OPENWAVE SYSTEMS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2004

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

For the transition period from to

Commission file number: 001-16073

OPENWAVE SYSTEMS INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or organization)

94-3219054

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

1400 Seaport Blvd.

Redwood City, California 94063

(Address of principal executive offices, including zip code)

(650) 480-8000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

As of October 31, 2004 there were 66,340,619 shares of the registrant’s Common Stock outstanding.

OPENWAVE SYSTEMS INC.

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004	3

	Condensed Consolidated Statements of Operations for the three months ended September 30, 2004 and 2003	4

	Condensed Consolidated Statements of Cash Flows for the three months ended September 30, 2004 and 2003	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	42

Item 4.	Controls and Procedures	43

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3.	Defaults Upon Senior Securities	44

Item 4.	Submission of Matters to a vote of Security Holders	44

Item 5.	Other Information	44

Item 6.	Exhibits and Reports on Form 8-K	45

SIGNATURES

CERTIFICATIONS

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	September 30, 2004			June 30, 2004
Assets
Current Assets:
Cash and cash equivalents	$	172,662		$	231,509
Short-term investments		53,012			38,262
Accounts receivable, net		115,371			78,421
Prepaid and other current assets		15,376			15,694

Total current assets		356,421			363,886

Property and equipment, net		29,794			30,552
Long-term investments, and restricted cash and investments		54,344			72,047
Deposits and other assets		6,814			7,072
Intangibles assets, net		26,171			2,228
Goodwill		43,323			723

	$	516,867		$	476,508

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	4,929		$	4,697
Notes payable		3,814			—
Accrued liabilities		42,337			36,679
Accrued restructuring costs		9,981			10,429
Deferred revenue		70,494			60,662

Total current liabilities		131,555			112,467

Accrued restructuring costs, less current portion		37,327			38,838
Deferred revenue, less current portion		1,477			1,321
Deferred rent obligations		4,473			4,308
Deferred tax liabilities		7,683			—
Convertible subordinated notes, net		146,748			146,542

Total liabilities		329,263			303,476

Commitments and contingencies

Stockholders’ equity:
Common stock		66			64
Additional paid-in capital		2,755,568			2,742,139
Deferred stock-based compensation		(1,762	)		(1,991	)
Accumulated other comprehensive loss		(777	)		(736	)
Notes receivable from stockholders		(208	)		(204	)
Accumulated deficit		(2,565,283	)		(2,566,240	)

Total stockholders’ equity		187,604			173,032

	$	516,867		$	476,508

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,
	2004			2003
Revenues:
License	$	38,185		$	32,208
Maintenance and support services		21,498			20,366
Professional services		16,818			9,803
Project/Systems		7,067			5,612

Total revenues		83,568			67,989

Cost of revenues:
License		1,209			2,567
Maintenance and support services		6,650			6,252
Professional services		12,295			7,296
Project/Systems		3,051			2,149

Total cost of revenues		23,205			18,264

Gross profit		60,363			49,725

Operating expenses:
Research and development		22,005			25,586
Sales and marketing		22,921			23,623
General and administrative		10,198			10,056
Restructure and other costs		907			2,652
Stock-based compensation*		594			735
Amortization of intangible assets		525			68

Total operating expenses		57,150			62,720

Operating income (loss)		3,213			(12,995	)
Interest income		1,264			881
Interest expense		(1,292	)		(303	)
Other expense, net		(215	)		—

Income (loss) before provision for income taxes		2,970			(12,417	)
Income taxes		2,013			1,572

Net income (loss)	$	957		$	(13,989	)

Basic net income (loss) per share	$	0.01		$	(0.23	)

Diluted net income (loss) per share	$	0.01		$	(0.23	)

Shares used in computing basic net income (loss) per share		65,151			60,104

Shares used in computing diluted net income (loss) per share		68,000			60,104
* Stock-based compensation by category:
Research and development	$	118		$	268
Sales and marketing		123			81
General and administrative		353			386

	$	594		$	735

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net income (loss)	$	957		$	(13,989	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization		4,353			6,802
Amortization of discount on convertible debt and debt issuance costs		260			59
Stock-based compensation		594			735
Loss on sale of property and equipment		11			209
Provision for doubtful accounts		1,101			135
Impairment of property and equipment - restructuring related		—			738
Changes in operating assets and liabilities:
Accounts receivable		(31,562	)		923
Prepaid assets, deposits, and other assets		1,403			510
Accounts payable		(909	)		364
Accrued liabilities		2,202			6,631
Accrued restructuring costs		(1,960	)		(4,853	)
Deferred revenue		9,087			(10,981	)

Net cash used for operating activities		(14,463	)		(12,717	)

Cash flows from investing activities:
Purchases of property and equipment		(1,626	)		(651	)
Proceeds from sale of property and equipment		—			29
Restricted cash and investments		(205	)		(7,596	)
Acquisitions, net of cash acquired		(46,433	)		—
Purchases of short-term investments		—			(6,595	)
Proceeds from sales and maturities of short-term investments		3,412			8,789
Purchases of long-term investments		(68	)		(4,450	)
Proceeds from sales and maturities of long-term investments		—			8,862

Net cash used for investing activities		(44,920	)		(1,612	)

Cash flows from financing activities
Net proceeds from issuance of common stock, net		767			1,627
Net proceeds from issuance of convertible debt		—			144,975
Other		(4	)		4

Net cash provided by financing activities		763			146,606

Effect of exchange rates on cash and cash equivalents		(227	)		—

Net increase (decrease) in cash and cash equivalents		(58,847	)		132,277
Cash and cash equivalents at beginning of period		231,509			139,339

Cash and cash equivalents at end of period	$	172,662		$	271,616

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	1,046		$	1,796

Cash paid for interest	$	2,035		$	4

Noncash investing and financing activities:
Common stock issued for acquisition	$	12,300		$	—

Notes payable issued in conjunction with acquisition	$	3,805		$	—

Deferred stock-based compensation	$	365		$	118

Reversal of deferred stock-based compensation	$	—		$	14

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(1) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of Openwave Systems Inc.’s (the “Company”) management (“Management”), the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2004 and June 30, 2004, and the results of operations and cash flows for the three months ended September 30, 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, 2004.

On October 21, 2003, the Company effected a one-for-three reverse split of its common stock. The reverse split reduced the number of shares of our common stock outstanding at September 30, 2003 to approximately 60.9 million shares from 182.6 million shares. All share and per share amounts have been restated to reflect this reverse stock split, including the periods prior to the effective date of the reverse split.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America 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.

Revenue Recognition

The Company’s four primary revenue categories are comprised of license, maintenance and support services, professional services and project/systems revenues. As described in Note 3, “Geographic, Segment and Significant Customer Information,” the disaggregated revenue information reviewed on a product category by the Chief Executive Officer (“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; professional services; and project/system revenues, which include porting services with partners, and a significant “managed service” arrangement with a communications service provider. 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 the Company’s contracts include customer acceptance criteria that the Company has not reliably satisfied at the time of delivery of its software, delivery, for purposes of license, occurs when such acceptance criteria is satisfied. For professional services arrangements with milestones or customer specified acceptance criteria, delivery occurs as services are proportionally performed.

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 upon receipt of cash, assuming all other revenue recognition criteria are satisfied.

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 Consolidated Statements of Operations.

For its new version coverage and maintenance and support services elements, the Company determines 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 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 coverage 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. In a multiple element 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 VSOE of fair value does not exist for the services, then services are not accounted for separately. 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 applying 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 using an input method based on the ratio of direct labor hours incurred to date to total projected labor hours except in circumstances where completion status cannot be reasonably estimated or internal hazards exist, 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. The Company less frequently bills the customer one flat fee for licenses and services. In these flat fee contracts, if services are described in the contract such that the total price of the arrangement would be expected to vary as a result of the inclusion or exclusion of the services, services are accounted for separately, assuming all other revenue recognition criteria are satisfied. 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.

In certain arrangements the Company recognizes revenue based on information contained in license usage reports provided by customers. If such reports are not received in a timely manner, the Company estimates the revenue based on historical reporting trends, if reasonably possible. For all other arrangements the Company recognizes revenue related to usage fees on a consistent quarterly lag basis.

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:

•

Contracts where the arrangement fee is not considered fixed or determinable. As discussed above, fees from such arrangements are recognized as revenue as the payments become due.

•

Certain arrangements where the Company agrees to provide the customer with unspecified additional products for a specified term which are not covered by the Company’s new version coverage offering. License revenue from such arrangements is recognized ratably over the term the Company is committed to provide such additional products. If such arrangements also provide for fee terms that are not considered to be fixed or determinable, revenue is recognized in an amount that is the lesser of aggregate amounts due or the aggregate ratable amount that would have been recognized had the arrangement fees been considered fixed or determinable.

•

The Company enters into certain multiple-element arrangements in which license fees are sold on a committed basis, but maintenance and support and/or new version coverage fees are payable based on contingent usage. For these arrangements, the Company recognizes license revenue ratably over the period the Company expects to provide maintenance and support and/or new version coverage, and recognizes the contingent usage-based fees for maintenance and support fees and/or new version coverage fees at the time such fees become fixed and determinable.

During the year ended June 30, 2002, the Company entered into a significant contract with a service partner, under which the Company ported its software to the service partner’s hardware/software platform in exchange for a predetermined reimbursement rate; the partner resold the Company’s products and engaged in other joint activities. The Company recognized porting services revenues from this contract as project/systems revenues in the Company’s Consolidated Statements of Operations as the agreed upon activities were performed. With the adoption of Emerging Issue Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”, the Company separated the reseller and porting activities related to the project and recognized reseller revenues separately as they were earned. Cumulative revenues recognized may have been less or greater than cumulative billings at any point in time during the contract’s term. The resulting difference was recognized as either unbilled accounts receivable or deferred revenue. In accounting for project/system revenue the Company recognized revenue as the services were proportionally performed. As of June 30, 2004, the project was completed and all related project revenues were recognized.

During the year ended June 30, 2004, the Company entered into a significant contract with a communication services provider to provide a “managed service” software and system solution. Under the terms of the arrangement, the Company agreed to provide the following products and services in exchange for project milestone payments and ongoing service payments: software; third party software and hardware; maintenance and support and new version coverage; third party maintenance and support and new version coverage; implementation services, including significant customization and modification of the software and third party software; and ongoing managed services for the software system/solution. The Company initially determined that it had a single unit of accounting, as defined in EITF Issue No. 00-21, as the Company did not know the fair value of one undelivered element. For the quarter ended June 30, 2004, the Company recognized revenue using the proportional performance method initially assuming a zero profit margin, as the Company believed it could not reasonably estimate project completion status at June 30, 2004, but believed profitability was reasonably assured.

During the quarter ended September 30, 2004, the Company determined that it had the fair value of all remaining undelivered elements and thus was able to break the arrangement down into three specific accounting units which are as follows; post contract customer support, ongoing managed services, and a customized software, hardware and services arrangement. Amounts allocated to the post contract customer support and ongoing managed services will be recognized over a one-year contract term, commencing upon completion of the services arrangement. The Customer can renew both the post contract customer support and the ongoing managed services in year two and beyond for a stated renewal rate. For the customized software, hardware and services arrangement, the Company was able to estimate the project completion status and thus recognized revenue using the proportional performance method assuming an estimated profit margin on the overall project. The Company uses labor hours incurred as a percentage of total estimated labor hours as its input measure for determining the proportional performance on the customized software, hardware and services arrangement. Furthermore, applying the guidance in EITF Issue No. 00-21, which limits revenue recognition to earned and realizable billings or amounts that are not contingent upon the delivery of additional items or meeting other specified performance conditions, revenue recognition on the arrangement is limited to non-contingent revenue. Accordingly, the Company recognized $7.1 million in systems revenue from this arrangement, which was classified as project/systems revenues in the Company’s Consolidated Statement of Operations. Additionally, from this arrangement, the Company recognized $1.7 million of license revenue in the Company’s Consolidated Statement of Operations. This $1.7 million reflects the contracted value of non-system license fees pertaining to a separate contract that could not be separated for revenue recognition purposes from the larger managed services, software, and solution contract. The aggregate revenue recognized to date from the arrangement is $13.7 million with corresponding aggregate cost of sales of $8.0 million. As of September 30, 2004, direct and incremental costs of $4.6 million on the arrangement incurred in excess of the percent complete were deferred and were classified within prepaid and other current assets.

Cost of license revenues is primarily comprised of third-party license and related support fees and amortization of purchased technology and contract intangible assets. 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/system revenues includes direct costs incurred in the performance of development services under the porting arrangement, and direct and incremental costs on the “managed service” arrangement equal to the percent complete.

Allowance for Doubtful Accounts

The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are made at differing rates, based upon the age of the receivable. In determining these provisions, the Company analyzes several factors, including: its historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the allowance for doubtful accounts does not reflect the Company’s future ability to collect outstanding receivables, the Company may record additional provisions for doubtful accounts. The Company records the provision for doubtful accounts in general and administrative expense in the Consolidated Statement of Operations.

Stock Based Compensation

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 uses the Black-Scholes option pricing model to value options and warrants granted to non-employees.

If the fair value based method as prescribed by SFAS No. 123 had been applied in measuring employee stock compensation expense, the pro-forma effect on net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share amounts):


	Three months ended September 30,
	2004			2003
Net income (loss), as reported:	$	957		$	(13,989	)
Add:
Stock-based compensation included in net loss, net of tax		594			735
Deduct:
Stock-based compensation expense determined under the fair value method for all awards, net of tax		(9,024	)		(15,253	)

Pro forma net loss	$	(7,473	)	$	(28,507	)

Basic net income (loss) per share:
As reported	$	0.01		$	(0.23	)

Pro forma	$	(0.11	)	$	(0.47	)

Diluted net income (loss) per share:
As reported	$	0.01		$	(0.23	)

Pro forma	$	(0.11	)	$	(0.47	)

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:


	Three months ended September 30,
	2004		2003
Expected life (years)	2.17		2.76
Risk-free interest rate	2.48	%	2.35	%
Volatility	110	%	135	%

Under SFAS No. 123, the weighted-average fair value of stock options and restricted stock grants granted during the three months ended September 30, 2004 and 2003 were as follows:


	Three months ended September 30,
	2004		2003
Weighted-average fair value of stock options	$	5.35	$	8.01
Weighted-average fair value of restricted stock grants	$	10.42	$	2.36

Recently Issued Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Applications to Certain Investments.” EITF Issue No. 03-01 includes new guidance on evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are considered to be temporarily impaired. The disclosure requirements for debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, are effective for annual periods ending after December 15, 2003. The Company adopted the initial disclosure requirements of EITF Issue No. 03-01 in June 2004. The adoption of the remaining portions of EITF 03-01 has been postponed by the Financial Accounting Standards Board pending issuance of additional implementation guidance regarding the impairment of certain debt securities.

(2) Net Income (Loss) Per Share

In accordance with SFAS No. 128, “Earnings Per Share” basic net income (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 reconciles the number of shares used in the basic and diluted net income (loss) per share computations for the periods presented, (in thousands, except per share amounts):


	Three months ended September 30,
	2004	2003
Weighted average shares used in computing basic net income (loss) per common share	65,151	60,104
Dilutive effect of restricted stock subject to repurchase	226	—
Dilutive effect of employee stock options	1,866	—
Dilutive effect of contingently issuable shares	757	—

Weighted average shares used in computing basic and diluted net loss per common share	68,000	60,104

The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when their effect would be anti-dilutive to the net income (loss) per share computation. The following table sets forth potential common stock that are not included in the diluted net loss per share calculation because to do so would be anti-dilutive for the periods indicated below (in thousands):


	September 30,
	2004	2003
Weighted average effect of potential common stock:
Unvested common stock subject to repurchase	—	486
Options that would have been included in the computation of dilutive shares outstanding had the Company reported net income	—	7,848
Options that were excluded from the computation of dilutive shares outstanding because the exercise price exceed the average market value of the Company’s common stock during the fiscal year	8,439	1,036
Shares issuable pursuant to warrants to purchase common stock	—	41
Shares resulting from an “as-if” conversion of the convertible debt	8,154	1,971

(3) Geographic, Segment and Significant Customer Information

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

The Company has organized its operations based on a single operating segment: the development and delivery of 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/systems revenues.

Application software and related maintenance and support services enable end users to exchange electronic mail, and multimedia messages from PC’s, wireline telephones and mobile phones. The Company’s application software and services also includes, but is not limited to email, IP Voicemail, Messaging Anti-Abuse products and services and other messaging products.

Infrastructure software and related maintenance and support services contain the foundation software required to enable Internet connectivity to mobile devices and to build a set of applications for mobile users and includes, but is not limited to, Openwave Mobile Access Gateway, Openwave Location Products, Multimedia Messaging Services (“MMS”), and Openwave Provisioning Manager.

Client software and related maintenance and support services primarily include the Openwave Mobile Browser software, which is a microbrowser software that is designed and optimized for wireless devices, Openwave Mobile Messaging Client and Openwave Phone Suite software.

Services are activities performed by the Company to help customers to install, deploy, manage, maintain and support the Company’s software products and to help design and manage overall Internet implementations. Customer services included professional services and training.

Project/Systems revenues are derived from a porting services project and systems revenues which are comprised of packaged solution elements which include our software licenses, professional services, third-party software and hardware.

The disaggregated information reviewed on a product basis by the CEO is as follows (in thousands):


	Three months ended September 30,
	2004		2003
Revenues by product groups:
Applications software and services	$	14,998	$	16,966
Infrastructure software and services		29,107		22,784
Client software and services		15,578		12,814
Services		16,818		9,813
Project/Systems		7,067		5,612

Total revenues	$	83,568	$	67,989

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


	Three months ended September 30,
	2004		2003
Americas	$	39,319	$	34,499
Europe, Middle East, Africa		19,452		14,249
Japan and Asia Pacific		24,797		19,241

Total revenues	$	83,568	$	67,989


	Three months ended September 30,
	2004		2003
United States	$	34,834	$	28,147
Japan		13,962		13,403
Other countries		34,772		26,439

Total revenues	$	83,568	$	67,989

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

Significant customer information is as follows:


	% of Total Revenue Three months ended September 30,
	2004		2003
Customer:
IBM	5.9	%	16.0	%
Sprint	7.3	%	10.0	%
Nextel	14.1	%	3.6	%

(4) Balance Sheet Components

(a) Accounts Receivable, net

Accounts receivable, net consisted of the following (in thousands):


	September 30, 2004			June 30, 2004
Accounts receivable	$	95,472		$	61,174
Unbilled accounts receivable		27,023			23,342
Allowance for doubtful accounts		(7,124	)		(6,095	)

	$	115,371		$	78,421

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

(b) Long-term investments and restricted cash and investments

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


	September 30, 2004		June 30, 2004
Unrestricted U.S. Treasury securities and obligations of U.S. government agencies (matures through year ending June 30, 2006)	$	26,755	$	44,663
Restricted cash and investments		27,589		27,384

	$	54,344	$	72,047

(c) Goodwill and intangible assets, net

The following table presents a roll-forward of the goodwill and intangible assets from June 30, 2004 to September 30, 2004 (in thousands):


	Balance as of June 30, 2004		Additions (a)		Amortization			Balance as of September 30, 2004
Goodwill	$	723	$	42,600	$	—		$	43,323
Intangibles assets:
Customer contracts and relationships		620		11,387		(807	)		11,200
Developed and core technology		1,548		14,222		(841	)		14,929
Trademarks		60		—		(18	)		42

	$	2,951	$	68,209	$	(1,666	)	$	69,494

(a) Additions comprise goodwill and intangibles acquired in the acquisition of Magic4, (see Note 5)

Total amortization expense related to intangible assets during the three months ended September 30, 2004 and 2003 was follows (in thousands):


	Three Months Ended September 30,
	2004			2003
Customer contracts and relationships	$	(807	)	$	(278	)
Developed and core technology		(841	)		(394	)
Trademarks		(18	)		(18	)

	$	(1,666	)	$	(690	)

During the three months ended September 30, 2004 and 2003, amortization of acquisition-related contract intangibles and developed and core technology included in Cost of Revenues – License were approximately $1.1 million and $622,000, respectively. Amortization of acquisition-related contract intangibles included in Cost of Revenue – Maintenance and Support was approximately $13,000 during the three months ended September 30, 2004. Amortization of acquisition-related customer relationships and trademark, which were sales and marketing related, included in Operating expenses were $525,000 and $68,000 during the three months ended September 30, 2004 and 2003, respectively.

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


	September 30, 2004							June 30, 2004
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer contracts and relationships	$	16,037	$	(4,837	)	$	11,200	$	4,650	$	(4,030	)	$	620
Developed and core technology		19,242		(4,313	)	$	14,929		5,020		(3,472	)	$	1,548
Trademarks		200		(158	)	$	42		200		(140	)	$	60

	$	35,479	$	(9,308	)	$	26,171	$	9,870	$	(7,642	)	$	2,228

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


Fiscal Year	Amortization
2005	$	5,921
2006		5,972
2007		5,678
2008		5,448
2009		2,927
Thereafter		225

	$	26,171

(d) Deferred Revenue

As of September 30 and June 30, 2004, the Company had deferred revenue of $72.0 million and $62.0 million, respectively, consisting of deferred license fees, new version coverage and maintenance and support fees, and professional services fees. Deferred revenue results from amounts billed:

•

prior to acceptance of product or service;

•

for new version coverage and maintenance and support elements prior to the time service is delivered;

•

for subscriber licenses committed greater than subscriber activated for arrangements being recognized on an subscriber activation basis; and

•

for license arrangements amortized over a specified future period due to the provision of unspecified future products.

Amounts in accounts receivable that have offsetting balances in deferred revenue aggregated approximately $45.5 million and $28.9 million as of September 30 and June 30, 2004, respectively.

(e) Accumulated Other Comprehensive Loss

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


	September 30, 2004			June 30, 2004
Unrealized loss on marketable securities	$	(364	)	$	(550	)
Cumulative translation adjustments		(413	)		(186	)

Accumulated other comprehensive loss	$	(777	)	$	(736	)

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


	Three Months Ended September 30,
	2004			2003
Net income (loss)	$	957		$	(13,989	)
Other comprehensive income (loss):
Change in unrealized loss on marketable securities, net of tax		186			(97	)
Change in accumulated foreign currency translation adjustments		(227	)		—

Total other comprehensive income (loss)	$	916		$	(14,086	)

(5) Acquisition

Acquisition of Magic4 Limited

On July 30, 2004, the Company acquired all of the outstanding issued share capital of Magic4 Limited (“Magic4”), a leading provider of messaging software for mass-market mobile phones, for initial aggregate consideration of $72.2 million (the “Initial Consideration”). The Initial Consideration consists of the following: (i) the payment of cash consideration of $54.2 million, (ii) the issuance of 1,135,712 shares of the Company’s common stock with an aggregate value of $12.3 million, (iii) Loan Notes in the amount of $3.8 million, (see Note 6), and (iv) transactions costs of $1.9 million, consisting primarily of primarily of professional fees incurred related to attorneys, accountants and valuation advisors and transfer taxes. The shares issued were valued at $12.3 million based upon a 3-day weighted average closing price through the close date of the acquisition. As of September 30, 2004, the Company had paid $71.6 million of the Initial Consideration and expects to pay the remaining $639,000 related to transaction costs in the quarter ending December 31, 2004.

In the event that certain key employees of Magic4 continue employment with the Company for certain specified periods, the Company will be required to issue up to an additional 1,135,734 shares of common stock with an aggregate value of $12.3 million, based on the fair value of the common stock at the closing date, to be distributed to all of the former holders of share capital of Magic4 on a pro-rata basis. The valuation of the contingently issuable shares of common stock will be remeasured upon the completion of the various specified employment periods.

With the acquisition of Magic4, the Company has strengthened its position as an open standards-based software provider for data phone manufacturers. This acquisition serves to deepen the Company’s relevance on mobile phones while enabling manufacturers to deliver an intuitive user experience as operator service requirements evolve. The results of Magic4 have been included in the Consolidated Financial Statements since July 31, 2004.

In accordance with the purchase method of accounting as prescribed by SFAS No. 141, “Business Combinations”, the Company allocated the Initial Consideration to the tangible net assets and liabilities and intangible assets acquired, based on their estimated fair values. Under the purchase method of accounting, the Initial Consideration does not include the contingent consideration described above. The Initial Consideration has been allocated as follows (in thousands):


Tangible assets:
Cash and cash equivalents	$	8,481
Accounts receivable		6,489
Prepaid and other current assets		872
Property, plant and equipment		315

Total tangible assets		16,157

Intangible assets:
Identifiable intangibles		25,609
Goodwill		42,600

Total intangible assets		68,209

Liabilities assumed:
Accounts payable and accrued liabilities		(1,991	)
Deferred revenue		(901	)
Deferred tax liability		(9,259	)

Total liabilities assumed		(12,151	)

Net assets acquired	$	72,215

(6) Debt

Notes Payable.

On July 30, 2004, in connection with the acquisition of Magic4, the Company issued Loan Notes with an aggregate face value of approximately $3.8 million. The Loan Notes are payable on demand after 6 months, but no later than August 31, 2005 and bear interest at an initial rate of 1.5% per annum during the initial interest rate period. During the subsequent interest rate period the Loan Notes bear interest at a rate equal to the strategic cash portfolio overnight rate offered by Bank of America to Dollar funds deposited in the United States of America as of the first day of the subsequent interest period. The initial interest period is from the issuance date of the Loan Notes through December 31, 2004. All subsequent interest is due and payable on June 30 and will be recorded as interest expense in our Consolidated Statement of Operations.

Convertible Subordinated Notes

On September 9, 2003, the Company issued $150.0 million of 2³/4% convertible subordinated notes (the “Notes”), due September 9, 2008. The Notes are recorded on the Company’s consolidated balance sheet net of a discount of $4.1 million, which is being amortized over the term of the Notes using the straight-line method, which approximates the effective interest rate method. Approximately $206,000 and $48,000 of the discount was amortized during the three months ended September 30, 2004 and 2003, respectively. The notes are subordinated to all existing and future senior debt and are convertible into shares of the Company’s common stock at the option of the holder at a conversion price of $18.396 per share, which is equates to approximately 8.2 million shares in aggregate. The Company may redeem some or all of the Notes for cash at any time on or after September 9, 2006 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 certain specified periods. Each holder may require the Company to purchase all or portion of such holder’s notes upon occurrence of specified change in control events. The Company incurred $900,000 of costs in connection with the issuance of the Notes, which were deferred and included in deposit and other assets. The finance costs are being recognized as interest expense over the term of the notes using the straight-line method, which approximates the effective interest rate method. During the fiscal quarters ended September 30, 2004 and 2003, the Company amortized approximately $45,000 and $11,000 of debt issuance costs, respectively. Interest on the Notes began accruing in September 2003 and is payable semi-annually on March 9 and September 9. 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. At September 30, 2004 and June 30, 2004, the balance of the pledged securities was $8.1 million and $10.1 million, respectively, and was recorded as restricted cash and investments within the Company’s consolidated balance sheet at September 30, 2004 and June 30, 2004.

(7) Contingencies

Litigation

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 the Company’s 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 an agreement extending the statute of limitations, through September 30, 2003. The complaint alleges liability as under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed. Similar allegations were made in over 300 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 the settlement or opt out of the settlement. No amount is accrued as of September 30, 2004, as a loss is not considered probable and estimable.

(8) Restructuring and Other Related Costs

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 September 30, 2004 (in thousands):


	FY 02 Restructuring Plan							FY 03 Q1 Restructuring Plan							FY 03 Q4 Restructuring Plan								Total
	Facility ( a )			Severance ( b )		Other ( c )		Facility ( a )			Severance ( b )		Other ( c )		Facility ( a )			Severance ( b )			Other ( c )		Reserve
Balance as of June 30, 2004	$	5,924		$	—	$	—	$	42,587		$	—	$	—	$	598		$	158		$	—	$	49,267
Activity for the three months ended September 30, 2004:		—			—
Total charges (1)		930			—		—		—			—		—		2			(25	)		—		907
Cash paid		(1,023	)		—		—		(1,713	)		—		—		(90	)		(40	)		—		(2,866	)

Balance as of September 30, 2004	$	5,831		$	—	$	—	$	40,874		$	—	$	—	$	510		$	93		$	—	$	47,308

(1)	During the quarter ended September 30, 2004, the Company incurred an additional $930,000 in facilities charges related the FY02 Restructuring Plan due to the exercise of an early termination clause within a facility lease agreement.

Facility

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 represents the low end of the range and will be adjusted in the future upon triggering events (such as changes in estimates of time to sublease and actual sublease rates). Since June 30, 2001, 18 sites had 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

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

Other

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.

Restructuring Plans

The FY2003 Q4 Restructuring was announced during the quarter ended June 30, 2003 and included further reductions in operating expenses in order to better align our overall costs structure with current revenues. These reductions included a decrease in the Company’s workforce of approximately 200 employees. The majority of these reductions were completed by December 31, 2003. In connection with the implementation of the restructuring plan, the Company has incurred approximately $10.8 million in total restructuring charges. The restructuring charges included facility costs of $1.3 million, equipment costs of $2.9 million, severance and employment related charges of $6.5 million and other restructuring related costs of $0.1 million. Of the $0.6 million remaining restructuring accrual at September 30, 2004, we expect to pay $0.3 million through June 30, 2005 and $0.3 million during the three years ending June 30, 2008.

The FY2003 Q1 Restructuring was announced during the quarter ended September 30, 2002 and included the consolidation of products within three core product groups: client software and services, application software and services, and infrastructure software and services. This restructuring plan resulted in a decrease in the Company’s workforce by approximately 480 employees as of June 30, 2003. To date, restructuring cost totaled approximately $82.2 million, including facility costs of $52.1 million, fixed asset impairments of $12.2 million, severance and employment related charges of $17.6 million and other restructuring related costs of $0.3 million. Of the remaining $40.9 million accrual at September 30, 2004, we expect to pay $4.9 million through June 30, 2005 and $36.0 million from July 2005 through April 2013.

The FY 2002 Restructuring was announced during the quarter ended December 30, 2001 as a result of our desire to improve our cost structure and profitability. This restructuring plan resulted in a decrease in the Company’s workforce by approximately 400 employees. During the quarter ended September 30, 2004, the Company incurred an additional $930,000 in facilities charges related to the exercise of an early termination clause within a facility lease agreement, bringing the total restructuring costs to $39.7 million. Other related costs totaled $1.9 million which were primarily associated with the accelerated depreciation charges related to the planned closing of certain facilities under the restructuring plan. The restructuring costs included facility costs of $21.2 million, fixed asset impairments of $5.4 million, severance and employment-related charges of $10.3 million and other restructuring-related charges of $2.8 million. Of the remaining $5.8 million accrual as of September 30, 2004, we expect to pay $2.7 million through June 30, 2005 and $3.1 million through various dates to November 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

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 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.

Overview of Our Business and Products

Openwave Systems Inc., (“Openwave”) is a leading independent provider of open standards software products and services for the telecommunications industry. We provide software and services to mobile and wireline carriers, Internet service providers (“ISP’s”), broadband providers, and handset manufactures. Our customers use our products and technologies and leverage our deep industry experience and knowledge to continuously innovate and deliver differentiated services that enhance the user experience for their subscribers. Our product development is focused on: client software, mobile infrastructure software anchored by wireless application protocol (“WAP”) and Open Mobile Alliance (“OMA”) standards, and messaging applications software built around a flexible Internet-Protocol (“IP”) messaging core.

Our software products comprise client software, that resides on mobile phones; mobile infrastructure software which comprises the foundation software required to enable internet connectivity to mobile phones and to build a set of services for mobile phone users; and messaging application software which enables end-users to exchange electronic mail and multimedia messages from personal computers, wireline and mobile phones, and provides end-users with spam and virus protection. For further detail regarding our products, please see our Annual Report on Form 10-K for our fiscal year ended June 30, 2004.

We were incorporated in 1994 as a Delaware corporation and completed our initial public offering in June 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 to this report.

Operating Environment during the Three Months Ended September 30, 2004

We are benefiting from some key trends in each of our core markets:

•

In the mobile market, 2.5G networks are fully deployed and 3G networks such as EVDO and wideband CDMA are being rolled out globally. Using this infrastructure, mobile operators are launching new services around music and video. Additionally, mobile virtual network operators are now introducing data services, which provide us with a new growing market opportunity.

•

In the mobile phone area, we are experiencing demand for more technology and a more comprehensive systems integration offering. Demand is growing for complete platforms from a new set of start-ups and chip providers to deliver wideband CDMA mobile phones in 2005.

•

In the wireline and broadband markets, service providers are actively purchasing anti-spam and anti-virus software technologies to protect their end-users from virus and spam attacks. In addition, broadband providers are pursuing IP video and voicemail solutions to add new offerings for their customers. Both of these areas are fueling growth in this market.

We believe that our strategy is gaining momentum as exhibited by two recent client/server deployments with Nextel and Virgin Mobile:

•

Nextel recently launched its first camera phone – the Motorola i860, which uses our V7 browser. In conjunction, we teamed with Nextel to deploy and manage the next generation messaging platform for multimedia and text messaging. The solution uses our Multimedia Messaging Service Center and was our first comprehensive systems delivery project.

•

Virgin Mobile also has deployed our client and server products for its recently launched Flasher V7 camera phone by AudioVox. We are helping Virgin Mobile deliver games, music and picture messaging. The camera phone utilizes our client technology and Virgin has deployed our access, download and messaging server components.

In the wireline and broadband markets, we have emerged as a leading email provider. We are extending our platform with anti-abuse and integrated messaging technologies.

During the quarter ended September 30, 2004, we deployed our EdgeGx product and have eight active engagements worldwide with both wireline and mobile operators. We also announced EdgeGx 2.0, the first mobile messaging anti-abuse edge services gateway that protects users against viruses and spam for SMS, email and MMS.

Financial Performance for the Three Months Ended September 30, 2004

Overall, we achieved profitability and increased overall revenue. Furthermore, with the acquisition of Magic4 Limited (“Magic4”), we have emerged as a leading company with a client/server offering that will improve the user experience for mobile data services. Key financial highlights included:

•

Revenue was $83.6 million, an increase of 9% from $76.8 million during the preceding quarter ended June 30, 2004, and an increase of 23% from $68.0 million during the September quarter in the preceding year.

•

We achieved profitability with a net income of $957,000, or $0.01 per basic and diluted net income per share compared to a net loss of $737,000, or ($0.01) per basic and diluted net loss per share, for the preceding quarter and a net loss of $14.0 million, or ($0.23) per basic and diluted net loss per share for the September quarter in the preceding year.

•

Net cash used in operating activities was $14.5 million compared to $12.7 million for the same period in fiscal 2003.

Recent Events

On November 4, 2004, we announced the hiring of David C. Peterschmidt as the President and Chief Executive Officer and the resignation of Don Listwin as the President and Chief Executive Officer. Prior to joining Openwave, Mr. Peterschmidt was the chief executive officer and chairman of Security, a security software company, and will continue to serve as a director on its board. Mr. Peterschmidt was also formally the chief executive officer of Inktomi, where he steered the company to a leadership position in the Internet infrastructure software industry.

On October 6, 2004, we announced that Steve Peters had been promoted to Executive Vice President and Chief Administrative Officer, and that Allen Snyder had been promoted to Executive Vice President, Server Business.

On July 30, 2004, we acquired Magic4 Limited, a private company incorporated in the United Kingdom, acquiring the entire issued capital of Magic4 from the existing Magic4 shareholders. As a result of this transaction, we have strengthened our position as an open standards-based software provider for data phone manufacturers.

Corporate Governance and Internal Controls

We have historically considered our policies and procedures relating to our corporate governance and internal controls over financial reporting a high priority and will continue to do so. We believe that our accounting policies are prudent and provide a clear and accurate view of our financial performance. As of September 30, 2004, we have made significant progress in our efforts to comply with the Sarbanes-Oxley Act, including Section 404 thereof, and anticipate that we will meet all requirements within the applicable time frames as specified by the Sarbanes-Oxley Act.

We have formed a Disclosure Committee, comprised primarily of senior financial and legal personnel, which helps to ensure that our internal controls over financial reporting, and financial results and disclosures, are complete and accurate. Prior to the release of our financial results, representatives of our senior management team review our operating results, key accounting policies and estimates with our Audit Committee, which is comprised solely of independent members of our Board of Directors.

Critical Accounting Policies and Judgments

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

•

Revenue recognition

•

Allowance for doubtful accounts

•

Impairment assessment of goodwill and identifiable intangible assets

•

Restructuring-related assessments

These policies, and our procedures related to these policies, are described in detail below. For further discussion of our critical accounting policies and judgments, please refer to the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q and to our audited consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004.

Revenue Recognition

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 97-2 Software Revenue Recognition, With Respect to Certain Transactions,” and generally recognize revenue when all of the following criteria are met as set forth in paragraph 8 of SOP 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 been 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. We also consider customer acceptance our criteria for substantial completion. Use of estimates requires management to make judgments to estimate the progress to completion, (see Risk Factors).

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.

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 reasonably possible. For all other arrangements we recognize revenue related to usage fees on a consistent quarterly lag basis.

During the year ended June 30, 2004, we entered into a significant contract with a communication services provider to provide a “managed service” software and system solution. Under the terms of the arrangement, we agreed to provide the following products and services in exchange for project milestone payments and ongoing service payments: software; third party software and hardware; maintenance and support and new version coverage; third party maintenance and support and new version coverage; implementation services, including significant customization and modification of the software and third party software; and ongoing managed services for the software system/solution. We initially determined that we had a single unit of accounting, as defined in EITF Issue No. 00-21, as we did not know the fair value of one undelivered element. For the quarter ended June 30, 2004, we recognized revenue using the proportional performance method initially assuming a zero profit margin, as we believed we could not reasonably estimate project completion status at June 30, 2004, but believed profitability was reasonably assured.

During the quarter ended September 30, 2004, we determined that we had the fair value of all remaining undelivered elements and thus we were able to break the arrangement down into three specific accounting units which are as follows; post contract customer support, ongoing managed services, and a customized software, hardware and services arrangement. Amounts allocated to the post contract customer support and ongoing managed services will be recognized over a one-year contract term, commencing upon completion of the services arrangement. The Customer can renew both the post contract customer support and the ongoing managed services in year two and beyond for a stated renewal rate. For the customized software, hardware and services, we was able to estimate the project completion status and thus recognized revenue using the proportional performance method assuming an estimated profit margin on the overall project. We use labor hours incurred as a percentage of total estimated labor hours as its input measure for determining the proportional performance on the customized software, hardware and services arrangement. Furthermore, applying the guidance in EITF Issue No. 00-21, which limits revenue recognition to earned and realizable billings or amounts that are not contingent upon the delivery of additional items or meeting other specified performance conditions, revenue recognition on the arrangement is limited to non-contingent revenue. Accordingly, we recognized $7.1 million in systems revenue from this arrangement, which was classified as project/systems revenues in our Consolidated Statement of Operations. Additionally, from this arrangement, we recognized $1.7 million of license revenue in our Consolidated Statement of Operations. This $1.7 million reflects the contracted value of non-system license fees pertaining to a separate contract that could not be separated for revenue recognition purposes from the larger managed services, software, and solution contract. The aggregate revenue recognized to date from the arrangement is $13.7 million with corresponding aggregate cost of sales of $8.0 million. As of September 30, 2004, direct and incremental costs of $4.6 million on the arrangement incurred in excess of the percent complete were deferred and were classified within prepaid and other current assets.

Allowance for Doubtful Accounts

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 until cash is received. In addition, we maintain a general reserve for all other receivables not included in the specific reserve by applying 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.

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.

Impairment Assessments

(a) Goodwill and intangible assets

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.

We record goodwill when consideration paid in a purchase acquisition exceeds the fair value of the net tangible assets and the identified intangible assets acquired. On July 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Prior to the adoption of SFAS No. 142, goodwill and the identified intangible assets were amortized on a straight-line basis over three to five years. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. We have no intangible assets with indefinite useful lives. Goodwill is tested for impairment in the Company’s fiscal third quarter. SFAS No. 142 also requires that we amortize other intangible assets over their respective finite lives up to their estimated residual values.

With the adoption of SFAS No. 142 on July 1, 2002, we determined that there was a single reporting unit for the purpose of goodwill impairment tests under SFAS No. 142. While goodwill is tested for impairment in our fiscal third quarter, 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 three months ended September 30, 2004 and 2003, there were no impairments of goodwill. We have impaired our goodwill and intangible assets during the fiscal years ended June 30, 2003 and 2002.

(b) Strategic investments

We perform an impairment assessment of our strategic equity investments on a quarterly basis. In performing the impairment assessment, we consider 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 September 30, 2004, the remaining book value of our investments in non-marketable equity securities was approximately $1.1 million and was recorded within deposits and other assets in our Consolidated Balance Sheets.

Restructuring–related assessments

Our critical accounting policy and judgment as it relates to restructuring-related assessments includes our estimate of facility costs and severance-related costs. To determine the facility costs, which 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. The facility cost is an estimate representing the low end of the range and will be adjusted in the future upon triggering events (such as changes in estimates of time and rates to sublease, based upon current market conditions, or changes in actual sublease rates). We have estimated that the lease loss for the fiscal year 2003 and fiscal year 2002 restructuring plans could be as much as $22.3 million higher if facilities operating lease rental rates continue to decrease in the applicable markets or if it takes longer than expected to find a suitable tenant to lease the facility. To determine the severance and employment-related charges, we made certain estimates as they relate to severance benefits including the remaining time employees will be retained and the estimated severance period.

Summary of Operating Results

Three Months Ended September 30, 2004 and 2003

Revenues

We generate four different types of revenues. 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 communication service providers and wireless device manufacturers; professional services revenues are primarily a result of providing deployment and integration consulting services to communication service providers; and project/systems revenues are derived from a porting services project and systems revenues which are comprised of packaged solution elements which may include our software licenses, professional services, third-party software and hardware.

The majority of our revenues have been to a limited number of customers and our sales are concentrated in a single industry segment. Significant customers during the three months ended September 30, 2004 and 2003 include IBM, Sprint and Nextel.

Sales to IBM, which were reseller in nature, accounted for 5.9% and 16.0% of total revenues during the three months ended September 30, 2004 and 2003, respectively. Sales to Sprint accounted for 7.3% and 10.0% of total revenues during three months ended September 30, 2004 and 2003, respectively. Sales to Nextel accounted for 14.1% and 3.6% of total revenues during three months ended September 30, 2004 and 2003, respectively. No other customers accounted for 10% or more of total revenues for the three months ended September 30, 2004 and 2003, respectively.

The following table presents the key revenue financial metric information for the three months ended September 30, 2004 and 2003, respectively (in thousands):


	Three Months Ended September 30,						Percent Change
	2004			2003			Percent Change
Revenues:
License	$	38,185		$	32,208		18.6	%
Maintenance and support services		21,498			20,366		5.6	%
Professional services		16,818			9,803		71.6	%
Project/Systems		7,067			5,612		25.9	%

Total Revenues	$	83,568		$	67,989		22.9	%

Percent of revenues:
License		45.7	%		47.4	%
Maintenance and support services		25.7	%		30.0	%
Professional services		20.1	%		14.4	%
Project/Systems		8.5	%		8.2	%

License Revenues

The increase in license revenues of 18.6% as compared to the corresponding quarter in the prior fiscal year was due to an overall increase in sales of both our client and infrastructure products as new mobile phones reach the market. Client license revenue increased approximately $2.1 million of which $1.4 million was related to Magic4 products. The continued increase in handset shipments in the mobile market is generating increases in this area of our business. In addition, we saw an increase in license revenue for our infrastructure products of approximately $5.3 million from the same quarter last year. This growth was primarily due to an increase in our customers’ subscribers and related data transactions, which translated into customers using their license inventory and returning to purchase additional licenses in the first fiscal quarter of 2005. These increases were offset by a $1.5 million decrease in license revenue from our applications business.

Maintenance and Support Services Revenues

The increase in maintenance and support services revenues of 5.6% as compared to the corresponding quarter in the prior fiscal year was due to the growth in both our client and infrastructure business as noted in the license revenue section. The client support revenue increased approximately $700,000 from the same quarter of the previous year as we shifted many OEM customers from general support agreements to higher value dedicated support contracts. In the infrastructure business, we saw increases due to a greater number of subscribers and/or related transactions at our customers offset by a decrease due to renegotiation of a large support contract.

Professional Services Revenues

The increase in professional services of 71.6% as compared to the corresponding quarter in the prior fiscal year was primarily attributed to an increase in the number of custom projects as we focused our strategy on building unique offerings for our customers based on our products and deep knowledge of the mobile and broadband markets. In addition, we saw an increase in services provided for product upgrades of our existing technology, primarily MAG 6.0 and Email Mx 6.0, and other value-added services to our customers.

Project/Systems Revenues

Project/Systems revenues generated during the three months ended September 30, 2004 represented systems revenues which were comprised of packaged solution elements which may include our software licenses, our professional services, and third-party software and hardware. During the quarter ended September 30, 2004, we recognized $7.1 million in systems revenues on an arrangement, which was classified as project/systems revenues and an additional $1.7 million which was classified as license revenues within the Company’s Consolidated Statement of Operations. Please see the Revenue Recognition section under Critical Accounting Policies and Judgments for further discussion of this arrangement.

Project/Systems revenues generated during the three months ended September 30, 2003 comprised revenue recognized under our porting service arrangement with a service partner. Prior to September 30, 2003, we were unable to reliably estimate total costs and revenues on the project and therefore project revenue was recognized only to the extent of project costs incurred. At September 30, 2003, we determined that we were able to reliably estimate total costs and total revenues on the project, and recognized gross margin in excess of costs on a cumulative basis since project inception. Consequently, the Company recognized $3.0 million of gross profit in the September 30, 2003 quarter.

Other Key Financial Revenue Metric

Other key financial revenue metric include our disaggregated revenues by product groups. The disaggregated revenues by product group for the three months ended September 30, 2004 and 2003 were as follows (in thousands):


	Three months ended September 30,				Percent Change
	2004		2003		Percent Change
Revenues by product groups:
Applications software and services	$	14,998	$	16,966	(11.6	)%
Infrastructure software and services		29,107		22,784	27.8	%
Client software and services		15,578		12,814	21.6	%
Services		16,818		9,813	71.4	%
Project/Systems		7,067		5,612	25.9	%

Total revenues	$	83,568	$	67,989	22.9	%

Client software and services revenue increased $2.8 million from the same quarter last year, of which $1.5 million was related to the acquisition of Magic4. The remaining $1.3 million in growth was due to the continued increase of data mobile phone shipments from 468.2 million at the end of 2003 to 559.9 million projected by the end of 2004. Infrastructure software and services increased $6.3 million year over year as mobile phone users increased their adoption and usage of mobile data through our wireless carrier customers. Over the last year, mobile data usage at our customers has increased from 5% to 10% quarterly growth in 2003 to 15% to 20% quarterly growth in 2004. This growth at our service provider customers has resulted in them using their existing inventory and purchasing additional inventory. Application software and services decreased by $2.0 million from the corresponding quarter of the prior fiscal year primarily due to the recognition of revenue of a large messaging anti-abuse agreement in the quarter ending September 30, 2003. In the quarter ended September 30, 2004 quarter, the decrease from this one large deal was partially offset by new anti-spam and anti-virus software sales as well as new sales of our Email Mx mail platform. The increase in services revenues was primarily attributable to an increase in the number of custom projects in which we had engaged as well as an increase in services for product upgrades on our existing technology, primarily MAG 6.0 and Email Mx 6.0, and other value-added services to our customers.

Cost of Revenues

The following table presents cost of revenues as a percentage of related revenue type for the three months ended September 30, 2004 and 2003, respectively:


	Three Months Ended September 30,				Percent Change
	2004		2003		Percent Change
Cost of revenues:
License	$	1,209	$	2,567	(52.9	)%
Maintenance and support services		6,650		6,252	6.4	%
Professional services		12,295		7,296	68.5	%
Project/Systems		3,051		2,149	42.0	%

Total cost of revenues	$	23,205	$	18,264	27.1	%



	Three Months Ended September 30,
	2004		2003
Gross margin per related revenue:
License	96.8	%	92.0	%
Maintenance and support services	69.1	%	69.3	%
Professional services	26.9	%	25.6	%
Project/Systems	56.8	%	61.7	%
Total Gross Margin	72.2	%	73.1	%

Cost of License Revenues

Cost of license revenues consists primarily of third-party license fees and amortization of developed technology and customer contract and relationship intangible assets related to our acquisitions.

Costs of license revenues decreased by $1.4 million during the three months ended September 30, 2004 as compared to the prior fiscal period. The decrease was primarily attributable to the recognition of $1.3 million in royalty expense in the quarter ended September 30, 2003, associated with revenue recognized from a significant anti-virus and anti-spam agreement, and a decrease in the amortization of a software license of $0.6 million, offset by an increase in the amortization of contract and customer relationship intangibles in the amount of $0.5 million related to the acquisition of Magic4.

Cost of Maintenance and Support Services Revenues

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

Maintenance and support services revenues and margins remained relatively constant in the comparable periods.

Cost of Professional Services Revenues

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

Professional services costs increased by $5.0 million during the three months ended September 30, 2004 as compared to the corresponding prior year period due to an increase in demand for our products resulted in an increase in subcontractor costs of $3.0 million, the addition of 38 average headcount lead to an increase of $2.3 million in labor and other charges, an increased utilization of our research and development group resulting in $2.0 million in cross charges, offset by charges of $2.3 million that were either cross-charged to Project/Systems or capitalized as deferred charges on the balance sheet.

Professional services gross margin remained relatively flat during the comparative periods. We expect the professional services gross margin to continue to fluctuate as revenue is recognized based on completion of milestones.

Cost of Project/Systems Revenues

During the three months ended September 30, 2004 , our cost of project/systems revenue was comprised of costs associated with a systems arrangement with a service partner. For the quarter ended June 30, 2004, we recognized revenue using the proportional performance method initially assuming a zero profit margin, as we believed we could not reasonably estimate project completion status at June 30, 2004, but believed profitability was reasonably assured. During the quarter ended September 30, 2004, we were able to estimate the project completion status and thus recognized revenue using the proportional performance method assuming a estimated profit margin on the overall project. The aggregate revenue recognized to date from the arrangement is $13.7 million with corresponding aggregate cost of sales of $8.0 million. Included in the $13.7 million, is $1.7 million that was included in license revenue. Therefore, the adjusted estimated profit margin on revenues recognized to date is approximately 41%.

During the three months ended September 30, 2003, our cost of project/systems revenues was comprised of direct costs associated with the porting services arrangement with a service partner. Without the impact of the additional revenue recognized as discussed above in Project Revenues, our project margins would have been 18% for the three months ended September 30, 2003.

Overall, we expect gross margins to remain above 70% in the near term with an estimated gross margin between 70% and 73% for the second fiscal quarter of 2005.

Operating Expenses

We have continued to reduce costs and expenses to better align our resources with revenue opportunities anticipated in the current information technology market. Additionally, overall headcount for the operating departments decreased by an average of 83 employees during the three months ended September 30, 2004 as compared to the same period in the prior year. The Magic4 acquisition added approximately $1.7 million in operating costs in the September 2004 quarter, excluding amortization of acquisition-related intangibles.

The following table represents operating expenses for the three months ended September 30, 2004 and 2003 respectively:


	Three Months Ended September 30,						Percent Change
	2004			2003			Percent Change
Operating expenses:
Research and development	$	22,005		$	25,586		(14.0	)%
Sales and marketing		22,921			23,623		(3.0	)%
General and administrative		10,198			10,056		1.4	%
Restructuring and other related costs		907			2,652		(65.8	)%
Stock-based compensation		594			735		(19.2	)%
Amortization of intangible assets		525			68		672.1	%

Total Operating Expenses	$	57,150		$	62,720		(8.9	)%

Percent of Revenues:
Research and development		26.3	%		37.6	%
Sales and marketing		27.4	%		34.7	%
General and administrative		12.2	%		14.8	%

Research and Development Expenses

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, including recruiting and hiring of software developers, 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 use of outside consultants.

As a result of our continued restructuring efforts and resource realignments, our average research and development headcount decreased by 83 employees during the three months ended September 30, 2004 as compared to the prior fiscal period, resulting in

a decrease in salary and other labor related costs of $1.4 million for the period. Bonus expense also decreased by $0.7 million due to reduced headcount and fewer retention bonuses. Asset depreciation and amortization decreased by $0.8 million for the current period as compared to the prior fiscal period. This decrease was a result of assets becoming fully depreciated. Facility and information technology allocated-in costs also decreased by $1.0 million during the current year period. In addition, we decreased our research and development expenses by increasing the allocated-out costs to Project/Systems or Professional Services of $0.8 million. These costs reductions were partially offset by a $0.8 million increase in contingent worker expense due primarily to the use of contractors as a short term solution to meet customer commitments and an overall increase of $0.3 million for other costs.

Sales and Marketing Expenses

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.

Our average sales and marketing headcount remained relatively flat during the three months ended September 30, 2004 period as compared to the prior fiscal period. The lower sales and marketing costs of $0.7 million are primarily associated with lower bonus and commission expenses of $1.3 million incurred during the current fiscal quarter as compared to the corresponding quarter of the prior fiscal year, offset by an increase in salary and other labor costs, excluding bonuses, of $0.6 million related to the initial phase in of salary raises for our employees for the first time in three years.

General and Administrative Expenses

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.

Our average general and administrative expense headcount remained relatively flat during the three months ended September 30, 2004 period as compared to the corresponding period in the prior fiscal year. Total general and administrative expenses remained relatively flat and were impacted by increased bad debt expense of $1.0 million due to a general increase in accounts receivable, an increase in salary expense and other labor costs, excluding bonuses and commissions, of $0.5 million due primarily to the initial phase in of salary raises for our employees and a decrease in facility and information technology allocated-out costs of $1.1 million due to a higher amount of system requirements and a higher proportion of headcount to the overall company. These increases were offset primarily by, a decrease in bonus and commission expenses of $1.3 million and a decrease in depreciation expense of approximately $1.3 million as a result of assets becoming fully depreciated and fewer retention bonuses.

Overall, we expect operating expenses to increase 2% to 3% in the second fiscal quarter of 2005 due primarily to the continued phase in of employee raises as well as the impact of a full quarter of Magic4 expenses.

Restructuring and Other Related Costs

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 2003 fourth quarter restructuring (FY2003 Q4 Restructuring), the fiscal 2003 first quarter restructuring (FY2003 Q1 Restructuring), and the fiscal 2002 restructuring (FY2002 Restructuring.)

For the three months ended September 30, 2004, we incurred additional FY2002 restructuring charges of $0.9 million, which was comprised of facilities charges related to the exercise of an early termination clause within a facility lease agreement.

For the three months ended September 30, 2003, we incurred additional restructuring charges of $2.7 million which was comprised of an increase in charges related to the FY2003 Q4 Restructuring of $2.4 million related to $1.0 million in severance and other charges and $1.4 million in additional restructuring related facility charges, a decrease in charges related to the FY2003 Q1 restructuring of $0.3 million, and an increase in charges related to the FY2002 restructuring of $0.5 million related to changes in estimates of sublease income.

As of September 30, 2004, we have remaining restructuring liabilities that total $47.3 million and are comprised of remaining liabilities for the FY2003 Q4 Restructuring Plan, the FY2003 Q1 Restructuring Plan, and the FY2002 Restructuring Plan of $0.6 million, $40.9 million, and $5.8 million, respectively.

The following table summarizes the future payments on the remaining restructuring liabilities (in thousands):


Year ending June 30,	Cash Payable
2005	$	7,828
2006		8,271
2007		6,502
2008		5,160
2009		4,145
Thereafter		15,402

	$	47,308

Stock-Based Compensation

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 compensation expense recognized on warrants, 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 expense by category (in thousands):


	Three Months Ended September 30,				Percent Change
	2004		2003		Percent Change
Stock-based compensation by category
Research and development	$	118	$	268	-56.0	%
Sales and marketing		123		81	51.9	%
General and administrative		353		386	-8.5	%

	$	594	$	735	-19.2	%

Stock-based compensation expense decreased by $141,000 during the three months ended September 30, 2004 as compared to the same quarter of prior fiscal year primarily due to the accelerated amortization methodology used by the Company to amortize deferred stock-based compensation. During the fiscal quarters ended September 30, 2004 and 2003, we issued restricted stock grants that resulted in deferred stock-based compensation that totaled approximately $365,000 and $118,000, respectively. In neither quarter did we issue any stock options or grants to non-employees.

Amortization of Intangible Assets

The following table presents the total amortization of intangible assets:


	Three Months Ended September 30,
	2004		2003
Amortization of contract intangibles (a)	$	300	$	228
Amortization of developed and core technology (a)		841		394
Amortization of other intangible assets (b)		525		68

	$	1,666	$	690

(a)

(b)	Amortization of acquisition-related customer relationships and trademark, which are sales and marketing in nature, is included in Operating expenses in our Condensed Consolidated Statement of Operations.

The increase in amortization of intangible assets for the three months ended September 30, 2004, as compared to the respective prior fiscal quarter, was primarily due to amortization of intangibles acquired as part of our acquisition of Magic4. During the fiscal quarter ended September 30, 2004, we incurred approximately $996,000 of intangible amortization expense attributable to the intangible assets acquired in the acquisition of Magic4.

Interest Income

Interest income totaled approximately $1.3 million and $881,000 for the three months ended September 30, 2004 and 2003, respectively. The increase in our interest income during the fiscal quarter ended September 30, 2004 as compared to the fiscal quarter ended September 30, 2003 was primarily due to the higher average cash and investment balance during the quarter ended September 30, 2004 as compared to September 30, 2003. The net proceeds from our Convertible Subordinated Notes of approximately $145.0 million were received during the final month of the quarter ended September 30, 2003.

Interest Expense

Interest expense totaled $1.3 million and $303,000 for the three months ended September 30, 2004 and 2003, respectively, and is primarily comprised of accrued interest on convertible subordinated notes and amortization of the discount on the convertible debt and debt issuance costs.

Other Expense, net

Other expense, net totaled $215,000 and none during the three months ended September 30, 2004 and 2003, respectively. The expense incurred during the three months ended September 30, 2004 was primarily related to foreign exchange losses on foreign denominated transactions.

Income Taxes

Income tax expense totaled $2.0 million and $1.6 million for the three months ended September 30, 2004 and 2003, respectively. Income taxes in all periods presented consisted primarily of foreign withholding and foreign income taxes. Foreign withholding taxes fluctuate quarterly based on both the product and geographical mix of our revenue, as well as the timing of the revenue recognized, with a resulting fluctuation in the quarterly effective tax rate.

In light of our history of operating losses, we recorded a valuation allowance for substantially all of our net deferred tax assets outside of two foreign jurisdictions, 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, 2004, we had net operating loss carryforwards for federal and state income tax purposes of approximately $1.1 billion and $404.7 million, respectively.

Liquidity and Capital Resources

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

Our restricted cash and investments increased by approximately $205,000 during the quarter-ended September 30, 2004. The increase was primarily attributable to a newly restricted investment to secure a warranty bond pursuant to a customer contract of approximately $2.2 million off-set by a reduction the amount of pledged investments used to secure the payment of the first six scheduled semi-annual interest payments on our convertible subordinated debt of approximately $2.0 million when the second of the six schedule payments was made.

The following table discloses our off-balance sheet contractual obligations as of September 30, 2004 (in thousands):


	2005			2006		2007		2008		2009	Thereafter	Total
Contractual obligation:
Operating Lease Obligation	$	26,318		21,642		20,212		19,160		17,778	72,382	$	177,492
Sublease Income	$	(2,799	)	(924	)	(772	)	(526	)	—	—	$	(5,021	)
Net Operating Lease Obligation	$	23,519		20,718		19,440		18,634		17,778	72,382	$	172,471
Interest due on convertible subordinated debt	$	2,063		4,125		4,125		4,125		2,063		$	16,501
Product purchase commitments	$	155		—		—		—		—	—	$	155

Working Capital and Cash Flows

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


	September 30, 2004		June 30, 2004		Percent Change
Working capital	$	224,866	$	251,419	(10.6	)%

Cash and cash investments:
Cash and cash equivalents	$	172,662	$	231,509	(25.4	)%
Short-term investments		53,012		38,262	38.5	%
Long-term investments		26,755		44,663	(40.1	)%
Restricted cash and investments		27,589		27,384	0.7	%

Total cash and cash investments	$	280,018	$	341,818	(18.1	)%


	Three Months Ended September 30,
	2004			2003
Cash used for operating activities	$	(14,463	)	$	(12,717	)
Cash used for investing activities	$	(44,920	)	$	(1,612	)
Cash provided by financing activities	$	763		$	146,606

We obtained a majority of our cash and investments prior to fiscal year 2004 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 received approximately $145.0 million from the issuance of our $150 million convertible subordinated notes during the year-ended June 30, 2004. 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.

(a) Working Capital

Our working capital decreased by approximately $26.6 million or 10.6% from June 30, 2004 to September 30, 2004. The decrease was primarily attributable to a decrease in our cash and cash equivalents of $58.8 million, plus an increase in our accrued liabilities of $5.7 million and the issuance of loan notes of $3.8 million offset by an increase in accounts receivable of $37.0 million and a net decrease in other current assets and liabilities of $4.7 million.

(b) Cash used for operating activities

Net cash used in operating activities during the three months ended September 30, 2004 and 2003 was $14.5 million and $12.7 million, respectively. The net cash used in operating activities increased by $1.8 million in the quarter ended September 30, 2004 compared to the quarter ended September 30, 2003. Cash paid for restructuring was $2.9 million and $6.9 million in three months ended September 30, 2004 and 2003, respectively. Additionally, we received a settlement that resulted in a $3.6 million prepayment of sublease rental income during the three months ended September 30, 2003. Excluding cash paid for restructuring activities and the prepaid rental income received, the cash used for operating activities totaled $11.6 million and $9.4 million for the three months ended September 30, 2004 and 2003, respectively. The increase in cash used for operating activities was primarily attributable to a decrease in the amount of receivable collections as a percentage of the revenue recognized in the quarter ended September 30, 2004 as compared to the quarter ended September 30, 2003.

Our accounts receivable during the quarter ended September 30, 2004 of $31.2 million as compared to a decrease in our accounts receivable in the quarter ended September 30, 2003 of $923,000, a combined difference of $32.5 million. Additionally, our deferred revenue balance decreased by $9.0 million in the September 30, 2004 quarter and increased by $11.0 million in the September 30, 2003 quarter a combined difference of $20.1 million.

(c) Cash used for investing activities

Net cash used in investing activities during the three months ended September 30, 2004 and 2003 was $44.9 million and $1.6 million, respectively. The increase in the amount of cash used for investing activities of $43.3 million is primarily attributable to the net cash used to acquire Magic4 of approximately $46.4 million. Capital expenditures increased by approximately $975,000 during the current quarter compared to the same quarter of the prior fiscal year. The remaining change in our cash used for investing activities is primarily related to a net increase in proceeds received of $4.1 million from the sales of short-term and long term investments and restricted cash and investments needed to fund our operations in the current fiscal quarter.

(d) Cash provided by financing activities

Net cash provided by financing activities decreased by $145.8 million during the current fiscal quarter compared to the same quarter of the prior fiscal year. The decrease is reflective of the cash proceeds received in the prior year from the issuance of our convertible subordinated debt of $145.0 million. Cash proceeds from the issuance of common stock for options exercised also decreased by approximately $860,000, which was primarily attributable to fewer employee options being exercised.

Risk Factors

You should carefully consider the following risks, as well as the other information contained in this 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 or referred to in this report on Form 10-Q or incorporated by reference in our annual report for the year ended June 30, 2004, including our consolidated financial statements and the related notes incorporated by reference herein.

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 $29.9 million during the fiscal year ended June 30, 2004. As of September 30, 2004, we had an accumulated deficit of approximately $2.6 billion, which includes approximately $2.0 billion of goodwill impairment and amortization. We currently have 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. We will need to generate increases in revenue and continue to manage costs to achieve profitability. We face a number of risks including:

•

our ability to upgrade, develop and maintain our products and effectively respond to the rapid technology change in wireless and broadband communications;

•

our ability to anticipate and respond to the announcement or introduction of new or enhanced products or services by our competitors;

•

the rate of growth, if any, in end-user purchases of data-enabled mobile phones, use of our products, and the growth of wireless data networks generally;

•

the growth of mobile data usage by our customers’ subscribers;

•

the volume of sales of our products and services by our strategic partners, distribution partners and resellers; and

•

general economic market conditions and their affect on our operations and the operations of our customers.

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 convertible subordinated notes due September 2008, which we may not be able to repay in cash upon a change of control or at maturity and could result in dilution of our earnings per share.

In September 2003, we issued $150 million of 2¾% convertible subordinated notes due September 9, 2008. The notes are convertible into shares of our common stock at the option of the holder at any time on or prior to the business day prior to maturity. The notes are currently convertible at a conversion price of $18.396 per share, or 54.3596 shares of our common stock per $1,000 principal amount of notes, subject to adjustment upon the occurrence of specified events. In addition, each holder may require us to purchase all or a portion of such holder’s notes upon the occurrence of specified change in control events. We may choose to pay the repurchase 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 in cash on a change of control or at maturity. The repurchase of our notes with shares of our common stock or the conversion of the notes into shares of our common stock may 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:

•

the introduction of new products or services or changes in pricing policies by us or our competitors;

•

delays in development, launches, market acceptance or implementation by our customers of our products and services;

•

purchasing patterns of and changes in demand by our customers for our products and services and the lack of visibility into the timing of our customers’ purchasing decisions;

•

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

•

potential slowdowns or quality deficiencies in the introduction of new telecommunication networks or improved mobile phones.

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

Changes in accounting standards or our accounting policy relating to stock-based compensation may negatively affect our reported operating results.

We are currently not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the deemed fair value of our common stock at the date of grant. However, several companies have recently elected to change their accounting policies and begun to record the fair value of stock options as an expense. Although the standards have not been finalized, the FASB has announced its support for recording expense for the fair value of stock options granted. Please see Note 1 of the Condensed Consolidated Financial Statements for a table displaying the impact to our operating expenses if we were to change our accounting policy in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”, and SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”, and retroactively restate all prior periods as if we had adopted SFAS No. 123 for all periods presented. If we elect, or are required, to expense stock-based compensation then such a change will negatively affect our reported operating results.

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

Our sales cycle is lengthy, often 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 mobile phones 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 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 approximately 58.3% and 58.6% of our total revenues for the three months ended September 30, 2004 and 2003, respectively. Risks inherent in conducting business internationally include:

•

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

•

fluctuations in currency exchange rates and any imposition of currency exchange controls;

•

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

•

differing technology standards and pace of adoption;

•

export restrictions on encryption and other technologies;

•

difficulties in collecting accounts receivable and longer collection periods; and

•

differences in foreign laws and regulations, including foreign tax, intellectual property, labor and contract law.

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

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 is derived through customers who tend to have access to more limited financial resources than others and, therefore, represent potential sources of increased credit risk. 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 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.

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.

We rely upon a small number of customers for a significant portion of our revenues, 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 months ended September 30, 2004 include Nextel. Sales to Nextel accounted for approximately 14.1% of total revenues during the three months ended September 30, 2004. This customer may not continue to generate significant revenues for us and we may be 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 foreseeable future, and any failure by us to capture a significant share of these customers could materially harm our business. We believe that the telecommunications industry is entering a period of consolidation. To the extent that our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

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, 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:

•

wireless equipment manufacturers, such as Ericsson, Nokia, and Nortel;

•

wireless messaging software providers, such as Comverse, Ericsson, and LogicaCMG;

•

software providers, such as 7.24 Solutions, Critical Path, Intrado, and LightSurf;

•

service providers, such as E-Commerce Solutions;

•

client technology competitors, such as Access, Qualcomm, Symbian, and Teleca;

•

computer system companies such as Microsoft and Sun;

•

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

•

antispam and antivirus providers such as Ironport.

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 a 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.

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 market position of our client software offerings as other software becomes more competitive in price.

Our technology depends on the adoption of standards such as those set forth by the Open Mobile Alliance (“OMA”). If such standards are not effectively established our business could suffer. Use of open industry standards, however, 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 mobile phones. 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. In addition, large wireless operators sometimes create detailed service specifications and requirements, such as Vodafone Live or DoCoMo iMode, and such operators are not required to share those specifications with us. 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.

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.

If mobile phones are not widely adopted for mobile delivery of data services or if new data services such as mobile messaging are not adopted widely our business could suffer materially.

We have focused a significant amount of our efforts on mass-market mobile phones as the principal means of delivery of data services using our products. If mobile phones 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, PDAs, and smart phones, to remotely access the Internet and email. These products generally are designed for the visual presentation of data, while, until recently, mobile phones historically have been limited in this regard. In addition, the development and proliferation of many types of competing products capable of mobile delivery of data service in a rapidly evolving industry represents a significant risk to the development of a primary standard. 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.

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 mobile phones 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.

If widespread integration of browser technology does not occur in mobile phones, 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 mobile phones. 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.

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 and widespread spamming.

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 mobile phone or other wireless device manufacturers produce new mobile phones that contain updated software and functionality that are compatible with our software. There can be no assurance that mobile phone or wireless device manufactures will produce enough mobile phones, 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 mobile phones 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.

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 opportunities for our products could deteriorate.

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.

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 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. Further, even if we make investments, we may not gain strategic benefits from those investments. In addition, we may need to record an impairment charge of the strategic investments to our operations.

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:

•

diversion of Management’s attention from other business concerns;

•

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

•

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

•

impact of any negative customer relationships acquired;

•

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

•

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

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

We depend on others to provide content and develop applications for mobile phones.

In order to increase the value to customers of our product platform and encourage subscriber demand for Internet-based services via mobile phones, 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 mobile phones, 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 mobile phones that enable the wireless Internet.

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 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 required to make certain product and product development tradeoffs with limited information regarding the future demand for our various products. There can be no assurance that in connection with the restructurings we decided to pursue the correct product offerings to take advantage of future market opportunities. Furthermore, the implementation of our restructuring plans has placed, and may continue to place, a significant strain on our managerial, operational, financial, employee and other resources. Additionally, the restructurings may negatively affect our employee turnover as well as recruiting and retention of important employees. 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.

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 limited arrangements with 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.

Third parties may claim that we infringe their intellectual property or other rights and we may be forced to engage in expensive and time-consuming litigation or take other actions that divert management’s attention and resources from developing our business.

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 certain jurisdictions, such as 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 in which case we may need to stop marketing and licensing our products.

As the number of our products and services increases and their features and content continue to expand, and as we acquire the right to use technology through acquisitions or licenses, we may increasingly become subject to infringement and other types of claims by third parties. Our exposure to risks associated with the use of intellectual property may increase as a result of acquisitions, as we have a lower level of visibility into how such technology was developed or otherwise procured. 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.

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.

If we are unable to favorably assess the effectiveness of our internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment our stock price could be adversely affected.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and beginning with our Annual Report on Form 10-K for the year ending June 30, 2005, our management will be required to report on, and our independent auditors to attest to, the effectiveness of our internal controls over financial reporting as of June 30, 2005. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are new and complex, and require significant documentation, testing and possible remediation. We are currently in the process of reviewing, documenting and testing our internal controls over financial reporting, which has and will likely continue to result in increased expenses and the devotion of significant management and other internal resources. We may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal controls over financial reporting. In addition, in connection with the attestation process by our independent auditors, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal controls over financial reporting, or if our independent auditors are unable to provide an unqualified attestation report on our assessment, investor confidence and our stock price could be adversely affected.

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 sometimes 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

(a) Foreign Currency Risk

We operate internationally and thus are exposed to potentially adverse movements in foreign currency rate changes. We have entered into foreign exchange forward contracts to reduce our exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a nonfunctional currency. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on our operating results. These contracts require us to exchange currencies at rates agreed upon at the inception of the contracts. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange forward contracts. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from changes in currency exchange rates. We do not designate our foreign exchange forward contracts as hedges and, accordingly, we adjust these instruments to fair value through earnings in the period of change in their fair value. Net foreign exchange transaction losses are included in “Other expenses, net” in the accompanying Condensed Consolidated Statements of Operations totaled $(216,000) and $(1,000) for the three months ended September 30, 2004 and 2003, respectively. As of September 30, 2004, we have forward contracts that have a total notional amount of Euro 16.2 million and GBP 2.0 million that expire during the December 31, 2004 quarter.

(b) Interest Rate Risk

As of September 30, 2004, we had cash and cash equivalents, short-term and long-term investments, and restricted cash and investments of $280.0 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 & Poors of P-1 or higher, and, by policy, limit the amount of the credit exposure to any one issuer. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents; all investments with maturities of three months 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 September 30, 2004:


	Expected maturity date for the year ending June 30,										Cost Value Total		Fair Value Total
	2005		2006		2007		2008		2009		Cost Value Total		Fair Value Total
Corporate Bonds	$	7,436	$	7,125	$	—	$	—	$	—	$	14,561	$	14,485
Federal Agencies		27,611		37,740		—		—		—		65,351		65,062

	$	35,047	$	44,865	$	—	$	—	$	—	$	79,912	$	79,547

Additionally, the Company had $27.6 million of restricted investments that were included within restricted cash and investments on the consolidated balance sheet as of September 30, 2004. $17.3 million of the restricted investments comprised a certificate of deposit to collateralized letters of credit for facility leases. $8.1 million of the balance comprises U.S. government securities pledged for payment of the remaining four semi-annual interest payments due under the terms of the convertible subordinated notes indenture. The remaining balance of $2.2 million comprises a restricted investment to secure a warranty bond pursuant to a customer contract. The weighted average interest rate of the restricted investments was 1.7% at September 30, 2004.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) 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”). From April 2003 to June 2004, the Company did not have a CFO. On July 28, 2004, the Company promoted Joshua Pace from Chief Accounting Officer to 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, however based on the evaluation performed, the CEO and current CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting on a timely basis information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act.

(b) Internal Control Over Financial Reporting

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.

PART II Other Information

Item 1. Legal Proceedings

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. We believe a loss is not probable or estimable. Therefore no amount has been accrued as of September 30, 2004.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 2, 2004, we issued 2,271,446 shares of Openwave common stock, $54.2 million in cash and a $3.8 million loan note in connection with our acquisition of Magic4. We believe that the transaction was exempt from the registration requirements of the Securities Act by virture of Section 3(a)(10) because the California Department of Corporations held a fairness hearing and granted a permit pursuant to Section 25121 of the California Corporation Code to issue the securities.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


Exhibit Number		Description
3.1		Amended and Restated Bylaws of the Company as of November 4, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K filed on November 5, 2004).

10.1		Employment Agreement, dated November 1, 2004, by and between the Company and David C. Peterschmidt (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on November 5, 2004)

10.2		Amended and Restated Employment Agreement, dated October 4, 2004, by and between the Company and Steve Peters (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on October 8, 2004).

10.3		Amended and Restated Employment Agreement, dated October 4, 2004, by and between the Company and Allen Snyder (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed on October 8, 2004).

10.4		Summary of Stock Option Grants and Restricted Stock Awards made to Executives and Director in September 3, 2004 through November 5, 2004.

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 Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002.

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

(b) Reports on Form 8-K

On November 5, 2004, we filed a Current Report on Form 8-K to announce (i) the appointment of David C. Peterschmidt as the President and CEO of the Company and the entry into an employment agreement and certain related agreements between the Company and him, (ii) the resignation of Don Listwin as President and CEO and to describe the terms of his employment transition, and (iii) amendment to Section 3.1 of the Company’s Amended and Restated Bylaws to increase the number of directors on the Company Board from seven to eight.

On October 26, 2004 we filed a Current Report on Form 8-K to furnish our financial results for the fiscal first quarter ended September 30, 2004.

On October 8, 2004 we filed a Current Report on Form 8-K to announce the entry into amended employment agreements with each of Steve Peters and Allen Snyder.

On August 6, 2004 we filed a Current Report on Form 8-K to announce the consummation of its previously announced acquisition of Magic4 Limited (“Magic4”), a private company incorporated in the United Kingdom, acquiring the entire issued share capital of Magic4 from the existing Magic4 shareholders.

On July 28, 2004 we filed a Current Report on Form 8-K to furnish our financial results for the fiscal fourth quarter ended June 30, 2004.

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Date: November 9, 2004
	OPENWAVE SYSTEMS INC.

	By:	/s/ Joshua Pace
		Joshua Pace
		Chief Financial Officer