, 2004 due to cash proceeds from the convertible subordinated notes issued on September 9, 2003, interest income decreased due to a decease in the average interest rates obtained on the invested balances and lower overall average cash balances during the first quarter ended September 30, 2003.

Included in “Interest income and other, net” is foreign exchange gain (losses), which totaled ($36,000) and $0.3 million for the three and nine months ended March 31, 2004 compared with $0.2 million and $0.4 million for the three and nine months ended March 31, 2003, respectively. These fluctuations are the result of our exposure to movements in foreign currency rate changes. We use hedges to limit our exposure to these types of movements.

We incurred interest expense during the three and nine months ended March 31, 2004 totaling $1.3 million and $2.9 million, respectively, due to the amortization of the discount and debt issuance costs, as well as an interest accrual of 2.75% per annum on the convertible subordinated notes issued September 9, 2003.

Income tax expense totaled $1.1 million and $3.3 million for the three months ended March 31, 2004 and 2003, respectively, and $7.5 million and $7.9 million for the nine months ended March 31, 2004 and 2003, respectively. Income taxes in all periods presented consisted primarily of foreign withholding and foreign income taxes. During the nine months ended March 31, 2004, we incurred a one time charge of $1.3 million related to a foreign jurisdiction tax audit of one of our customers.

During the quarter ended March 31, 2004, we recognized $1.1 million deferred tax asset related to our operations in a foreign jurisdiction, as we concluded that it is more likely than not the deferred tax benefit will be realized in the foreign jurisdiction. Recording this deferred tax asset produced a $1.1 million income tax benefit in the quarter ended March 31, 2004. Foreign withholding taxes fluctuate from year to year 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 1% to 4% 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 in tax jurisdictions other than the United Kingdom and Japan, 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.

As of June 30, 2003, we had net operating loss carryforwards for federal and state income tax purposes of approximately $1.1 billion and $402.0 million, respectively.

During the nine months ended March 31, 2003, we recognized a transitional impairment of $14.5 million upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” which was reported as a “Cumulative effect of change in accounting principle” on our Consolidated Statements of Operations.

Operating Lease Obligations, Off-Balance Sheet Arrangements and Contractual Obligations

Our restricted cash and investments increased by $5.3 million during the nine months ended March 31, 2004 to $27.6 million primarily due to the restriction of $10.1 million in cash for interest payments as a result of the convertible debt issuance, offset by a $4.8 million decrease in worldwide collateral obligations as they relate to our principle commitments on operating leases.

During the quarter ended September 30, 2003, we renegotiated the security obligation requirements on our operating lease agreements to remove the stipulation of 125% on the letter of credit be restricted and to replace it with a stipulation that only 100% of the letter of credit be restricted with the addition that the collateral needed to be invested in certificates of deposits. As of March 31, 2004, our principal commitments consisted of obligations outstanding under operating leases, as well as our convertible debt obligations.

In March 2000, we entered into a lease for approximately 280,000 square feet of office space in Redwood City, California (Redwood City Lease). The Redwood City Lease terms commenced in April 2001, and required a base rent of $3.25 per square foot per month increasing by 3.5% annually on the anniversary of the initial month of the commencement of the lease. The lease is for a period of 12 years from the commencement date. The agreement required that we provide a letter of credit in the amount of $16.5 million. In addition we have $1.0 million in letters of credits primarily related to facilities located outside of the Redwood City headquarters. The restricted cash on the operating lease commitments are earning an annual interest rate of approximately 1.88% as of March 31, 2004, and the resulting income earned is not subject to any restrictions.

In addition, during the quarter ended September 30, 2003, we issued $150 million in 2.75% convertible subordinated notes. As part of the debt issuance, we were required to place in escrow treasury strips at face value whose principal and related interest earned would be used to pay the first six semi-annual payments. The restricted cash and investments held in escrow under these agreements total $10.1 million and are earning an annual interest rate of approximately 1.55% as of March 31, 2004, and the resulting income earned is restricted.

Except for the operating lease obligations discussed above, we do not have any off-balance sheet arrangements as of March 31, 2004.

The following table discloses our gross contractual obligations as of March 31, 2004 (in thousands):

The following table presents selected financial information and statistics as of March 31, 2004 and June 30, 2003, respectively (in thousands):

We obtained a majority of our cash and investments through prior public offerings. We intend to use cash provided by such financing activities for general corporate purposes, including potential future acquisitions or other transactions. In addition, we issued $150 million in convertible subordinated notes during the three months ended September 30, 2003. While we believe that our current working capital and its anticipated cash flows from operations will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next 12 months, we may elect to raise additional capital through the sale of additional equity or debt securities, obtain a credit facility or sell certain assets. If additional funds are raised through the issuance of additional 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. In the mean time, we will continue to manage our cash portfolios in a manner designed to ensure that we have adequate cash and cash equivalents to fund our operations as well as future acquisitions, if any.

The increase in working capital of 81.6% as of March 31,2004 as compared to the fiscal year ended June 30, 2003, was primarily a result of the issuance of convertible debt, which lead to an increase in cash and cash equivalents and short-term investments.

Cash used for operating activities decreased by $2.3 million. During the nine months ended March 31, 2004 and 2003, we incurred charges related to our restructuring to improve our cost structure and profitability, and to change our strategy. The restructuring resulted in $16.3 million and $22.9 million of cash used in operations for the nine months ended March 31, 2004 and 2003. Furthermore, we received a settlement that resulted in a $3.6 million prepayment of sublease rental income during the nine months ended March 31, 2004. Excluding restructuring and the prepaid rental income, the cash flows used for operating activities totaled $34.9 million and $27.1 million for the nine months ended March 31, 2004 and 2003, respectively. Although we had an average of 408 more employees during the nine months ended March 31, 2003, total cash used for operations increased by $7.8 million during the nine months ended March 31, 2004 primarily due to $10.3 million of prepaid contract expenses related to a contract for which revenue will be recognized ratably over a 32 month period, offset by higher cash collections during the nine months ended March 31, 2003.

Cash flow provided by (used for) investing activities decreased by $54.6 million for the nine months ended March 31, 2004 as compared to the same period last year primarily as a result of receiving $72.8 million fewer net proceeds from the sales of short-term and long-term investments needed to fund our operations during the nine months ended March 31, 2004 as compared to the respective prior year period and a $5.3 million increase in restricted cash and investments primarily related to the debt offering discussed above under Operating Lease Obligations/Off-Balance Sheet Arrangements in the current year, offset by cash paid for the acquisition of Signalsoft of $19.0 million and higher purchases of property and equipment of $4.8 million in the prior year fiscal period.

During the nine months ended March 31, 2004, cash flows provided by financing activities increased by $159.8 million primarily due to the issuance of convertible debt for net proceeds of $145.7 million during the current year and a net increase of $14.3 million in proceeds from the exercises of employee stock options compared to the respective prior year period. The Company pays interest on the convertible subordinated Notes at 2.75% annually with the first payment due March 2004 and the principal due in full in September 2008, unless the Notes are converted per the terms of the Indenture. See the gross contractual obligation schedule in section “Operating Lease Obligations, Off-Balance Sheet Arrangements and Contractual Obligations” for the schedule of payments.

You should carefully consider the following risks, as well as the other information contained in our 2003 Annual Report, before investing in our securities. If any of the following risks actually occurs, our business could be harmed. You should refer to the other information set forth in this report on Form 10-Q or incorporated by reference in our annual report for the year ended June 30, 2003, including our consolidated financial statements and the related notes incorporated by reference herein and therein.

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

We have incurred losses since our inception, including losses of approximately $29.1 million during the nine months ended March 31, 2004. As of March 31, 2004, we had an accumulated deficit of approximately $2.6 billion, which includes approximately $2 billion of goodwill impairment and amortization. We currently have net losses and negative cash flows and expect to continue to spend significant amounts to develop or enhance our products, services and technologies and to enhance sales and operational capabilities. We may not achieve profitability in accordance with our expectations or at all. We will need to generate increases in revenue as well as reduce costs to achieve profitability. We face a number of risks including:

In addition, our customer base consists of a limited number of communication service providers and mobile device manufacturers. Our ability to achieve or maintain profitability depends in large part on our continued ability to introduce reliable and robust products that meet the demanding needs of these customers and their willingness to launch, maintain and market commercial services utilizing our products. As a result, our business strategy may not be successful, and we may not successfully address these risks.

We issued $150 million of senior convertible notes due September 2008, which we may not be able to repay in cash and could result in dilution of our earnings per share.

In September 2003, we issued $150 million of 2¾% senior convertible notes due September 9, 2008. The notes are convertible into our common stock at a conversion price of $18.396 per share, which would result in an aggregate of approximately 8.1 million shares, subject to adjustment upon the occurrence of specified events. Therefore, each $1,000 principal amount of the notes will initially be convertible into 54.3596 shares of our common stock prior to September 9, 2008 if the sale price of our common stock issuable upon conversion of the notes reaches a specified threshold or specified corporate transactions have

occurred. We may be required to repurchase all of the notes following a fundamental change of the Company, such as a change of control, prior to maturity. Following a fundamental change of the Company, we may choose to pay the purchase price of the notes in cash or shares of our common stock. We may not have enough cash on hand or have the ability to access cash to pay the notes if presented on a fundamental change or at maturity. In addition, the purchase of our notes with shares of our common stock or the conversion of the notes into our common stock could result in dilution of our earnings per share.

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

Our operating results have fluctuated in the past and may do so in the future. Our revenue, particularly our licensing revenue, is difficult to forecast and is likely to fluctuate from quarter to quarter. Factors that may lead to significant fluctuation in our operating results include, but are not limited to:

Our operating results could also be affected by disputes or litigation with other parties, acts of terrorism and war, general industry factors, including a slowdown in capital spending or growth in the telecommunications industry, either temporary or otherwise, general political and economic factors, including a further economic slowdown or recession and health crises or disease outbreaks.

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 may be of limited use. From time to time we may be unable to meet our internal projections or the projections of securities analysts and investors that follow us. To the extent that we are unable to do so, we expect that the trading price of our stock could fall dramatically. These fluctuations may be exaggerated if the trading volume of our common stock is low.

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. Significant customers for the three and nine months ended March 31, 2004 include KDDI and Sprint. Sales to KDDI accounted for approximately 5% and 5% of total revenues during the three and nine months ended March 31, 2004, respectively. Sales to Sprint accounted for approximately 7% and 5% of total revenues during the three and nine months ended March 31, 2004, respectively. Any of these customers may not continue to generate significant revenues for us and we may be unable to replace these customers may not continue to generate significant revenues for us and we may unable to replace these customers with new ones on a timely basis or at all.

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 forseeable 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.

If handsets are not widely adopted for mobile delivery of data services, our business could suffer.

We have focused a significant amount of our efforts on mass-market handsets as the principal means of delivery of data services using our products. If handsets are not widely adopted for mobile delivery of data services, our business could suffer materially. End-users currently use many competing products, such as portable computers and smart phones, to remotely access the Internet and e-mail. These products generally are designed for the visual presentation of data, while, until recently, handsets 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 data service in a rapidly evolving industry represents a significant risk to a primary standard emerging. If end-users do not adopt mobile phones or other wireless devices containing our browser or client middleware platform as a means of accessing data services, our business could suffer materially.

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. To date, only a limited number of communication service providers and other customers have implemented and deployed services based on our products. In addition, many of these customers are large telecommunications companies who may be able to exert significant influence over our relationship with them. Furthermore, we are dependent upon our customers having growth in subscriber adoption for additional purchases as well as future versions of our products. 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. Communication service providers and other partners may not widely deploy or successfully market services based on our products, and large numbers of subscribers might not use these services. The failure to do so could harm our operating results.

Our operating results are dependent on the level of technology spending by our customers.

Information technology spending on these items have substantially declined in the past, may deteriorate further or may not increase in accordance with our expectations, which would have a negative impact on our sales and operating results.

The market for our products and services is highly competitive. We may be unable to successfully compete which may decrease our market share and harm our operating results.

The market for our products and services is highly competitive. Many of our existing and potential competitors have substantially greater financial, technical, marketing and distribution resources than we have. Their greater financial resources have enabled, and may continue to enable, them to aggressively price, finance and bundle certain of their product offerings to attempt to gain market adoption or to increase market share. These activities have increased price pressure on us and increased the need for us to partner with larger resellers with broader product offerings and financing capabilities, both of which may negatively affect our market share and financial performance.

If our competitors offer deep discounts on certain products in an effort to gain market share or to sell other products or services, we may then need to lower prices, change our pricing models, or offer other favorable terms in order to compete successfully. Any such changes would be likely to reduce margins and could adversely affect operating results and constrain prices we can charge our customers in the future.

We expect that we will continue to 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:

Nokia also competes directly with us by offering WAP servers, client software and messaging (offering end-to-end solutions based on its proprietary smart messaging protocol and on MMS) to communication service providers. Nokia also markets its WAP server to corporate customers and content providers, which if successful, could undermine the need of communication service providers to provide their own WAP gateways (since these WAP servers directly access applications and services rather than through WAP gateways).

Qualcomm’s end-to-end proprietary system called “BREW” ^TM does not use our technology and offers wireless device manufacturers an alternative method for installing applications. Qualcomm’s strong market position in CDMA with its chipsets technology provides them with the competitive position to build the BREW system with CDMA operators. If Qualcomm’s BREW system is widely adopted it could undermine the need for wireless device manufacturers to install our client software and reduce our ability to sell gateways and wireless applications to communication service providers.

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 data services. In addition, communication service providers may encounter greater customer service demands to support data services via handsets 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.

Our intellectual property 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 secret laws to protect our intellectual property or proprietary rights in such 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 also 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, technology or trademarks. Effectively policing the unauthorized use of our products, technology and trademarks is time consuming and costly, and there can be no assurance that the steps taken by us will prevent infringement of our intellectual property or proprietary rights in our products, technology and 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, re-engineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products.

We attempt to avoid infringing intellectual property rights of third-parties in the operation of our business. 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 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 intellectual property 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 grow and the functionality of software products in different industry segments overlaps. In addition, from time to time, we or our customers may become aware of certain third party patents that may relate to our products. If a patent infringement claim is asserted against us, it 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 infringing or similar technology could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, the proliferation and evolution of operating system software in smartphones, a market segment backed by corporations with resources greater than ours, such as Microsoft and Nokia, may threaten the incumbency of our client software offerings as other software becomes more competitive in price.

We may not be successful in obtaining complete license usage reports from our customers on a timely basis, which could impact our reported results.

Although our customers are contractually obligated to provide license usage reports, we are sometimes unable to obtain such reports in a timely manner. In addition, the reports may not completely reflect actual usage. We assist customers in complying with this obligation by providing a software measurement tool, installing the measurement tool whenever possible and customizing that tool where appropriate. The measurement tool, however, currently is not installed with all of our customers, does not measure the use of all of our products and has other limitations that we are continuing to attempt to address by refining the tool. In addition, we may be unable to install our measurement tool with all of our customers or we may be unable to overcome all of the limitations currently within the tool. The inability to obtain accurate license usage reports on all of our customers could have an adverse impact on the revenues that we realize and could, accordingly, negatively affect our financial performance.

We rely on estimates to determine arrangement fee revenue recognition for a particular reporting period. If our estimates change, future expected revenues could adversely change.

For certain fixed fee solutions-based arrangements, we apply the percentage of completion method to recognize revenue. Applying the percentage of completion method, we estimate progress on our professional services projects, which determines license and professional service revenues for a particular period. If, in a particular period, our estimates to project completion change and we estimate project overruns, revenue recognition for such projects in the period may be less than expected or even negative.

Certain arrangements have refundability and penalty provisions that, if triggered, could adversely impact future operating results.

In certain of our solution-based arrangements, customers have refundability rights and can invoke penalties should we not perform against certain contractual obligations. If these refundability provisions or penalty clauses are invoked, certain deferred revenues may not be recognizable as revenue, negative revenues may be recorded, and certain deferred charges and penalty expenses may be recognized as expenses at such time.

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 could be harmed. Because we are in the business of providing Internet infrastructure software and services, 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 are 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 are 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 3rd generation 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 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 invest 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, September 2002 and June 2003, 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 and continue to be 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 are pursuing 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. 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. In addition, our restructuring may not result in anticipated cost-savings, which could harm our future operating results.

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. Our past acquisitions and combinations have resulted in a variety of challenges, including the ability to successfully assimilate the personnel, operations and customers of these businesses and integrate their technology with our existing technology, products and services.

We may acquire or enter into business combinations in the future. Entering into any business combination entails many risks, any of which could materially harm our business. These risks include:

Additionally, we may fail to achieve the anticipated synergies from such acquisitions, including product integration, marketing, product development, distribution and other operating synergies.

We may not be successful in forming or maintaining strategic alliances with other companies, which could negatively affect our product offerings and sales, and could result in deterioration of our sales channels.

Our business is becoming increasingly dependent on forming or maintaining strategic alliances with other companies, and we may not be able to form 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 into potential new 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. If we cannot form and maintain significant strategic alliances with other companies as our target markets and technology evolves, the sales channels for our products could deteriorate.

Our technology depends on the adoption of standards such as WAP. If such standards are not effectively established our business could suffer. Use of open industry standards may also make us more vulnerable to competition.

We promote open standards in our technology in order to support open competition and interoperability. We aim to achieve this through working together with customers, suppliers and industry participants regarding standardization issues. Through open standards, specifications and interoperability, we hope that the mobile data market achieves enhanced interoperability. We do not exercise control over many aspects of the development of open standards. Our products are integrated with communication service providers’ systems and handsets. If we are unable to continue to successfully integrate our platform products with these third-party technologies, our business could suffer. For example Qualcomm’s BREW^™ system is a proprietary standard that could create impediments to the integration of our platform products. Failure or delay in the creation of open, global specifications could have an adverse effect on the mobile data market in general and a negative impact on our sales and operating

results. 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. Finally, infrastructure providers like Nokia and Ericsson may leverage installed technology and/or wireless device sales to sell end-to-end solutions.

The widespread adoption of open industry standards, however, may make it easier for new market entrants and existing competitors to introduce products that compete with our software products.

We may not be successful in our strategic investments, which could harm our operating results.

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 of the strategic investments to our operations.

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 due to the lengthy education and customer approval process for our products, including internal reviews and capital expenditure approvals. Further, the emerging and evolving nature of the market for data services via handsets may lead prospective customers to postpone 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 which could result in write-offs in excess of amounts reserved for credit exposure.

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 handsets, 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 handsets. 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.

We depend substantially on the sale of international product licenses. A slow-down in international sales could harm our operating results.

International sale of product licenses and services accounted for 58% and 60% of our total revenues for the three and nine months ended March 31, 2004, respectively. Risks inherent in conducting business internationally include:

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

Our software products may contain defects or errors, which could result in rejection of our products, delays in shipment of our products, damage to our reputation, product liability and lost revenues.

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 which are integral in developing, marketing and selling our products.

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.

Our success 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 be 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 handsets.

In order to increase the value to customers of our product platform and encourage subscriber demand for Internet-based services via handsets, 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 handsets, 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.

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, which could result in costly litigation or 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.

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 companies in our industry in particular, have recently experienced 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. Therefore, if a large number of shares of our stock are sold in a short period of time, our stock price will decline. In the past, securities class action litigation has often been brought against companies following periods of volatility in their stock prices. We have in the past and may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert our Management’s time and resources, which could harm our business, financial condition, and operating results.

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 inter-company 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. Net foreign exchange transaction gains (losses) included in other income, net in the accompanying condensed consolidated statements of operations were $(36,000) and $0.3 million for the three and nine months ended March 31, 2004. As of March 31, 2004, we have put option contracts outstanding that have a total notional amount of Euro 3.0 million and GBP 4.0 million and forward contracts in the amount of Euro 2.0 million and GBP 2.0 million that expire during the June 30, 2004 quarter.

As of March 31, 2004, we had cash and cash equivalents, short-term and long-term investments, and restricted cash and investments of $345.9 million. Our exposure to market risks for changes in interest rates relates primarily to corporate debt securities, U.S. Treasury Notes and certificates of deposit. We place our investments with high credit quality issuers that have a rating by Moody’s of A1 or higher and Standard & Poor’s 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 or greater 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.

The following is a chart of the principal amounts of short-term investments and long-term investments by expected maturity at March 31, 2004 (in thousands):

Additionally, we have $27.6 million of restricted investments included within restricted cash and investments on the consolidated balance sheet as of March 31, 2004. $17.5 million of the restricted investments comprise a certificate of deposit to collateralize letters of credit for facility leases. The remaining $10.1 million consists of U.S. government securities pledged for payment of the remaining five semi-annual interest payments due under the terms of the convertible subordinated notes indenture. The weighted average interest rate of the restricted investments was 1.71% as of March 31, 2004.

The Company’s Management, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Accounting Officer (CAO) have evaluated the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report (the “Evaluation Date”). Joshua Pace, our CAO, performs similar functions as a Chief Financial Officer (CFO). We believe that there are always limitations on the effectiveness of any control system, no matter how well conceived and operated. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are being met. Therefore, the CEO and CAO do not expect that our disclosure controls will prevent all error and all fraud. Based on the evaluation performed, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting on a timely basis to information required to be disclosed by the Company in our reports filed or submitted under the Exchange Act.

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

On May 11, 2004 we filed a Current Report on Form 8-K announcing that we entered into an agreement to acquire all outstanding shares of Magic4 Limited, a private company incorporated in the United Kingdom.

On April 28, 2004 we filed a Current Report on Form 8-K to furnish our financial results for the second fiscal quarter ended March 31, 2004.

On April 28, 2004 we filed a Current Report on Form 8-K announcing the election of a new director, Ken Denman, to our board of directors.

On January 21, 2004 we filed a Current Report on Form 8-K to furnish our financial results for the first fiscal quarter ended December 31, 2003.

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.


OPENWAVE SYSTEMS INC.

By:		/s/ JOSHUA PACE

		Joshua Pace Vice President of Finance and Chief Accounting Officer


Delaware		94-3219054
(State of incorporation or organization)		(I.R.S. Employer Identification No.)


PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets as of March 31, 2004 and June 30, 2003 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2004 and 2003 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2004 and 2003 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	44

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	45
Item 2.	Changes in Securities and Use of Proceeds	45
Item 3.	Defaults Upon Senior Securities	45
Item 4.	Submission of Matters to a Vote of Security Holders	45
Item 5.	Other Information	45
Item 6.	Exhibits and Reports on Form 8-K	46

SIGNATURES		46


	March 31, 2004			June 30, 2003
Assets
Current Assets:
Cash and cash equivalents	$	228,471		$	139,339
Short-term investments		20,202			33,345
Accounts receivable, net		77,315			62,907
Prepaid and other current assets		13,015			13,218

Total current assets		339,003			248,809
Property and equipment, net		29,932			44,582
Long-term investments, and restricted cash and investments		97,197			61,466
Deposits and other assets		15,812			6,311
Goodwill and intangibles, net		3,637			6,283

	$	485,581		$	367,451

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	2,521		$	3,844
Accrued liabilities		36,924			37,159
Accrued restructuring costs		11,801			18,358
Deferred revenue		57,733			62,786

Total current liabilities		108,979			122,147
Accrued restructuring costs, less current portion		40,650			48,152
Deferred revenue, less current portion		13,075			11,004
Deferred rent obligations		4,566			3,870
Convertible subordinated notes, net		146,336			—

Total liabilities		313,606			185,173

Commitments and contingencies
Stockholders’ equity:
Common stock		64			60
Additional paid-in capital		2,740,284			2,720,994
Deferred stock-based compensation		(2,716	)		(2,185	)
Accumulated other comprehensive income		48			52
Notes receivable from stockholders		(202	)		(254	)
Accumulated deficit		(2,565,503	)		(2,536,389	)

Total stockholders’ equity		171,975			182,278

	$	485,581		$	367,451


	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
Revenues:
License	$	38,437		$	35,011		$	108,820		$	110,978
Maintenance and support services		20,523			18,494			62,991			56,321
Professional services		14,450			4,933			33,588			19,034
Project		817			5,033			8,570			15,079

Total revenues		74,227			63,471			213,969			201,412

Cost of revenues:
License		1,672			1,600			6,495			6,464
Maintenance and support services		6,435			6,571			18,477			22,264
Professional services		11,439			5,911			27,420			17,160
Project		772			4,381			4,883			13,536

Total cost of revenues		20,318			18,463			57,275			59,424

Gross profit		53,909			45,008			156,694			141,988

Operating expenses:
Research and development		23,625			27,256			72,976			88,323
Sales and marketing		25,479			27,058			74,169			90,418
General and administrative		7,621			9,343			26,071			38,328
Restructuring and other costs		726			—			2,996			83,191
Stock-based compensation*		938			686			2,427			2,780
Amortization and impairment of goodwill and intangible assets		67			67			202			8,248
In-process research and development		—			—			—			400
Merger, acquisition and integration-related costs		—			—			—			386

Total operating expenses		58,456			64,410			178,841			312,074

Operating loss		(4,547	)		(19,402	)		(22,147	)		(170,086	)
Interest and other income, net		1,151			1,385			3,402			5,138
Interest expense		(1,284	)		(13	)		(2,873	)		(27	)
Write-down of nonmarketable equity securities		—			(1,864	)		—			(3,864	)

Loss before provision for income taxes and cumulative effect of change in accounting principle		(4,680	)		(19,894	)		(21,618	)		(168,839	)
Income taxes		1,058			3,320			7,496			7,869

Loss before cumulative effect of change in accounting principle		(5,738	)		(23,214	)		(29,114	)		(176,708	)
Cumulative effect of change in accounting principle		—			—			—			(14,547	)

Net loss	$	(5,738	)	$	(23,214	)	$	(29,114	)	$	(191,255	)

Basic and diluted net loss per share:
Before cumulative effect of change in accounting principle	$	(.09	)	$	(0.39	)	$	(.47	)	$	(2.99	)
Cumulative effect of change in accounting principle		—			—			—			(0.24	)

Basic and diluted net loss per share	$	(.09	)	$	(0.39	)	$	(.47	)	$	(3.23	)

Shares used in computing basic and diluted net loss per share		63,233			59,547			61,756			59,175

*Stock-based compensation by category:
Research and development	$	231		$	28		$	729		$	872
Sales and marketing		191			118			360			372
General and administrative		516			540			1,338			1,536

	$	938		$	686		$	2,427		$	2,780


	Nine Months Ended March 31,
	2004			2003
Cash flows from operating activities:
Net loss	$	(29,114	)	$	(191,255	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		18,871			27,678
Amortization of discount on convertible debt and debt issuance costs		562			—
Amortization of stock-based compensation		2,427			2,780
Loss on sale of property and equipment		332			215
Impairment of non-marketable equity securities		—			3,864
Provision for (recovery of) doubtful accounts		(1,280	)		4,991
Impairment of goodwill and intangible assets		—			8,045
Cumulative effect of change in accounting principle		—			14,547
Impairment of property and equipment - restructuring related		813			12,202
In-process research and development		—			400
Changes in operating assets and liabilities:
Accounts receivable		(13,128	)		18,554
Prepaid expenses and other assets		(8,499	)		4,475
Accounts payable		(1,323	)		(1,618	)
Accrued liabilities		(236	)		(15,274	)
Accrued restructuring costs		(14,059	)		48,420
Deferred revenue		(2,982	)		12,023

Net cash used for operating activities		(47,616	)		(49,953	)

Cash flows from investing activities:
Purchases of property and equipment		(2,763	)		(7,528	)
Proceeds from sale of property and equipment		43			—
Restricted cash and investments		(5,294	)		344
Acquisitions, net of cash acquired		—			(18,973	)
Purchases of short-term investments		(9,900	)		(10,746	)
Proceeds from sales and maturities of short-term investments		35,855			69,551
Purchases of long-term investments		(62,688	)		(33,373	)
Proceeds from sales and maturities of long-term investments		19,435			30,012

Net cash provided by (used for) investing activities		(25,312	)		29,287

Cash flows from financing activities
Proceeds from issuance of common stock, net		16,336			2,069
Repayment of notes receivable from stockholders		52			307
Net proceeds from issuance of convertible debt		145,672			—
Repayment of capital lease obligations and long-term debt		—			(151	)

Net cash provided by financing activities		162,060			2,225

Net increase (decrease) in cash and cash equivalents		89,132			(18,441	)
Cash and cash equivalents at beginning of period		139,339			140,699

Cash and cash equivalents at end of period	$	228,471		$	122,258

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	8,852		$	9,577

Cash paid for interest	$	2,070		$	27

Non-cash investing and financing activities
Common stock issued and options assumed in acquisitions	$	—		$	140

Deferred stock-based compensation, net	$	2,958		$	(1,714	)

Retirement of treasury stock	$	—		$	38,087

Reclass of long-term investments to short-term investments	$	12,933		$	52,998


	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003
Revenues
Application Software	$	13,609	$	22,172	$	45,433	$	61,570
Infrastructure software		31,971		22,008		88,068		79,038
Client software		13,358		9,305		38,219		26,436
Customer services		14,472		4,953		33,679		19,289
Project		817		5,033		8,570		15,079

Total revenues	$	74,227	$	63,471	$	213,969	$	201,412


	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003
Revenues
Americas	$	32,631	$	35,115	$	99,905	$	101,821
Europe, Middle East and Africa		21,625		8,852		52,404		35,098
Japan and Asia Pacific		19,971		19,504		61,660		64,493

Total revenues	$	74,227	$	63,471	$	213,969	$	201,412


	% of Total Revenue								% of Total Accounts Receivable March 31, 2004
	Three Months Ended March 31,				Nine Months Ended March 31,
	2004		2003		2004		2003
KDDI	5	%	7	%	5	%	12	%	5.6	%
Sprint	7	%	14	%	5	%	14	%	4.0	%


	March 31, 2004		June 30, 2003
Unrestricted U.S. Treasury securities and obligations of U.S. government agencies (maturing through year ending June 30, 2006)	$	69,633	$	39,195
Restricted cash and investments		27,564		22,271

	$	97,197	$	61,466


	2004		2003
Goodwill		723		723
Customer contracts and relationships		895		2,308
Developed and core technology		1,942		3,123
Trademarks		77		129

	$	3,637	$	6,283


		March 31, 2004
	Amortization Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer contracts and relationships	0-3 yrs	$	4,650	$	(3,755	)	$	895
Developed and core technology	3 yrs		5,020		(3,078	)		1,942
Trademarks	3 yrs		200		(123	)		77

		$	9,870	$	(6,956	)	$	2,914


		June 30, 2003
	Amortization Life	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer contracts and relationships	0-3 yrs	$	4,650	$	(2,342	)	$	2,308
Developed and core technology	3 yrs		5,020		(1,897	)		3,123
Trademarks	3 yrs		200		(71	)		129

		$	9,870	$	(4,310	)	$	5,560


Fiscal Year	Amortization
2004	$	688
2005		2,168
2006		58

	$	2,914


	March 31, 2004			June 30, 2003
Unrealized gain on marketable securities	$	234			238
Cumulative translation adjustments		(186	)		(186	)

Accumulated other comprehensive income	$	48		$	52


	FY 02 Restructuring Plan								FY 03, Q1 Restructuring Plan									FY 03, Q4 Restructuring Plan									Total
	Facility			Severance			Other		Facility			Severance			Other			Facility			Severance			Other			Accrual
Accrual balance as of June 30, 2003	$	9,165		$	81		$	—	$	49,599		$	1,002		$	161		$	783		$	5,639		$	80		$	66,510

New charges and adjustments to estimates ⁽¹⁾		506			—			—		(106	)		(185	)		—			634			965			100			1,914
Cash paid		(970	)		(2	)		—		(1,848	)		(127	)		(113	)		(145	)		(3,462	)		(100	)		(6,767	)

Accrual balance as of September 30, 2003	$	8,701		$	79		$	—	$	47,645		$	690		$	48		$	1,272		$	3,142		$	80		$	61,657

New charges and adjustments to estimates		(74	)		—			—		(120	)		(327	)		15			12			112			—			(382	)
Cash paid		(992	)		—			—		(2,050	)		(143	)		(42	)		(354	)		(1,597	)		—			(5,178	)

Accrual balance as of December 31, 2003	$	7,635		$	79		$	—	$	45,475		$	220		$	21		$	930		$	1,657		$	80		$	56,097

New charges and adjustments to estimates		235			—			—		649			—			(21	)		(158	)		47			(26	)		726
Cash paid		(1,039	)		(79	)		—		(1,863	)		(129	)		—			(82	)		(1,126	)		(54	)		(4,372	)

Accrual balance as of March 31, 2004	$	6,831		$	—		$	—	$	44,261		$	91		$	—		$	690		$	578		$	—		$	52,451


Year ending June 30,	Net Cash Payable
2004	$	3,692
2005		10,240
2006		7,553
2007		6,372
2008		5,047
Thereafter		19,547

	$	52,451


	Three Months Ended March 31,				Percent Change		Nine Months Ended March 31,				Percent Change
	2004		2003		Percent Change		2004		2003		Percent Change
Stock-based compensation by category
Research and development	$	231	$	28	725	%	$	729	$	872	(16.4	%)
Sales and marketing		191		118	61.9	%		360		372	(3.2	%)
General and administrative		516		540	(4.4	%)		1,338		1,536	(12.9	%)

Total stock-based compensation	$	938	$	686	36.7	%	$	2,427	$	2,780	(12.7	%)


	Payments due during the year ended June 30,
	Total			2004			2005			2006			2007			2008			Thereafter
Contractual obligation:
Gross Operating lease obligations	$	203,602		$	27,316		$	25,426		$	21,533		$	20,366		$	19,235		$	89,726
Less: Sublease income	$	(8,432	)	$	(3,208	)	$	(2,970	)	$	(925	)	$	(772	)	$	(557	)		—

Net Operating lease obligations	$	195,170		$	24,108		$	22,456		$	20,608		$	19,594		$	18,678		$	89,726
Convertible subordinated Debt	$	170,625		$	2,063		$	4,125		$	4,125			4,125		$	4,125		$	152,062
Third Party Royalty Obligations	$	2,624		$	1,207		$	1,417			—			—			—			—


	March 31, 2004		June 30, 2003		Percent Change
Working capital	$	230,024	$	126,662	81.6	%
Cash and cash investments:
Cash and cash equivalents		228,471		139,339	64.0	%
Short-term investments		20,202		33,345	(39.4	%)
Long-term investments		69,633		39,195	77.7	%
Restricted cash		27,564		22,271	23.8	%

Total cash and cash investments	$	345,870	$	234,150	47.7	%


	Expected maturity date for the year ending June 30,											Cost Value March 31, 2004 Total		Fair Value March 31, 2004 Total
	2004			2005		2006		2007		2008		Cost Value March 31, 2004 Total		Fair Value March 31, 2004 Total
Corporate bonds	$	1,001		$	10,628	$	6,213	$	—	$	—	$	17,842	$	17,850
Federal agencies		—			27,721		44,038		—		—		71,759		71,985

	$	1,001		$	38,349	$	50,251	$	—	$	—	$	89,601	$	89,835

Weighted-average interest rate		1.29	%


Exhibit Number		Description

3(ii)		Amended and Restated Bylaws of the Company, adopted as of April 15, 2004

10.1		Amended and Restated Employment Terms by and between the Company and Allen Snyder dated February 6, 2004.

10.2		Summary of Stock Option Grants Made to Independent Directors in January, April and May of 2004.

10.3		Form of US Stock Option Agreement

10.4		Form of International Stock Option Agreement

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Accounting Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer and Chief Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.