OPENWAVE SYSTEMS INC - 10-Q Quarterly Report

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

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

As of April 30, 2005 there were 68,845,804 shares of the registrant’s Common Stock outstanding.

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 March 31, 2005 and June 30, 2004, and the results of operations and cash flows for the three and nine months ended March 31, 2005 and 2004. 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 December 31, 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.

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.

Certain amounts in fiscal 2004 as reported on the Condensed Consolidated Balance Sheet and Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. We reclassified $78.0 million in auction rate securities from cash and cash equivalents to short-term investments on the fiscal 2004 condensed consolidated balance sheet and condensed consolidated statement of cash flows. We also reclassified $133.2 million and $43.0 million in auction rate securities from cash and cash equivalents to short-term investments as of March 31, 2004 and June 30, 2003, respectively, which decreased cash flows from investing activities by $90.2 million in the condensed consolidated statement of cash flows for the nine months ended June 30, 2004.

There have been no material changes to our revenue recognition policy from the information provided in Note 1 to the financial statements included in the Company’s Annual Report on Form–K for the year ended June 30, 2004.

During the year ended June 30, 2004, the Company entered into a significant contract with a communications 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 separate the arrangement 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 project. 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. For the three and nine months ended March 31, 2005, the Company recognized $5.3 million and $15.6 million, respectively, in systems revenue from this arrangement, which was classified as project/systems revenues in the Company’s Condensed Consolidated Statement of Operations. The aggregate revenue recognized from inception of this arrangement through March 31, 2005 was $20.5 million with corresponding aggregate costs of sales of $13.9 million. Additionally, from this arrangement, for the three and nine months ended March 31, 2005, the Company recognized $719,000 and $2.8 million, respectively, of license revenue in the Company’s Condensed Consolidated Statement of Operations. This revenue 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. As of March 31, 2005, and June 30, 2004, direct and incremental costs of $1.3 million and $5.7 million, respectively, on the arrangement incurred in excess of the proportional performance were deferred and were classified within prepaid and other current assets.

During the quarter ended December 31, 2004, the Company entered into a significant contract with a communications 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 software custom modification and installation milestone payments, license fee 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, modification and development of the software and third-party software; and ongoing managed services for the software system/solution. The software custom modification and installation milestone fees are due when certain progress milestones are achieved; the license fees are due within twelve months from final acceptance of the solution; and the ongoing service payments are due when services are performed. The software custom modification and installation fees are refundable to the extent of approximately $14.5 million if the Company does not satisfy certain customer specified acceptance testing and the Company is subject to liquidated damage penalties if it fails to deliver against certain progress milestones. Through March 31, 2005, the Company has received $15.7 million in payments of which no amount is refundable. As of March 31, 2005, the Company believes delivery against this acceptance testing is reasonably assured and therefore the refundability provisions will not be triggered and the customer will satisfy their contractual obligations. Additionally, the Company believes that it will not trigger liquidated damage penalties. Prospectively, if the Company determines that it will be unable to satisfy the acceptance testing or expects it will incur liquidated damages, a reduction in the total contract revenue will be accounted for in the period that the Company determines that it will not be able to satisfy the acceptance testing or it will incur liquidated damages. The Company determined that it had three units of accounting as defined in EITF Issue No. 00-21 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 communications service provider can renew both the non-third party post contract customer support and the ongoing managed services in year two and beyond for a stated renewal rate. Additionally, the Company determined it had evidence of fair value for third party post contract customer support. 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 project. Accordingly, the Company recognized approximately $7.4 million and $14.2 million in systems revenue from this arrangement during the three and nine months ended March 31, 2005, which was classified as project/systems revenues in the Company’s Condensed Consolidated Statements of Operations. The aggregate revenue recognized from inception of the arrangement through March 31, 2005 was $14.2 million with corresponding aggregate costs of sales of $8.6 million. As of March 31, 2005, direct and incremental costs of $6.3 million on the arrangement incurred in excess of the percent complete were deferred and were classified within prepaid and other current assets.

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.

During the three and nine months ended March 31, 2005, the Company granted employees 260,000 and 925,000 shares, respectively of restricted stock with an aggregate value of $3.4 million and $10.5 million, respectively on the date of grant, which was recorded as deferred compensation and will be amortized over the service period of one to four years.

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):

In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” which is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” The interpretation requires a liability for the fair value of a conditional asset retirement obligation be recognized if the fair value of the liability can be reasonably estimated. The interpretation is required to be implemented by the end of fiscal 2006. The interpretation is not expected to have a material impact on our results of operations or financial position.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (SFAS 123R) and in March 2005 the SEC released Staff Accounting Bulletin No. 107 (SAB 107), Topic 14: Share-Based Payment. SFAS 123R and SAB 107 will be effective in the first quarter of fiscal 2006 and will result in the recognition of substantial compensation expense relating to our employee stock options. The Company currently uses the intrinsic value method to measure compensation expense for stock-based awards to employees. Under this standard, compensation expense is generally not recognized related to stock option grants issued under the Company’s stock option plans. Under the new rules, the Company will be required to adopt a fair-value-based method for measuring the compensation expense related to employee stock awards. This will lead to substantial additional compensation expense. The paragraph entitled Stock Based Compensation included in Note 1 to these consolidated financial statements provides the pro forma net income and earnings per share as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure the compensation expense for the three and nine months ended 2005 and 2004.

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.

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):

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):

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 disaggregated revenue information reviewed on a product category basis by the CEO includes server software and services and client software and services revenues.

Server software and services includes, but is not limited to: software which enables end users to exchange electronic mail, and multimedia messages from PC’s, wireline telephones and mobile phones; software that contains the foundation software required to enable Internet connectivity to mobile devices and to build a set of applications for mobile users; our system solutions software and services and third-party hardware. Server software and services’ products includes the following: email, IP Voicemail, Messaging Anti-Abuse products and services, other messaging products, Openwave Mobile Access Gateway, Openwave Location Products, Multimedia Messaging Services (“MMS”), Openwave Provisioning Manager, and our packaged solution elements which include our software licenses, professional services, third-party software and hardware.

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

The disaggregated revenue information reviewed by the CEO is as follows (in thousands):

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

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 as a percentage of total revenue for the three and nine months ended March 31, 2005 and 2004 was as follows:

The following table presents a roll-forward of the goodwill and intangible assets from June 30, 2004 to March 31, 2005 (in thousands):

Total amortization expense related to intangible assets during the three and nine months ended March 31, 2005 and 2004 was as follows (in thousands):

Amortization of acquired developed and core technology and customer license contracts is included in Cost of Revenues – License.

Amortization of acquired customer support contracts is included in Cost of Revenue – Maintenance and Support.

Amortization of acquired customer relationships, trademarks, and workforce-in-place is included in Operating expenses.

The following tables set forth the carrying amount of intangible assets, net as of March 31, 2005 and June 30, 2004 (in thousands):

The following table presents the estimated future amortization of the intangible assets, based upon intangible assets recorded as of March 31, 2005, (in thousands):

As of March 31, 2005 and June 30, 2004, the Company had deferred revenue of $63.4 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 to the customer but not yet recognized as revenue as of the balance sheet date since the billing related to one or more of the following:

Amounts in accounts receivable that have offsetting balances in deferred revenue aggregated approximately $38.0 million and $28.9 million as of March 31, 2005 and June 30, 2004, respectively.

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

Comprehensive income (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):

On July 30, 2004, the Company acquired all of the outstanding issued share capital of Magic4, a leading provider of messaging software for mass-market mobile phones, for initial aggregate consideration of $72.0 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 $1.7 million, consisting 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 3-day weighted average closing price through the close date of the acquisition. As of March 31, 2005, the Company had paid $72.0 million of the Initial Consideration.

In addition to the Initial Consideration, the Company has agreed to additional contingent consideration consisting of 1,135,734 shares of the Company’s 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 issued to the former holders of share capital of Magic4 on a pro-rata basis (the “Contingent Consideration”). The Contingent Consideration is contingent upon the continued employment of certain key employees of Magic4 with the Company for specified periods. These key employees were also holders of the share capital of Magic4. On January 31, 2005, the Company issued the first installment of the contingent consideration comprising 113,570 shares of common stock to the former holders of the share capital of Magic4. The amount of the first installment issued to the key employees was 24,918 shares, resulting in stock-based compensation expense of $339,000 in the quarter ended March 31, 2005, based upon the value at the date of issuance. The value of the remaining 88,652 shares was $1.2 million and was recorded as an addition to goodwill. The sum of Initial Consideration and Contingent Consideration paid as of March 31, 2005 equals $73.2 million (“Consideration”).

As of March 31, 2005, the remaining 1,022,164 shares of common stock were held in escrow. The value of the contingently issuable shares of common stock will be remeasured upon the completion of the various specified employment periods through January 2006.

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 Condensed 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 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 not yet earned. The Consideration has been allocated as follows (in thousands):

The deferred tax liability included $7.7 million classified as non-current. The goodwill of $43.4 is not tax-deductible for tax purposes.

On January 31, 2005, the Company consummated the acquisition of Cilys 53 Inc. (“Cilys”), a private company in the development stage and incorporated in Canada, acquiring the entire issued share capital of Cilys from the existing Cilys shareholders. As a result of the transaction, Cilys became a wholly owned subsidiary of Openwave. The purchase price of approximately $9.7 million consisted of 314,104 shares of the Company’s common stock, valued at $4.3 million, or $13.62 per share using the market price on the closing date and cash in the amount of $4.9 million, and transaction costs of approximately $463,000.

Cilys is a wireless telecommunications software infrastructure vendor which makes data compression software for the communications industry. With the acquisition of Cilys, the Company has strengthened its position as an open standards-based software provider for both wireless service providers and data phone manufacturers. As of January 31, 2005, the date of the acquisition, the technology acquired in the Cilys acquisition was approximately 98% complete, resulting in acquired core technology of $11.1 million identified as an intangible asset, along with $414,000 recorded as workforce in place.

The results of Cilys have been included in the Condensed Consolidated Financial Statements since February 1, 2005. The acquisition has been accounted for as an asset purchase since Cilys had not commenced principal operations and had no material revenue. The purchase price has been allocated as follows (in thousands):

On July 30, 2004, in connection with the acquisition of Magic4, the Company issued unsecured 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 through December 31, 2004, and 2.28% thereafter. The Loan Notes and accrued interest were repaid on April 30, 2005.

On September 9, 2003, the Company issued $150.0 million of 2 ¾% convertible subordinated notes (the “Notes”), due September 9, 2008. The Notes are recorded on the Company’s consolidated balance sheets net of a $4.1 million discount, which is being amortized over the term of the Notes using the straight-line method, which approximates the effective interest rate method. Approximately $207,000 and $619,000 of the discount was amortized during the three and nine months ended March 31, 2005, respectively, as compared to approximately $207,000 and $461,000 for the corresponding periods of the prior fiscal year. 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 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 three and nine months ended March 31, 2005 the Company amortized debt issuance costs of approximately $45,000 and $135,000 as compared to $45,000 and $101,000 for the corresponding periods of the prior fiscal year. Interest on the Notes began accruing in September 2003 and is payable semi-annually in March and September. 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 March 31, 2005 and June 30, 2004, the balance of the pledged securities was $6.1 million and $10.1 million, respectively, and was recorded as restricted cash and investments within the Company’s consolidated balance sheet at March 31, 2005 and June 30, 2004.

On February 28, 2005, the Company entered into two sublease agreements (the “Sublease Agreements”) with Informatica Corporation (“Informatica”) to lease office space in the buildings known as 2100 Seaport Boulevard (Floors 1-4) and 2000 Seaport Boulevard (2nd Floor and part of the 1st floor) in Redwood City, California. Collectively, the Sublease Agreements cover approximately 186,732 square feet, in addition to access to another 5,030 square feet (collectively, the “Premises”). The Company intends for the Premises to serve as the Company’s corporate headquarters and to vacate its current corporate headquarters located at 1400 Seaport Boulevard, Redwood City, California.

The terms of the Sublease Agreements will begin on May 1, 2005 and end on June 29, 2013; however, the Company has a one time right to terminate each of the Sublease Agreements on July 30, 2009 by giving written notice to Informatica prior to October 31, 2008. The Sublease Agreements are triple-net subleases and the Company has a right of first refusal to lease additional space at 2000 Seaport Boulevard. The average base rent expense for the Premises for the first 4 years will be approximately $0.77 per square foot, or about $1.73 million per year. The average base rent for the remaining term of the leases shall be approximately $0.95 per square foot, or approximately $2.13 million per year. In addition, the Company initially expects common area and maintenance pass-through charges for the Premises, including real estate taxes, to be about $1.5 to $1.8 million per year. The Company expects to spend approximately $1.8 to $2.3 million for tenant improvements for the Premises.

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 December 31, 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 March 31, 2005, as a loss is not considered probable or reasonably estimable.

The Company’s software license and services agreements generally include a limited indemnification provision for claims from third-parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5, “Accounting for Contingencies”. As of March 31, 2005, the Company has $500,000 accrued for potential settlements related to indemnification claims.

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 remaining restructuring accrual as of March 31, 2005 relates solely to excess-leased facilities. As of March 31, 2005, the Company has estimated $17.0 million of sublease income from third parties on these facilities. Included in the $17.0 million estimate is $12.0 million of sublease income from potential tenants that have not yet been identified. Estimates of sublease income is netted from our total lease liability when estimating our net restructuring liability. If estimates regarding future

sublease income change further, we could be required to record additional restructuring costs of up to $12.0 million. The following table sets forth the components of the restructuring liability at March 31, 2005 (in thousands):

Included in restructuring and other related costs on the Condensed Consolidated Statement of Operations during the three and nine months ended March 31, 2005, was an accelerated depreciation charge of $4.9 million related to a revision in the estimated of useful life of leasehold improvements and certain furniture in our headquarters at 1400 Seaport Boulevard in Redwood City, California. This was a non-cash charge and is not included in the restructuring liability table above. The Company intends to relocate its headquarters to certain floors of 2100 and 2000 Seaport Boulevard in order to take advantage of more favorable office lease terms. The associated restructuring charge for excess facilities will be recorded primarily in the quarter ending June 30, 2005 upon the “cease-use” dates in accordance with FAS 146 “Accounting for Costs Associated with Exit or Disposal Activities”. Also included in restructuring and other related costs on the Condensed Consolidated Statement of Operations during the nine months ended March 31, 2005 was a non-cash loss of $805,000 on the disposal of fixed assets from the early termination of a facility lease that was not previously included in the restructuring accrual. The $457,000 reduction in the accrual for the three months ended March 31, 2005 primarily relates to changes in our sublease income due to successfully subleasing an abandoned property at terms more favorable than previously anticipated. The $220,000 reduction in the accrual for the quarter-ended December 31, 2004 primarily relates to changes in our estimates of sublease income due to successfully subleasing an abandoned property not originally anticipated. The $907,000 charge during the quarter-ended September 30, 2004 primarily related to the exercise of an early termination clause within a facility lease agreement.

The following table sets forth the restructuring liability activity through March 31, 2005 (in thousands):

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

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. In particular, the following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: (a) the ability to realize our strategic objectives by taking advantage of market opportunities in the Americas, Europe, the Middle East, and Asia; (b) the ability to make changes in business strategy, development plans and product offerings to respond to the needs of our current, new and potential customers, suppliers and strategic partners; (c) risks associated with the development and licensing of software generally, including potential delays in software development, technical difficulties that may be encountered in the development or use of our software, and potential infringement claims by third parties; (d) the effects of our restructurings and the ability to successfully support our operations; (e) the ability to recruit and retain qualified, experienced employees; (f) the willingness of communication service providers to invest and improve their data networks; (g) the ability to successfully partner with other companies; (h) the ability to acquire additional companies and technologies and integrate such acquisitions; (i) increased global competition and pricing pressure on our products; (j) technological changes and developments; (k) general risks of the Internet and wireless and wireline telecommunications sectors; and (l) the uncertain economic and political climate in the United States and throughout the rest of the world and the potential that such climate may deteriorate. Other 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.

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 manufacturers. 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.

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.

In the mobile market in general, 2.5G networks are fully deployed and 3G networks such as Evolution Data Only (“EVDO”) and wideband Code-Division Multiple Access (“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 client software area, we are experiencing demand for more technology and a more comprehensive systems integration offering. Demand has grown for complete platforms from a new set of start-ups and chip providers to deliver wideband CDMA mobile phones in 2005.

In the mobile infrastructure software market, we partnered with our customers to launch several new offerings:

In the multimedia messaging markets, we extended our platform with anti-abuse and integrated messaging technologies to help operators grow and protect their messaging communities.

We achieved strong growth in revenue and bookings for the three and nine months ended March 31, 2005. Furthermore, with the acquisition of Magic4, we have offer a client/server product designed to improve the user experience for mobile data services. Key financial highlights included the following:

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 practices are prudent and provide a fair presentation of our financial performance. As of March 31, 2005, we continue to advance towards the completion our documentation and testing requirements under Section 404 of the Sarbanes-Oxley Act of 2002. We have substantially completed our internal control design and documentation efforts and the majority of our internal testing and identification of remediation items, with the remainder anticipated to be completed by end of 2005 fiscal year-end close. We are in the process of remediating and retesting known areas of internal control deficiencies. As previously disclosed in our 10-Q for the period ending December 31, 2004, preliminary documentation and testing revealed certain deficiencies and during this past quarter we have taken action to begin remediation of these deficiencies. Given the current stage of our internal control assessment, we can give no assurance that these efforts will be completed in a timely manner or on a successful basis.

Our Disclosure Committee, comprised primarily of senior financial and legal personnel, helps our CEO and CFO monitor the effectiveness of the Company’s disclosure controls and assists them in providing oversight of the accuracy and timeliness of the Company’s financial reporting and disclosures.

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.

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

These policies and our procedures related to these policies are described in detail below. 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.

We entered into certain material contracts which involve significant judgment and estimates. Please refer to Note 1 in the notes to our condensed consolidated financial statements.

We make significant judgments in our assessment of our restructuring-related liabilities. Please refer to Note 8 to our Condensed Consolidated Financial Statements included with this Form 10-Q. As of March 31, 2005, we have assumed $12.0 million of sublease income from potential tenants that have not yet been identified. This assumed amount is netted from our total lease liability when estimating our net restructuring liability. Our sublease estimates are reviewed quarterly with third-party real-estate professionals. If estimates regarding future sublease income change further, we could be required to record additional restructuring costs.

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 comprised of managed services, software and systems solutions which may include our software licenses, professional services and 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 and nine months ended March 31, 2005 and 2004 include Sprint and Nextel. Sales to Sprint accounted for 16% and 7% of total revenues during three months ended March 31, 2005 and 2004, respectively, and 13% and 5% during the nine months ended March 31, 2005 and 2004, respectively. Sales to Nextel accounted for 11% and 7% of total revenues during three months ended March 31, 2005 and 2004, respectively, and 12% and 6% during the nine months ended March 31, 2005 and 2004. No other customers accounted for 10% or more of total revenues for the three and nine months ended March 31, 2005 and 2004, respectively.

The following table presents the key revenue financial metric information for the three and nine months ended March 31, 2005 and 2004, respectively (in thousands):

For the comparable periods, we saw an increase in revenues for all of our revenue types and our product mix shifted to a higher proportion of project/systems activities related to progress toward completion of certain projects discussed under “Project/systems Revenues” below. In addition, during the nine months ended March 31, 2005, professional services revenues increased as a percentage of total revenue. Professional services arrangements have become the primary driver for a higher proportion of unbilled accounts receivable since the arrangements tend to have longer payment terms. Therefore, unbilled accounts receivable increased by $4.7 million from June 30, 2004 to March 31, 2005. Although unbilled accounts receivable have increased since June 30, 2004, the March 31, 2005 unbilled accounts receivable reflects a decrease of $11.2 million from December 31, 2004.

The increase in license revenues of 26% and 22% during the three and nine months ended March 31, 2005, as compared to the corresponding periods of the prior fiscal year was primarily due to an overall increase in license in both the client and server products. On the client side of our business, we experienced continued strong sales of our V6 browser fueled 60% and 54% in license growth for the three and nine months ended March 31, 2005 as compared to the corresponding periods in the prior fiscal year. On the server side of our business, license revenue experienced increases of 15% and 12% for the three and nine month periods due to customers purchasing additional capacity to match the industry-wide acceleration of mobile subscriber and data transaction growth as compared to the corresponding periods in the prior fiscal year.

Maintenance and support services revenues increased by 19% and 9% for the three and nine months ended March 31, 2005, as compared to the corresponding periods of the prior fiscal year. The increases are relatively the strongest in our client business, which experienced growth in maintenance and support revenue of 49% and 32%, in the three and nine months ended March 31, 2005, respectively, as compared to the corresponding periods of the prior year, as we continued to shift many of our handset manufacturer customers from general support agreement to higher value dedicated support contracts. Increases in maintenance and support services revenue in our server business were 12% and 4% during the three and nine months ended March 31, 2005, respectively, as compared to corresponding periods of the prior year. The increase in the nine months period was partially offset by the renewal of several large support contracts at lower renewal rates in the first half of fiscal 2005.

Professional services revenue increased by 43% and 56% for the three and nine months ended March 31, 2005 as compared to the corresponding periods of the prior fiscal year. The increase in the three month period was attributable to our client business, which experienced an increase of $6.1 million in professional services revenues, primarily as a result of the increased demand for our services in-line with the increase in client software products discussed above. The increase in the nine month period was attributable to both our client and server businesses, with increases of $9.6 million and $9.3 million, respectively, in professional services revenues. The increase on the client side was a result of the increase in sales of client software due to our expansion of client-based products, while the increase on the server side was related to an increase in the number of consulting projects as our customers ask us to build unique offerings based on our products and deep knowledge of the mobile and broadband markets. In addition, we experienced 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 represent revenues which were comprised of managed services, software and systems solutions which may include our software licenses, our professional services, and third-party software and hardware.

During the three and nine months ended March 31, 2005, we recognized $12.7 million and $29.7 million in systems revenues on two arrangements as described in Note 1 to our condensed consolidated financial statements. During the three and nine months ended March 31, 2004, we recognized $817,000 and $8.6 million in systems revenues, primarily related to one project under a 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. On 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.

The other key financial revenue metrics reviewed by our CEO for purposes of making operating decisions and assessing financial performance include our disaggregated revenues by product groups. The disaggregated revenues by product group for the three and nine months ended March 31, 2005 and 2004 were as follows (in thousands):

The increase in our server and client revenues are discussed above under “License Revenues”.

Other key operating metrics include bookings, backlog, and software license penetration. Bookings comprise the aggregate value of all new arrangements executed during a period. We define backlog as the aggregate value of all existing arrangements less revenue recognized to date. Bookings in the three months ended March 31, 2005 were approximately $94 million, a 29% increase over bookings of approximately $73 million in the three months ended March 31, 2004. For the nine months ended March 31, 2005, bookings were approximately $282 million, up 28% or $61 million from approximately $221 million for the nine months ended March 31, 2004. These bookings resulted in a backlog of approximately $166 million as of March 31, 2005, up 2% from $163 million as of March 31, 2004. Bookings related to royalty or usage arrangements are recognized when reported and therefore do not impact backlog.

We measure software license penetration by the number of Carrier Service Providers (“CSP’s”) that license more than one of our products. We consider this to be a key operating metric because it is a gauge of how successful we are at penetrating our customer base with additional products. We believe that our continued growth is contingent upon generating additional revenues from existing customers. The following table summarizes our software license penetration as of:

Our total gross margin during the three and nine months ended March 31, 2005 was 67% and 69% as compared to 73% during both corresponding periods of the prior fiscal year. The decrease in the gross margin primarily due to a change in our product mix of revenue, which saw an increase in project/systems revenue, which has significantly lower margins than our license and maintenance and support services revenue categories. Additionally, we experienced a decrease in the maintenance and support services margins as discussed below. We expect our gross margins to fluctuate throughout the remainder of the current fiscal year depending on our product mix.

The following table presents cost of revenues as a percentage of related revenue type for the three and nine months ended March 31, 2005 and 2004, respectively:

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

Costs of license revenues increased by $408,000 and decreased by $727,000 during the three and nine months ended March 31, 2005 periods as compared to the corresponding periods of the prior fiscal year respectively. The increase during the three month period as compared to the same period in the prior fiscal year was attributable to an increase in amortization of intangibles of $1.0 million related to the amortization of purchased developed and core technology from the acquisitions of Magic4 and Cilys, offset by a $604,000 decrease in the amortization of a purchased software license. The decrease during the nine month period as compared to the same period in the prior fiscal year was attributable, a $1.0 million in lower royalty expense due to the recognition of costs in the prior fiscal year associated with a significant anti-virus and anti-spam revenue agreement during the prior fiscal period, and a $1.8 million decrease in amortization of a purchased software license which was fully amortized in fiscal 2005, offset by an increase in amortization of intangibles of $1.7 million primarily related to the amortization of purchased developed and core technology from the acquisition of Magic4 and Cilys.

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

Cost of maintenance and support services increased by $2.6 million and $4.2 million during the three and nine months ended March 31, 2005, respectively, as compared to the corresponding periods of the prior fiscal year. The increases in each period were caused by an increase in resources needed to service the increased customer support revenue. As such, costs associated with employees and contingent workers in maintenance support increased by $2.2 million and $4.7 million in the three and nine months ended March 31, 2005, respectively, compared to the prior year. During the nine months ended March 31, 2005 compared to the same period in the prior year, depreciation costs associated with maintenance and support decreased by $283,000 as a result of our efforts to reduce costs and expenditure over the last several years, which has resulted in new capital equipment purchases not keeping pace with the rate at which existing fixed assets have become fully depreciated.

Due to the investments in additional resources in fiscal year 2005, our gross margins in maintenance and support services have declined in the three and nine months ended March 31, 2005 compared to the same periods in the prior year. Although we expect to experience a gradual improvement in the maintenance and support gross margin, there can be no guarantee that the margins will improve in the future.

Cost of professional services revenues consists of compensation and independent consultant costs for personnel engaged in performing professional services and related overhead. In addition to performing services whose revenue is earned under professional services revenues, our professional services headcount and the portion of contingent worker costs incurred on engagements under the caption Project/systems revenues are cross charged to cost of Project/systems or capitalized as deferred charges in Prepaid and other current assets on the balance sheet.

Professional services costs increased by $3.7 million and $13.2 million during the three and nine months ended March 31, 2005, respectively, as compared to the corresponding periods of the prior fiscal year. This increase was primarily due to an increase in demand for our services which resulted in an increase in our average headcount of 84 and 67 employees and higher costs for consultants and contingent workers of $1.6 and $4.0 million, for the three and nine months ended March 31, 2005, as compared to corresponding periods in the prior fiscal year.

In the three and nine month periods ending March 31, 2005 compared to the prior year, we experienced an improvement in the gross margins related to professional services. This reflects realization of a higher hourly rate realized due to a change in the mix toward the client side of the business during the current fiscal year, which relates primarily to browser software implementation and yields higher rates than services associated with the server side of our business.

Cost of project/systems revenues increased by $7.5 million and $12.6 million during the three and nine months ended March 31, 2005, respectively, as compared to the corresponding periods of the prior fiscal year. The cost of project/systems revenues during the three and nine months ended March 31, 2004, was primarily related to a porting service arrangement, which was nearing

completion and for which we were dedicating fewer resources during the later half of the prior fiscal year, resulting in a lower cost of projects/systems revenues.

This is in contrast to the three and nine months ended March 31, 2005, where the costs are related to systems arrangements we entered into with two of our customers. The second of these two arrangements was entered into during the three months ended December 31, 2004, resulting in an increase in the resources dedicated to system arrangements. The aggregate costs incurred during the three and nine months ended March 31, 2005 related to this second systems arrangement was $4.5 million and $8.6 million, respectively.

Our gross margin related to project/systems revenues was 35% in the quarter ended March 31, 2005, compared to 6% in the quarter ended March 31, 2004. The increase was primarily due to an unusually low gross margin related to project/systems revenues in the prior year as the primary project included in project/systems revenues was nearing completion in the quarter ended March 2004. For the balance of fiscal year 2005, we expect gross margins related to project/systems revenues to be fairly consistent with the quarter ended March 31, 2005 as we continue to make progress toward completion of our current projects. After fiscal year 2005, we expect gross margins to vary depending upon our progress and efficiency toward completion of our current and any new relevant projects.

Operating expenses increased by $11.5 million and $9.9 million for the three and nine months ended March 31, 2005 as compared to the corresponding period of the prior fiscal year. The majority of this increase was experienced in general and administrative expenses and restructuring and other related costs, as explained below.

The following table represents operating expenses for the three and nine months ended March 31, 2005 and 2004, respectively (in thousands):

Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs, and expenses associated with computer equipment used in software development. We believe that investments in research and development, 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.

During the three months ended March 31, 2005, research and development costs increased $1.7 million compared to the same period in the prior year. The increase was primarily attributable to an increase in labor expense of $1.0 million and contingent worker expense of $883,000. The increase in labor expense relates to accrued bonus expense in connection with the fiscal year 2005 corporate bonus plan. The increase in contingent worker expense is attributable to the expansion of our overseas development centers.

During the nine months ended March 31, 2005, research and development costs decreased $3.4 million compared to the same period in the prior year. The decrease was primarily attributable to a reduction in labor costs of $3.4 million as more labor hours were allocated to cost of professional services revenues as a result of more engineers providing technical services to customers during the nine months ended March 31, 2005 than the same period in the prior year. In addition, allocated in information technology and facility expenses decreased by $2.4 million as a result of a larger reduction in headcount in the research and development department vis-a-vis our other departments. Depreciation also decreased by $1.6 million due to our efforts to reduce costs and expenditure over the last several years, which has resulted in new capital equipment purchases not keeping pace with the rate at which existing fixed assets have become fully depreciated. These decreases were partially offset by an increase of $3.0 million in contingent worker expense attributable to the expansion of our overseas development centers. Other increases included equipment expense and travel totaling $863,000 higher than during the same period in the prior year.

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

During the three months ended March 31, 2005, sales and marketing costs increased by $665,000 compared to the same period in the prior year. This increase is attributable to increases in marketing costs of $1.3 million which were impacted by the exchange movement against the dollar, offset by a $574,000 decrease in labor and contingent worker costs. The decrease in labor is a result of a reduction in average headcount by 32 from the prior quarter.

During the nine months ended March 31, 2005, sales and marketing costs increased by $272,000 compared to the same period in the prior year. This increase is attributable to increases in marketing costs of $1.2 million which were impacted by the exchange movement against the dollar, offset by a $964,000 decrease in depreciation expense as a result of new capital equipment purchases not keeping pace with the rate at which existing fixed assets have become fully depreciated.

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and 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.

During the three months ended March 31, 2005, general and administrative costs increased $4.6 million compared to the same period in the prior year. This increase was largely attributable to the increase in average headcount by 20 people compared to the same quarter in the prior year, and the hiring of several key executive positions which increased our labor and employee development and staffing costs by $2.9 million. Bad debt expense increased by $1.3 million during the current period as a result of a reversal of the estimate in the allowance reserve of a net $1.4 million during the three months ended March 31, 2004. The cost of contingent workers increased by $682,000 and professional fees increased by $597,000 as a result of increased Sarbanes-Oxley compliance costs. These increases were offset, in part, by lower depreciation of $605,000 due to our efforts to reduce costs and expenditure over the last several years, which has resulted in new capital equipment purchases not keeping pace with the rate at which existing fixed assets have become fully depreciated.

During the nine months ended March 31, 2005, general and administrative costs increased $7.8 million compared to the same period in the prior year. This increase was largely attributable to the increase in average headcount by 12 people compared to the same period in the prior year, and the hiring of several key executive positions which increased our labor and employee development and staffing costs by $4.4 million. In addition, we experienced an increase of $1.5 million in contingent worker costs compared to the same nine month in the prior year, as a result of increased Sarbanes-Oxley compliance costs. Bad debt expense increased during the period by $3.4 million due to increases in the accounts receivable balance which is a factor in estimating the allowance for bad debt. These increases were partially offset by a $1.1 million decrease in business insurance.

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 and nine months ended March 31, 2005, we incurred $4.5 and $6.0 million of additional restructuring and other related costs and other related expenses, as compared to $726,000 and $3.0 million for the corresponding periods of the prior fiscal year. The expenses incurred during the three months ended March 31, 2005, relates to an accelerated depreciation charge of $4.9 million related to a revision in the estimated of useful life of leasehold improvements and certain furniture in our headquarters at 1400 Seaport Boulevard in Redwood City, California. The Company intends to relocate its headquarters to 2100 and 2000 Seaport Boulevard in order to take advantage of more favorable office lease terms. Based upon our current plan to substantially complete the move prior to June 30, 2005, the associated restructuring charge for excess facilities are expected to be recorded primarily in the quarter ending June 30, 2005 upon the “cease-use” dates in accordance with FAS 146 “Accounting for Costs Associated with Exit or Disposal Activities”. Partially offsetting the $4.9 million accelerated depreciation charge in the three months ended March 31, 2005 is a reversal of $457,000 related to the reduction in the accrual associated with changes in our sublease income due to successfully subleasing an abandoned property at terms more favorable than previously anticipated. The restructuring and other related costs for the nine months ended March 31, 2005, in addition to the items discussed previously, also comprised additional restructuring charges of approximately $889,000 for the exercise of an early termination clause within a facility lease agreement, and $805,000 from the loss on the disposal of fixed assets from the early termination of a facility lease not previously included in the restructuring accrual. This expense was partially offset by a reduction in the facility lease accrual of approximately $220,000 which was primarily related to changes in our estimated sublease income due to our successfully subleasing an abandoned property not originally anticipated.

As of March 31, 2005, we have remaining restructuring liabilities that total $41.0 million and are comprised of remaining liabilities for the FY2003 Q4 Restructuring Plan, the FY2003 Q1 Restructuring Plan, and the FY2002 Restructuring Plan of $3.2 million, $37.5 million, and $285,000 million, respectively.

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

The following table summarizes stock-based compensation expense by category (in thousands):

Stock-based compensation expense increased by $73,000 and $410,000 during the three and nine months ended March 31, 2005, respectively, as compared to the corresponding periods of the prior fiscal year. The increases during these periods relates to the amortization expense associated with the issuance of restricted stock grants aggregating 925,000 shares with an aggregate value of approximately $10.5 million to key employees during the nine months ended March 31, 2005.

Amortization of acquired developed and core technology and customer license contract is included in Cost of Revenues – License and was approximately $1.7 and $4.2 during the three and nine months ended March 31, 2005, respectively, as compared to $645,000 and $2.4 million, during the corresponding periods of the prior fiscal year.

Amortization of acquired customer support contracts is included in Cost of Revenue – Maintenance and Support and was approximately $20,000 and $56,000 during the three and nine months ended March 31, 2005.

Amortization of acquired customer relationships, trademarks and workforce-in-place is included in operating expenses and was $772,000 and $2.0 million during the three and nine months ended March 31, 2005, respectively as compared to $67,000 and $202,000 during the corresponding periods of the prior fiscal year.

The increase in amortization of intangible assets for the three and nine months ended March 31, 2005, as compared to the corresponding periods of the prior fiscal year, was primarily due to amortization of intangibles acquired as part of our acquisition of Magic4 in July 2004. During the three and nine months ended March 31, 2005, we incurred approximately $1.5 million and $4.0 million, respectively, of intangible amortization expense attributable to the intangible assets acquired in the acquisition of Magic4.

Interest income was approximately $1.4 million and $3.9 million for the three and nine months ended March 31, 2005, respectively, as compared to $1.2 million and $3.1 million for the corresponding periods of the prior fiscal year. The increase in interest income is primarily due to higher interest rates earned on our investments.

Interest expense was approximately $1.3 million and $3.9 million for the three and nine months ended March 31, 2005, respectively, as compared to $1.3 million and $2.9 million for the corresponding periods of the prior fiscal year. The increase in interest expense for the nine month period of the current fiscal year as compared to the prior fiscal year is due to our convertible subordinated notes being outstanding for the entire nine month period as compared to the prior fiscal year when the notes were only outstanding for approximately seven months since issuance in September 2003.

Other income (expense), net was approximately ($1.5) million and ($46,000) during the three and nine months ended March 31, 2005, as compared to ($35,000) and $324,000 for the corresponding periods of the prior fiscal year. These amounts primarily related to foreign exchange gains and losses on foreign denominated assets and liabilities.

Income tax expense in all periods consisted of foreign withholding tax and foreign corporate tax. Both foreign withholding tax and foreign corporate tax fluctuate quarterly based on the product and geographic mix of our revenue, with a resulting fluctuation in quarterly effective tax rate.

Income tax expense was $3.0 million and $7.7 million for the three and nine months ended March 31, 2005, respectively, as compared to $1.1 million and $7.5 million for the corresponding periods of the prior fiscal year. The increase in income taxes for the three months ended March 31, 2005 was primarily related to an increase in foreign corporate taxes as well as an increase in

withholding taxes, and is shown net of an estimated $0.8 million UK tax refund claim relating to research and development tax incentives available in fiscal 2003 and 2004.

In light of our recent history of operating losses we recorded a valuation allowance for substantially all of our federal and state deferred tax assets, as we are presently unable to conclude that it is more likely than not that the federal and state deferred tax assets will be realized. We recorded deferred tax assets of approximately $2.4 million with respect to subsidiaries in Japan and the United Kingdom based upon our conclusion that it is more likely than not that the subsidiaries will earn future taxable profits enabling the realization of their respective deferred tax assets, given historical taxable income in those locations. We recorded a deferred tax liability of $9.3 million as part of the acquisition of Magic4 to reflect a future tax liability associated with book amortization deductions not recognized for tax purposes. This deferred tax liability will be amortized through income tax expense in proportion to the future Magic4 book amortization deductions. During the nine months ended March 31, 2005 we amortized $1.2 million of the deferred tax liability. We recorded a deferred tax liability of approximately $1.7 million as part of the acquisition of Cilys Corporation to reflect a future tax liability associated with book amortization deductions not recognized for tax purposes. This deferred tax liability will be amortized through income tax expense in proportion to the future Cilys book amortization deductions. During the nine months ended March 31, 2005 we amortized $155,000 of the deferred tax liability.

On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA includes a deduction of 85% for certain foreign earnings that are repatriated, as defined in the AJCA. Based on our analysis of the AJCA and business needs to date, we do not expect to repatriate foreign earnings as a result of the AJCA.

As of June 30, 2004, we had net operating loss carry-forwards for federal and state income tax purposes of approximately $1.1 billion and $388.4 million, respectively.

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

Our restricted cash and investments decreased by approximately $1.6 during the nine months ended March 31, 2005. The decrease was primarily attributable to reductions in the amount of pledged investments used to secure the payments of the first six scheduled semi-annual interest payments on our convertible subordinated debt, totaling approximately $4.0 million when the second and third payments were made, offset by a newly restricted investment to secure a warranty bond pursuant to a customer contract of approximately $2.3 million.

The following table discloses our off-balance sheet contractual obligations by fiscal year as of March 31, 2005 (in thousands):

We currently have subleased a portion of our unused facilities which will generate sublease income in aggregate of approximately $5.0 million through our fiscal year 2008.

In November 2004, we purchased developed and core technology from a private company. Included in the purchase price were contingent payments of $850,000, if specified milestones are satisfied. These milestones are primarily related to future revenues generated from the license of the developed and core technology and would be payable between 12 and 24 months from the signing of the purchase agreement.

On July 30, 2004, in connection with our acquisition of Magic4, in addition to the original consideration paid for the purchase, we agreed to additional contingent consideration consisting of 1,135,734 shares of the Company’s common stock to be issued upon the continued employment of certain key employees of Magic4 with the Company for certain specified periods. These certain employees were also holders of the share capital of Magic4. On January 31, 2005, we issued the first installment of the contingent consideration comprising 113,570 shares of common stock to the former holders of the share capital of Magic4. The amount of the first installment issued to the key employees was 24,918 shares, resulting in stock-based compensation expense of $339,000 in the quarter ended March 31, 2005, based upon the value at the date of issuance. The value of the remaining 88,652 shares was $1.2 million and was recorded as an addition to goodwill. As of March 31, 2005, the remaining 1,022,164 shares of common stock were held in escrow. The valuation of the contingently issuable shares of common stock will be set upon the completion of the various specified employment periods.

The following table presents selected financial information and statistics as of March 31, 2005 and June 30, 2004, respectively (in thousands):

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 $145.7 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 the 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.

Our working capital decreased by approximately $5.5 million or 2.2% from June 30, 2004 to March 31, 2005. The decrease was primarily attributable to net cash paid for acquisitions of Magic4 and Cilys of approximately $52.6 million, offset by a net increase in our accounts receivable and prepaid and other assets of $38.2 million and $11.4 million, respectively. The increase in accounts receivable is primarily a result of a $29.4 million increase in revenues in the quarter ended March 31, 2005 compared to June 30, 2004, in addition to an increase in unbilled receivables of $4.7 million as a result of a change in mix toward project/systems revenue discussed under “Summary of Operating Results—Revenues” above. The increase other assets primarily relates to an increase in deferred service costs on an engagement signed in December 2004—see Note 1 to the financial statements—as well as an increase in prepaid rent payments due a new building lease signed in February 2005, and timing of payments for various properties.

We used $16.7 million for operating activities during the nine months ended March 31, 2005, down $30.9 million from a use of $47.6 million in the corresponding period of the prior year. This was primarily attributable to the $29.3 million increase in net income during the same period, from a loss of $29.1 million to a profit of $209,000. Contributing to our use of cash during the nine months ended March 31, 2005 was the increase in accounts receivable of $38.2 million, as a result of the growth in revenues during the period. This was offset by non-cash depreciation and amortization expense of $14.6 million and various changes in working capital.

Net cash used in investing activities during the nine months ended March 31, 2005 was $44.1 million. Net cash provided by investing activities during the nine months ended March 31, 2004 was $115.5 million. The decrease in the amount of cash used for investing activities of $71.3 million was primarily attributable to net inflows to cash and cash equivalents from short and long-term investments of $16.2 million in the nine months ended March 31, 2005 versus net outflows from cash and cash equivalents to short and long-term investments of $126.9 million in the same period of the prior year, offset by $52.6 million in cash spent on acquisitions during the current fiscal year.

Net cash provided by financing activities decreased by $150.8 million during the nine months ended March 31, 2005 as compared to the corresponding period of the prior fiscal year. The decrease was reflective of the cash proceeds received in the prior year from the issuance of our convertible subordinated debt of $145.7 million. Cash proceeds from the issuance of common stock for options exercised also decreased by approximately $5.1 million, which was primarily attributable to fewer employee options being exercised.

You should carefully consider the following risks, as well as the other information contained in this quarterly 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 be able to maintain profitability.

Our prospects must be considered in light of the risks, expenses, delays and difficulties frequently encountered by companies engaged in rapidly evolving technology markets like ours. Except for the quarters ending September 30, 2004 and December 31, 2004, we incurred losses since our inception, including losses of approximately $29.9 million during the fiscal year ended June 30, 2004. As of March 31, 2005, 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, enhance or acquire products, services and technologies and to enhance sales and operational capabilities. We may not achieve profitability in accordance with our expectations, or if achieved, be able to maintain it at those levels or at all. Our business faces a number of challenges including:

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

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

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

Our operating results could also be affected by disputes or litigation with other parties, 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.

In addition, our operating results could be impacted by the amount and timing of operating costs and capital expenditures relating to our business and our ability to accurately estimate and control costs. 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 and we may be unable to meet our internal projections or the projections of securities analysts and investors that follow us which could result in the trading price of our stock falling dramatically. These fluctuations may be exaggerated if the trading volume of our common stock is low.

Changes in accounting for stock-based compensation will negatively affect our reported operating results.

We currently account for share based payments to employees using the APB No. 25 intrinsic method and related FASB Interpretation No. 28. We are currently not required to record stock-based compensation charges if the employee’s stock option exercise price equals or exceeds the fair value of our common stock at the date of grant. However, on December 16, 2004, the FASB issued SFAS No.123R), “Share-Based Payment.” SFAS No. 123(R) requires companies to measure all employee stock-based compensation awards using a fair value method and record such expense in the consolidated financial statements. We are required to comply with SFAS No. 123(R) commencing with the first quarter of fiscal year 2006. We expect to incur compensation expense in future periods related to our stock options as a result which will likely have a material negative effect on our reported results.

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 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 49% and 55% of our total revenues for the three and nine months ended March 31, 2005, respectively. Risks inherent in conducting business internationally include:

In addition, international sales could suffer due to unexpected changes in regulatory requirements applicable to the Internet or our business or 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. 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 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 a reduction in revenue 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 and nine months ended March 31, 2005 include Sprint and Nextel. Revenue recognized from arrangements with Sprint and Nextel accounted for approximately 16% and 11% of our total revenues during the three months ended March 31, 2005. These customers 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 for 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:

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” ^™ 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, 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. As well, 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. 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. 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.

All of our agreements with wireless device manufacturers are nonexclusive, and therefore such manufacturers 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.

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.

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.

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 Internet-based services. The failure of communication service providers to introduce and support Internet-based services utilizing our products in a timely and effective manner could harm our business.

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.

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 depends in part 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. 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 and could have a material adverse effect on our business or financial results.

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 them.

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 impairment charges to strategic investments we have completed.

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

Additionally, we may fail to achieve the anticipated synergies from such acquisitions, including product integration, marketing, product development, distribution and other operating synergies. As a result of such acquisitions, we may acquire significant assets that include goodwill and other purchased intangibles. The testing of these intangibles under established accounting guidelines for impairment requires significant use of judgment and assumptions. Changes in business conditions could require adjustments to the valuation of these assets and adversely affect our reported results.

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.

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 an infringement claim is asserted against us or against a customer for which we have an obligation to defend, it could be time consuming to defend, result in costly litigation, result in us paying a settlement amount or damage award, 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 our 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 fiscal 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 are currently providing training to field and operational personnel with respect to our business practices, accounting policies, and the effect of contracts and customer commitments on our revenue recognition policies. 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. Our independent auditors are also in the process of reviewing our documentation and may identify additional control deficiencies that must be remediated prior to our fiscal year-end. 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.

Provisions of our corporate documents may have anti-takeover effects that could prevent a change in control.

Provisions of our charter, bylaws, stockholder rights plan and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include authorizing the issuance of preferred stock without stockholder approval, prohibiting cumulative voting in the election of directors, prohibiting the stockholders from calling stockholders meetings, and prohibiting stockholder actions by written consent, among others.

We operate internationally and are exposed to potentially adverse movements in foreign currency rate changes. We have entered into foreign exchange derivative instruments to reduce our exposure to foreign currency rate changes on receivables, payables and intercompany balances denominated in a nonfunctional currency. The objective of these derivatives is to neutralize the impact of foreign currency exchange rate movements on our operating results. These derivatives may 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. We do not enter into foreign exchange transactions for trading or speculative purposes, nor do we hedge foreign currency exposures in a manner that entirely offsets the effects of movement in 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. Included in “Other income, net” in the accompanying Condensed Consolidated Statements of Operations is a net foreign exchange transaction loss of $1.5 million and gain of $124,000 for the three and nine months ended March 31, 2005. As of March 31, 2005, we held foreign currency derivative instruments in notional amounts totaling approximately $22 million that expire through June 30, 2005.

As of March 31, 2005, we had cash and cash equivalents, short-term and long-term investments, and restricted cash and investments of $274.5 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 March 31, 2005:

Additionally, the Company had $25.8 million of restricted investments that were included within restricted cash and investments on the consolidated balance sheet as of March 31, 2005. $17.4 million of the restricted investments comprised a certificate of deposit to collateralized letters of credit for facility leases. $6.1 million of the balance comprises U.S. government securities pledged for payment of the remaining three semi-annual interest payments due under the terms of the convertible subordinated notes indenture. The remaining balance of $2.3 million comprises a restricted investment to secure a warranty bond pursuant to a customer contract. The weighted average interest rate on our restricted investments was 1.8% at March 31, 2005.

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”). We believe that there are always limitations on the effectiveness of any control system, no matter how well conceived and operated. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, however a control system can provide only reasonable, not absolute, assurance that the objectives of the control system are being met. Based on the evaluation performed, the CEO and CFO have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are: (1) effective to ensure that information required to be disclosed in the reports that are filed with the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, to allow timely decisions regarding required disclosure and; (2) effective, at the reasonable assurance level, 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.

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. As of March 31, 2005, we continue to advance towards the completion our documentation and testing requirements under Section 404 of the Sarbanes-Oxley Act of 2002. We have substantially completed our internal control design and documentation efforts and the majority of our internal testing and identification of remediation items, with the remainder anticipated to be completed by end of 2005 fiscal year-end close. We are in the process of remediating and retesting known areas of internal control deficiencies. As previously disclosed in our 10-Q for the period ending December 31, 2004, preliminary documentation and testing revealed certain deficiencies and during this past quarter we have taken action to address those issues which required improvement. Given the current stage of our internal control assessment, we can give no assurance that these efforts will be completed in a timely manner or on a successful basis.

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 March 31, 2005.

On January 31, 2005, we issued 314,104 shares of Openwave common stock to the then existing holders of Cilys 53 Inc.’s issued capital in connection with our acquisition of Cilys. We believe that the transaction was exempt from the registration requirements of Securities Act because the shares were offered or sold as part of an offshore transaction as defined in Regulation S promulgated by the Securities and Exchange Commission. At the time of issuance, 107,800 shares were held in escrow by a third-party escrow agent as a provision for potential indemnification claims.

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


OPENWAVE SYSTEMS INC.

By:		/s/ Joshua Pace
		Joshua Pace Senior Vice President; Chief Financial Officer (Principal Financial and Accounting Officer And Duly Authorized Officer)


PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39
Item 4.	Controls and Procedures	40

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Submission of Matters to a Vote of Security Holders	41
Item 5.	Other Information	41
Item 6.	Exhibits	42

SIGNATURES		43


	March 31, 2005			June 30, 2004
Assets
Current Assets:
Cash and cash equivalents	$	103,807		$	153,469
Short-term investments		122,655			116,302
Accounts receivable, net		121,174			78,421
Deferred tax assets		—			470
Prepaid and other current assets		25,913			15,224

Total current assets		373,549			363,886

Property and equipment, net		24,865			30,552
Long-term investments and restricted cash and investments		47,994			72,047
Deferred tax assets, less current portion		—			2,020
Deposits and other assets		4,820			5,052
Intangibles assets, net		33,554			2,228
Goodwill		44,073			723

	$	528,855		$	476,508

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	6,853		$	4,697
Notes payable		3,805			—
Accrued liabilities		48,105			36,679
Accrued restructuring costs		8,235			10,429
Deferred tax liabilities, net		1,531			—
Deferred revenue		59,138			60,662

Total current liabilities		127,667			112,467

Accrued restructuring costs, less current portion		32,761			38,838
Deferred revenue, less current portion		4,222			1,321
Deferred rent obligations		4,874			4,308
Deferred tax liabilities, less current portion, net		7,254			—
Convertible subordinated notes, net		147,161			146,542

Total liabilities		323,939			303,476

Commitments and contingencies

Stockholders’ equity:
Common stock		69			64
Additional paid-in capital		2,779,194			2,741,935
Deferred stock-based compensation		(7,607	)		(1,991	)
Accumulated other comprehensive loss		(709	)		(736	)
Accumulated deficit		(2,566,031	)		(2,566,240	)

Total stockholders’ equity		204,916			173,032

	$	528,855		$	476,508


	Three Months Ended March 31,						Nine Months Ended March 31,
	2005			2004			2005			2004
Revenues:
License	$	48,417		$	38,437		$	132,393		$	108,820
Maintenance and support services		24,460			20,523			68,805			62,991
Professional services		20,657			14,450			52,425			33,588
Project/Systems		12,732			817			29,746			8,570

Total revenues		106,266			74,227			283,369			213,969

Cost of revenues:
License		2,080			1,672			5,768			6,495
Maintenance and support services		9,084			6,435			22,702			18,477
Professional services		15,133			11,439			40,648			27,420
Project/Systems		8,281			772			17,513			4,883

Total cost of revenues		34,578			20,318			86,631			57,275

Gross profit		71,688			53,909			196,738			156,694

Operating expenses:
Research and development		25,330			23,625			69,617			72,976
Sales and marketing		26,144			25,479			74,441			74,169
General and administrative		12,190			7,621			33,881			26,071
Restructure and other related costs		4,468			726			5,960			2,996
Stock-based compensation*		1,011			938			2,837			2,427
Amortization of intangible assets		772			67			2,052			202

Total operating expenses		69,915			58,456			188,788			178,841

Operating income (loss)		1,773			(4,547	)		7,950			(22,147	)
Interest income		1,371			1,186			3,879			3,078
Interest expense		(1,285	)		(1,284	)		(3,873	)		(2,873	)
Other income (expense), net		(1,483	)		(35	)		(46	)		324

Income (loss) before provision for income taxes		376			(4,680	)		7,910			(21,618	)
Income taxes		2,990			1,058			7,701			7,496

Net income (loss)	$	(2,614	)	$	(5,738	)	$	209		$	(29,114	)

Basic net income (loss) per share	$	(0.04	)	$	(0.09	)	$	0.00		$	(0.47	)

Diluted net income (loss) per share	$	(0.04	)	$	(0.09	)	$	0.00		$	(0.47	)

Shares used in computing basic net income (loss) per share		67,131			63,233			66,115			61,756

Shares used in computing diluted net income (loss) per share		67,131			63,233			69,775			61,756

*Stock-based compensation by category:
Research and development	$	189		$	231		$	397		$	729
Sales and marketing		272			191			773			360
General and administrative		550			516			1,667			1,338

	$	1,011		$	938		$	2,837		$	2,427


	Nine Months Ended March 31,
	2005			2004
Cash flows from operating activities:
Net income (loss)	$	209		$	(29,114	)
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization of intangibles		14,579			18,871
Amortization of discount on convertible debt and debt issuance costs		754			562
Stock-based compensation		2,837			2,427
Write-off of shareholder note receivable		260			—
Loss on sale of property and equipment		53			332
Provision for doubtful accounts		2,130			(1,280	)
Restructuring and related non-cash charges		5,273			813
Changes in operating assets and liabilities, net of effect of acquired businesses:
Accounts receivable		(38,168	)		(13,128	)
Prepaid assets, deposits, and other assets		(11,437	)		(8,499	)
Accounts payable		1,384			(1,323	)
Accrued liabilities		12,771			(236	)
Accrued restructuring costs		(7,814	)		(14,059	)
Deferred revenue		476			(2,982	)

Net cash used for operating activities		(16,693	)		(47,616	)

Cash flows from investing activities:
Purchases of property and equipment		(8,067	)		(2,763	)
Proceeds from sale of property and equipment		—			43
Purchase of intangible assets		(450	)		—
Restricted cash and investments		1,590			(5,294	)
Acquisitions, net of cash acquired		(52,588	)		—
Investment in non-marketable securities		(809	)		—
Purchases of short-term investments		(81,770	)		(164,066	)
Proceeds from sales and maturities of short-term investments		98,558			99,861
Purchases of long-term investments		(627	)		(62,688	)
Proceeds from sales and maturities of long-term investments		38			19,435

Net cash used for investing activities		(44,125	)		(115,472	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		11,217			16,336
Net proceeds from issuance of convertible debt		—			145,672
Repayment of notes receivable from stockholder		—			52

Net cash provided by financing activities		11,217			162,060

Effect of exchange rates on cash and cash equivalents		(61	)		—
Net decrease in cash and cash equivalents		(49,662	)		(1,028	)
Cash and cash equivalents at beginning of period		153,469			96,329

Cash and cash equivalents at end of period	$	103,807		$	95,301

Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	3,550		$	8,852

Cash paid for interest	$	4,098		$	2,070

Noncash investing and financing activities:
Common stock issued for acquisitions	$	18,006		$	—

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

Transfers among short-term and long-term investments	$	23,177		$	12,933


	Three Months Ended March 31,						Nine Months Ended March 31,
	2005			2004			2005			2004
Net income (loss), as reported:	$	(2,614	)	$	(5,738	)	$	209		$	(29,114	)
Add:
Stock-based compensation included in net income (loss), zero tax effect		1,011			938			2,837			2,427
Deduct:
Stock-based compensation expense determined under the fair value method for all awards, zero tax effect		(5,414	)		(13,899	)		(20,074	)		(44,330	)

Pro forma net loss	$	(7,017	)	$	(18,699	)	$	(17,028	)	$	(71,017	)

Basic net income (loss) per share:
As reported	$	(0.04	)	$	(0.09	)	$	0.00		$	(0.47	)

Pro forma	$	(0.10	)	$	(0.30	)	$	(0.26	)	$	(1.15	)

Diluted net income (loss) per share:
As reported	$	(0.04	)	$	(0.09	)	$	0.00		$	(0.47	)

Pro forma	$	(0.10	)	$	(0.30	)	$	(0.26	)	$	(1.15	)


	Three Months Ended March 31,		Nine Months Ended March 31,
	2005	2004	2005	2004
Weighted average effect of potential common stock:
Unvested common stock subject to repurchase	590	388	—	410
Options that would have been included in the computation of dilutive shares outstanding had the Company reported net income	2,462	13,356	—	10,223
Options that were excluded from the computation of dilutive shares outstanding because the exercise price exceeded the average market value of the Company’s common stock during the period	7,986	736	5,239	1,050
Shares resulting from an “as-if” conversion of the convertible debt	8,154	8,154	8,154	6,078


	% of Total Revenue Three Months Ended March 31,				% of Total Revenue Nine Months Ended March 31,
	2005		2004		2005		2004
Customer:
Sprint	16	%	7	%	13	%	5	%
Nextel	11	%	7	%	12	%	6	%


	Balance as of June 30, 2004		Additions (a)		Amortization			Balance as of March 31, 2005
Goodwill	$	723	$	43,350	$	—		$	44,073
Intangibles assets:
Developed and core technology		1,548		25,715		(3,571	)		23,692
Customer contracts—licenses		424		292		(615	)		101
Customer contracts—support		—		197		(56	)		141
Cusomer relationships and trademarks		256		11,002		(2,034	)		9,224
Workforce-in-place		—		414		(18	)		396

	$	2,951	$	80,970	$	(6,294	)	$	77,627


	March 31, 2005							June 30, 2004
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed and core technology	$	30,735	$	(7,043	)	$	23,692	$	5,020	$	(3,472	)	$	1,548
Customer contracts—licenses		4,342		(4,241	)		101		4,050		(3,626	)		424
Customer contracts—support		197		(56	)		141		—		—			—
Cusomer relationships and trademarks		11,802		(2,578	)		9,224		800		(544	)		256
Workforce-in-place		414		(18	)		396		—		—			—

	$	47,490	$	(13,936	)	$	33,554	$	9,870	$	(7,642	)	$	2,228


Fiscal Year	Amortization
2005	$	2,580
2006		9,003
2007		8,700
2008		8,423
2009		4,616
Thereafter		232

	$	33,554


	March 31, 2005			June 30, 2004
Unrealized loss on marketable securities	$	(461	)	$	(550	)
Cumulative translation adjustments		(248	)		(186	)

Accumulated other comprehensive loss	$	(709	)	$	(736	)


Tangible assets:
Cash and cash equivalents	$	8,481
Accounts receivable		6,715
Prepaid and other current assets		872
Propertly, plant and equipment		315

Total tangible assets		16,383

Intangible assets:
Identifiable intangibles		25,609
Goodwill		43,350

Total intangible assets		68,959

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	$	73,191


Year ending June 30,	Contractual Cash Obligation		Contractual Sublease Income			Sub-total		Estimated Future Sublease Income			Restructruing Accrual
2005	$	2,600	$	(434	)	$	2,166	$	—		$	2,166
2006		10,006		(1,834	)		8,172		(241	)		7,931
2007		8,806		(1,675	)		7,131		(921	)		6,210
2008		7,865		(1,106	)		6,759		(1,617	)		5,142
2009		5,963		—			5,963		(1,818	)		4,145
Thereafter		22,807		—			22,807		(7,405	)		15,402

	$	58,047	$	(5,049	)	$	52,998	$	(12,002	)	$	40,996


	Restructuring Plan initiated in:
	FY 02			FY 03 Q1			FY 03 Q4						Total
	Facility			Facility			Facility			Severance			Liability
Balance as of June 30, 2004	$	5,924		$	42,587		$	598		$	158		$	49,267
Activity for the three months ended September 30, 2004:
Accrual/(reversal)		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

Activity for the three months ended December 31, 2004:
Accrual/(reversal)		(215	)		—			(3	)		(2	)		(220	)
Cash paid		(1,064	)		(1,630	)		(61	)		3			(2,752	)

Balance as of December 31, 2004	$	4,552		$	39,244		$	446		$	94		$	44,336

Activity for the three months ended March 31, 2005:
Accrual/(reversal)		(244	)		(24	)		(101	)		(88	)		(457	)
Cash paid		(1,119	)		(1,698	)		(60	)		(6	)		(2,883	)

Balance as of March 31, 2005	$	3,189		$	37,522		$	285		$	—		$	40,996


	Three Months Ended March 31,						Percent Change		Nine Months Ended March 31,						Percent Change
	2005			2004			Percent Change		2005			2004			Percent Change
Revenues:
License	$	48,417		$	38,437		26	%	$	132,393		$	108,820		22	%
Maintenance and support services		24,460			20,523		19	%		68,805			62,991		9	%
Professional services		20,657			14,450		43	%		52,425			33,588		56	%
Project/Systems		12,732			817		1458	%		29,746			8,570		247	%

Total Revenues	$	106,266		$	74,227		43	%	$	283,369		$	213,969		32	%

Percent of revenues:
License		46	%		52	%				47	%		51	%
Maintenance and support services		23	%		28	%				24	%		29	%
Professional services		19	%		19	%				19	%		16	%
Project/Systems		12	%		1	%				10	%		4	%

Total Revenues		100	%		100	%				100	%		100	%


	March-04	June-04	September-04	December-04	March-05
CSP’s that have licensed 1 product	112	111	111	115	115
CSP’s that have licensed 2 products	21	22	24	25	24
CSP’s that have licensed 3 products	9	10	11	12	14
CSP’s that have licensed 4 or more products	16	16	18	18	18


	Three Months Ended March 31,				Percent Change		Nine Months Ended March 31,				Percent Change
	2005		2004		Percent Change		2005		2004		Percent Change
Cost of revenues:
License	$	2,080	$	1,672	24	%	$	5,768	$	6,495	-11	%
Maintenance and support services		9,084		6,435	41	%		22,702		18,477	23	%
Professional services		15,133		11,439	32	%		40,648		27,420	48	%
Project/Systems		8,281		772	973	%		17,513		4,883	259	%

Total cost of revenues	$	34,578	$	20,318	70	%	$	86,631	$	57,275	51	%


Year ending June 30,	Contractual Cash Obligation		Contractual Sublease Income			Sub-total		Estimated Future Sublease Income			Restructuring Accrual
2005	$	2,600	$	(434	)	$	2,166	$	—		$	2,166
2006		10,006		(1,834	)		8,172		(241	)		7,931
2007		8,806		(1,675	)		7,131		(921	)		6,210
2008		7,865		(1,106	)		6,759		(1,617	)		5,142
2009		5,963		—			5,963		(1,818	)		4,145
Thereafter		22,807		—			22,807		(7,405	)		15,402

	$	58,047	$	(5,049	)	$	52,998	$	(12,002	)	$	40,996


	Three Months Ended March 31,				Percent Change		Nine Months Ended March 31,				Percent Change
	2005		2004		Percent Change		2005		2004		Percent Change
Stock-based compensation by category
Research and development	$	189	$	231	-18	%	$	397	$	729	-46	%
Sales and marketing		272		191	42	%		773		360	115	%
General and administrative		550		516	7	%		1,667		1,338	25	%

	$	1,011	$	938	8	%	$	2,837	$	2,427	17	%


	2005		2006		2007		2008		2009		Thereafter		Total
Contractual obligation:
Operating Lease Obligations	$	27,407	$	24,225	$	22,581	$	21,347	$	20,261	$	81,525	$	197,346
Interest due on convertible subordinated debt		—		4,125		4,125		4,125		2,063		—		14,438


	Expected maturity date for the fiscal year ending June										Cost Value Total		Fair Value Total
	2005		2006		2007		2008		2009		Cost Value Total		Fair Value Total
Certificate of deposit	$	—	$	120	$	—	$	—	$	—	$	120	$	120
Corporate Bonds		11,401		8,632		350		—		—		20,383		20,326
Auction Rate Securities		66,524		—		—		—		—		66,524		66,525
Federal Agencies		19,386		38,903		—		—		—		58,289		57,884

	$	97,311	$	47,655	$	350	$	—	$	—	$	145,316	$	144,855


Exhibit Number		Description
10.1		Letter Agreement between the Company and Gerald Held, dated April 27, 2005 (incorporated by reference to Exhibit 99.1 to the Company’s current report on Form 8-K filed on May 3, 2005).

10.2		Indemnity Agreement, dated April 27, 2005, by and between the Company and Gerald Held (a form of which has been incorporated by reference to Exhibit 10.16 to the Company annual report on Form 10-K filed September 28, 2001).

10.3		Consulting Agreement, dated December 1, 2004, by and between the Company and Gerald Held as terminated by Letter Agreement between the Company and Gerald Held, dated April 27, 2005.

10.4		Amended and Restated Employment Agreement dated March 7, 2005, by and between the Company and Joshua Pace (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed on March 11, 2005).

10.5		Two Sublease Agreements, each entered into on February 28, 2005, by and between the Company and Informatica Corporation for the lease of office space in the buildings known as 2100 Seaport Boulevard and 2000 Seaport Boulevard, respectively, in Redwood City, California.

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.