Great Elm Capital Group, Inc. - FORM 10-Q

Attached files

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EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT SECTION 302 - Great Elm Capital Group, Inc.	dex312.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Great Elm Capital Group, Inc.	dex311.htm
EX-32.1 - CERTIFICATION OF THE CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - Great Elm Capital Group, Inc.	dex321.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission File Number: 001-16073

OPENWAVE SYSTEMS INC.

(Exact name of registrant as specified in its charter)


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

2100 Seaport Blvd. Redwood City, California		94063
(Address of principal executive offices)		(Zip Code)

(650) 480-8000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨		Accelerated filer	x

Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

As of October 31, 2010 there were 84,331,155 shares of the registrant’s Common Stock outstanding.

OPENWAVE SYSTEMS INC.

Table of Contents


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:
	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	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 6.	Exhibits	45

SIGNATURES		46

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	September 30, 2010			June 30, 2010
ASSETS

Current assets:
Cash and cash equivalents	$	60,286		$	60,935
Short-term investments		45,395			45,211
Accounts receivable, net of allowance for doubtful accounts		33,756			31,160
Prepaid and other current assets		19,265			18,018

Total current assets		158,702			155,324
Property and equipment, net		8,051			8,365
Long-term investments, and restricted cash and investments		11,801			13,222
Deposits and other assets		8,725			9,231
Goodwill		267			267
Intangible assets, net		1,780			2,200

Total assets	$	189,326		$	188,609

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	4,961		$	4,658
Accrued liabilities		20,296			20,584
Accrued restructuring costs		14,545			15,128
Deferred revenue		37,932			35,132

Total current liabilities		77,734			75,502
Accrued restructuring costs, net of current portion		21,330			23,820
Deferred revenue, net of current portion		11,698			11,800
Deferred rent obligations and other		4,917			4,728

Total liabilities		115,679			115,850

Commitments and contingencies

Stockholders’ equity:
Common stock		84			84
Additional paid-in capital		3,187,996			3,187,265
Accumulated other comprehensive loss		(2,430	)		(2,515	)
Accumulated deficit		(3,112,003	)		(3,112,075	)

Total stockholders’ equity		73,647			72,759

Total liabilities and stockholders’ equity	$	189,326		$	188,609

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,
	2010			2009
Revenues:
License	$	12,332		$	10,425
Maintenance and support		13,993			15,798
Services		11,203			23,619
Patents		4,000			—

Total revenues		41,528			49,842

Cost of revenues:
License		439			639
Maintenance and support		4,152			4,327
Services		8,887			17,773

Total cost of revenues		13,478			22,739

Gross profit		28,050			27,103

Operating expenses:
Research and development		11,430			9,864
Sales and marketing		10,821			10,711
General and administrative		6,612			7,925
Restructuring and other related costs		708			422

Total operating expenses		29,571			28,922

Operating loss from continuing operations		(1,521	)		(1,819	)
Interest income		160			268
Interest expense		(83	)		(102	)
Other expense, net		(40	)		(1,375	)

Loss from continuing operations before provision for income taxes		(1,484	)		(3,028	)
Income tax expense		681			498

Net loss from continuing operations		(2,165	)		(3,526	)

Discontinued operations:
Gain on sale of discontinued operation, net of tax	$	2,236		$	4,516

Net income	$	71		$	990

Basic and diluted net income (loss) per share from:
Continuing operations	$	(0.03	)	$	(0.04	)
Discontinued operations		0.03			0.05

Net income	$	0.00		$	0.01

Shares used in computing basic and diluted income (loss) per share		84,017			83,295
Supplemental disclosures:
Total other-than-temporary impairments	$	—		$	(1,824	)
Portion of other-than-temporary impairments included in other comprehensive income		—			360

Net other-than-temporary impairments		—			(1,464	)
Other investment gain		—			79

Total net investment losses in Other expense, net	$	—		$	(1,385	)

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	71		$	990
Gain on sale of discontinued operation		(2,236	)		(4,516	)
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization of intangibles		1,666			1,901
Stock-based compensation		661			547
Non-cash restructuring charges		315			391
Provision for (recovery of) doubtful accounts		(185	)		31
Amortization of premiums/discounts on investments, net		346			64
Realized losses and impairments of non-marketable securities		—			1,464
Changes in operating assets and liabilities, net of effect of acquired assets and liabilities:
Accounts receivable		(2,411	)		(5,321	)
Prepaid assets, deposits, and other assets		(741	)		7,536
Accounts payable		437			(1,717	)
Accrued liabilities		(98	)		(5,219	)
Accrued restructuring costs		(3,388	)		(4,539	)
Deferred revenue		2,698			(401	)

Net cash used for operating activities		(2,865	)		(8,789	)

Cash flows from investing activities:
Purchases of property and equipment		(1,066	)		(607	)
Proceeds from sale of discontinued operation, net		2,236			4,516
Purchases of short-term investments		(11,329	)		(7,016	)
Proceeds from sales and maturities of short-term investments		13,130			8,498
Purchases of long-term investments		(825	)		(2,395	)
Proceeds from sales and maturities of long-term investments		—			213
Release of restricted cash and investments		—			419

Net cash provided by investing activities		2,146			3,628

Cash flows from financing activities:
Proceeds from issuance of common stock, net		70			81

Net cash provided by financing activities		70			81

Net decrease in cash and cash equivalents		(649	)		(5,080	)
Cash and cash equivalents at beginning of period		60,935			91,545

Cash and cash equivalents at end of period	$	60,286		$	86,465

See accompanying notes to condensed consolidated financial statements

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED

(1) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). 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 management of Openwave Systems Inc. (the “Company” or “Openwave”), the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2010 and June 30, 2010, and the results of operations for the three months ended September 30, 2010 and 2009 and cash flows for the three months ended September 30, 2010 and 2009. 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, 2010.

Use of Estimates and Business Risks

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 could differ from those estimates.

The Company derives approximately half of its revenues from U.S. customers, which consist primarily of sales to Sprint Nextel and AT&T. Individual sales to these customers can be significant and the timing of these transactions can create significant variability in the timing and level of Company revenues and profitability.

Revenue Recognition

With the exception of the adoption of several accounting pronouncements related to revenue recognition, discussed below in Recently Adopted Accounting Pronouncements, there have been no material changes to our significant accounting policies as compared with the Company’s revenue recognition policies from the information provided in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10–K for the fiscal year ended June 30, 2010.

During the first quarter of fiscal 2011, the Company entered into a license agreement with a competitor whereby the Company licensed method claim rights to certain of its patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010 through the life of the patents. As part of the Company’s strategy for fiscal 2011 and beyond, the Company intends to seek monetization opportunities for its intellectual property. This could include licensing the Company’s patents as well as seeking damages for past infringements. However, there can be no guarantee that the Company’s patent licensing or enforcement efforts will be successful. Further, effectively policing and enforcing the Company’s intellectual property is time consuming and costly.

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

Stock Based Compensation

The following table illustrates stock-based compensation recognized in the condensed consolidated statements of operations by category of award (in thousands):


	Three Months Ended September 30,
	2010		2009
Stock-based compensation related to:
Grants of nonvested stock	$	56	$	52
Stock options granted to employees and directors		523		429
Employee stock purchase plan		82		66

Stock-based compensation recognized in the condensed consolidated statements of operations	$	661	$	547

During the three months ended September 30, 2010 and 2009, the tax benefits related to stock option expense were immaterial.

The Company amortizes stock-based compensation for awards granted on a straight-line basis over the requisite service (vesting) period for the entire award.

(a) Assumptions and Activity

The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and assumptions noted in the following table.


	Three Months Ended September 30,
	2010			2009
Expected volatility		65.4	%		75.4	%
Expected dividends		—			—
Expected term (in years)		3.93 – 3.94			3.52 – 3.56
Risk-free rate		1.2	%		1.8% – 2.0	%

The Company estimates the expected term for new grants based upon actual post-vesting option cancellation and exercise experience, as well as the average midpoint between vesting and the contractual term for outstanding options. The Company’s expected volatility for the expected term of the option is based upon the historical volatility experienced in the Company’s stock price, as well as implied volatility in the market traded options on Openwave common stock, when appropriate. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company determines the fair value of nonvested shares based on the NASDAQ closing stock price on the date of grant.

(b) Employee Stock Purchase Plan

Under the Openwave Systems Inc. 1999 Employee Stock Purchase Plan (“ESPP”), eligible employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the Company’s common stock as of the beginning and the end of the six month offering periods. The amount of stock-based compensation expense recognized relating to the ESPP during the three months ended September 30, 2010 was $0.1 million, with $0.1 million recognized in the corresponding period of the prior year.

The fair value used in recording the stock-based compensation expense associated with the ESPP is estimated for each offering period using the Black-Scholes-Merton option pricing model.

There were no ESPP purchases during the three months ended September 30, 2010 and 2009. The expected term is six months, coinciding with each offering period. Expected volatilities are based on the historical volatility experienced in the Company’s stock price, as well as implied volatility in the market traded options on Openwave common stock when appropriate. The risk-free rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

A summary of option activity from July 1, 2010 to September 30, 2010 is presented below (in thousands except per share and year amounts):


Options	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding at July 1, 2010		8,828		$	3.51
Options granted		2,935			2.03
Exercised		(49	)		1.46
Forfeited, canceled or expired		(210	)		3.41

Outstanding at September 30, 2010		11,504		$	3.14		7.95	$	1,790

Vested and expected to vest at September 30, 2010		9,818		$	3.34		7.74	$	1,598

Exercisable at September 30, 2010		4,728		$	4.83		6.43	$	855

The weighted average grant date fair values of options granted during the three months ended September 30, 2010 and 2009 were $0.82 and $1.31, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2010 and 2009 was $12,000 and $54,000, respectively. Upon the exercise of options, the Company issues new common stock from its authorized shares.

A summary of the activity of the Company’s nonvested share awards from July 1, 2010 to September 30, 2010 is presented below (in thousands except per share amounts):


Nonvested Shares	Shares			Weighted Average Grant Date Fair Value Per Share
Nonvested at July 1, 2010		222		$	1.98
Nonvested shares granted		—			—
Vested		(9	)		4.36
Forfeited		—			—

Nonvested at September 30, 2010		213		$	1.83

The total fair value of shares vested during both the three months ended September 30, 2010 and 2009 was $39,000. As of September 30, 2010, there was $5.0 million of total unrecognized compensation cost related to all unvested share awards. That cost is expected to be recognized as the awards vest over the next four years.

Stock-based compensation expense impacted the Company’s results of operations as follows (in thousands):


	Three Months Ended September 30,
	2010		2009
Stock-based compensation by category:
Maintenance and support services	$	45	$	38
Services		59		76
Research and development		131		98
Sales and marketing		156		146
General and administrative		270		189

	$	661	$	547

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

Recently Adopted Accounting Pronouncements

Effective July 1, 2010, the Company adopted the following accounting guidance for revenue recognition on a prospective basis for any contacts entered into after the date of adoption:

Accounting Standards Update 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements (“Update 2009-13”). Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for non-software products or services (deliverables) separately based on the value allocated to each element using vendor specific objective evidence, third party evidence, or estimated selling prices determined by management. The adoption of Update 2009-13 did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

Accounting Standards Update 2009-14, Software (Topic 985), Certain Revenue Arrangements that Include Software Elements (“Update 2009-14”). Update 2009-14 addresses concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. The adoption of Update 2009-14 did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

Accounting Standards Update No. 2010-17, Revenue Recognition—Milestone Method (Topic 605)—Milestone Method of Revenue Recognition (“Update 2010-17”). Update 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. The adoption of Update 2009-14 did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

(2) Net Income (Loss) 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 number of shares used in computing basic and diluted net income (loss) per share for each period presented was the same due to a net loss from continuing operations in each period.

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) from continuing operations per share computation. The following table sets forth potential shares of common stock that are not included in the diluted net income (loss) per share calculation because to do so would be anti-dilutive for the periods indicated below (in thousands):


	Three Months Ended September 30,
	2010		2009
Weighted average effect of potential common stock:
Unvested common stock subject to repurchase		218		193
Options that would have been included in the computation of dilutive shares outstanding had the Company reported net income from continuing operations, prior to applying the treasury method		2,504		5,746
Options that were excluded from the computation of dilutive shares outstanding because the total assumed proceeds exceeded the average market value of the Company’s common stock during the quarter		7,832		2,942

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

(3) Discontinued Operations

a) Client Operations

During fiscal 2008, the Company sold its Client operations to Purple Labs, a private company based in Chambéry, France. The terms of the agreement include initial consideration of $20.0 million in cash received by the Company in June 2008, and a note receivable of $5.8 million that was paid in July 2008.

Additionally, upon the sale in June 2008, $4.2 million was placed in escrow by Purple Labs, originally to be held until September 30, 2009, to secure indemnification claims made by Purple Labs, if any. On September 23, 2009, Myriad AG (formerly known as Purple Labs) made claims against the escrow in excess of $4.2 million and therefore the funds were not released from escrow. On September 24, 2010, the parties agreed to release $2.0 million from the escrow to Myriad and the remaining balance of $2.2 million, plus accrued interest, to Openwave. This amount was recognized as a gain on sale of discontinued operations in the first quarter of fiscal 2011.

The Client operations financial results have been classified as a discontinued operation in the Company’s condensed consolidated statements of operations for each period presented.

The financial results of Client operations included in discontinued operations were as follows (in thousands):


	Three Months Ended September 30,
	2010		2009
Gain on sale of discontinued operation	$	2,236	$	—

Total income from discontinued operation	$	2,236	$	—

As of September 30, 2010, there were no operational assets or liabilities attributable to Client operations due to the sale of the discontinued operation in June 2008.

b) Musiwave

On December 31, 2007, the Company sold Musiwave to Microsoft Corporation (“Microsoft”) for $41.4 million in cash, a note receivable of $5.9 million, and $4.6 million that Microsoft placed in escrow to secure indemnification claims made by Microsoft, if any. The Company received and recorded the payment on the note receivable in July 2008, which had increased in value to $6.5 million due to the loan being denominated in Euros. During the first quarter of fiscal 2010, the escrowed funds were distributed pursuant to certain agreements reached with Microsoft, resulting in a gain on sale of discontinued operations of $4.5 million.

The financial results of Musiwave included in discontinued operations were as follows (in thousands):


	Three Months Ended September 30,
	2010		2009
Gain on sale of discontinued operation	$	—	$	4,516

Total income from discontinued operation	$	—	$	4,516

As of September 30, 2010, there were no remaining assets or liabilities attributable to Musiwave due to the sale of the discontinued operation on December 31, 2007.

(4) Geographic, Segment and Significant Customer Information

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

The Company has organized its operations based on a single operating segment.

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

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 revenues in different geographic regions is as follows (in thousands):


	Three Months Ended September 30,
	2010		2009
United States	$	19,004	$	27,919
Americas, excluding the United States		4,938		4,405
Europe, Middle East, and Africa		5,872		6,967
Japan		9,197		7,798
Asia Pacific, excluding Japan		2,517		2,753

Total revenues	$	41,528	$	49,842

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

The majority of the Company’s revenues have been from a limited number of customers and the Company’s sales are concentrated in a single industry segment. During the periods noted below the Company had two significant customers, as shown in the following table:


	% of Total Revenue Three Months Ended September 30,
	2010			2009
Customer:
Sprint Nextel		21	%		39	%
AT&T		4	%		10	%

As noted in the tables above, the Company has derived a significant portion of its revenues from sales to U.S.-based customers during the three months ended September 30, 2010 and 2009, which itself primarily consists of sales to Sprint Nextel and AT&T. Although the Company intends to broaden its markets, there can be no assurance that this objective will be achieved.

(5) Balance Sheet Components

(a) Accounts Receivable, net

The following table presents the components of accounts receivable as of the dates noted (in thousands):


	September 30, 2010			June 30, 2010
Accounts receivable	$	28,678		$	26,935
Unbilled accounts receivable		6,064			5,272
Allowance for doubtful accounts		(986	)		(1,047	)

	$	33,756		$	31,160

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

Significant customer accounts receivable balances as a percentage of total gross accounts receivable were as follows:


	% of Total Accounts Receivable
	September 30, 2010			June 30, 2010
Customer:
Sprint Nextel		20	%		22	%
Telefonica Moviles Espana		13	%		14	%
Mobixell Networks		12	%		—
Itochu		9	%		10	%

(b) Goodwill and Intangible Assets, net

The following table presents activity recorded to goodwill and intangible assets from June 30, 2010 to September 30, 2010 (in thousands):


	Balance as of June 30, 2010		Amortization			Balance as of September 30, 2010
Goodwill	$	267	$	—		$	267
Intangible assets:
Developed and core technology		2,183		(409	)		1,774
Customer contracts—support		17		(11	)		6

	$	2,467	$	(420	)	$	2,047

Total amortization related to intangible assets was as follows (in thousands):


	Three Months Ended September 30,
	2010		2009
Developed and core technology	$	409	$	409
Customer contracts—support		11		11

Total amortization of intangible assets		420		420

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.

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


	September 30, 2010							June 30, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed and core technology	$	19,294	$	(17,520	)	$	1,774	$	19,294	$	(17,111	)	$	2,183
Customer contracts—support		220		(214	)		6		220		(203	)		17

	$	19,514	$	(17,734	)	$	1,780	$	19,514	$	(17,314	)	$	2,200

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

The following table presents the estimated future amortization of intangible assets, based upon the recorded intangible assets as of September 30, 2010 (in thousands):


Fiscal Year	Amortization
2011 (remaining)	$	1,219
2012		561

	$	1,780

(c) Deferred Revenue

As of September 30, 2010 and June 30, 2010, the Company had deferred revenue of $49.6 million and $46.9 million, respectively, consisting of deferred license fees, new version coverage, 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 billed prior to acceptance of product or service;

•

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

•

subscriber licenses committed in excess of subscribers activated for arrangements being recognized on a subscriber activation basis; and

•

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

Amounts in accounts receivable that have corresponding balances included in deferred revenue aggregated to approximately $9.1 million and $7.6 million as of September 30, 2010 and June 30, 2010, respectively.

(d) Accumulated Other Comprehensive Loss

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


	September 30, 2010			June 30, 2010
Net unrealized gains (losses) on marketable securities:
Unrealized gain on marketable securities not other-than-temporarily impaired	$	131		$	46
Unrealized loss on marketable securities other-than-temporarily impaired		(1,790	)		(1,790	)

Net unrealized loss on marketable securities		(1,659	)		(1,744	)
Cumulative translation adjustments		(771	)		(771	)

Total Accumulated other comprehensive loss	$	(2,430	)	$	(2,515	)

Comprehensive income is comprised of net income and changes in accumulated foreign currency translation and unrealized loss on marketable securities (in thousands):


	Three Months Ended September 30,
	2010		2009
Net income	$	71	$	990
Other comprehensive income:
Change in unrealized loss on marketable securities		85		1,260

Total comprehensive income	$	156	$	2,250

(6) Financial Instruments

Cash and cash equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. Cash equivalents are comprised of short-term investments with an investment rating of

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

any two of the following: Moody’s of A-2 or higher, or by Standard & Poor’s of A1 or higher. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts recorded on the balance sheet are in excess of amounts that are insured by the FDIC.

Investments

The Company’s investment policy is consistent with the definition of available-for-sale securities. From time to time, the Company may sell certain securities but the objectives are generally not to generate profits on short-term differences in price. The following tables show the Company’s available-for-sale investments within investments and cash and cash equivalents in the condensed consolidated balance sheet (in thousands):


	Expected maturity for the year ending June 30,						Cost Value		Fair Value
	2011		2012		Thereafter		September 30, 2010 Total		September 30, 2010 Total
U.S. Government Agencies	$	15,372	$	3,162	$	—	$	18,534	$	18,534
Commercial Paper		7,343		—		—		7,343		7,343
Certificates of Deposit		940		—		—		940		940
Corporate Bonds		19,571		2,471		169		22,211		22,342
Auction Rate Securities		—		—		11,069		11,069		9,279

	$	43,226	$	5,633	$	11,238	$	60,097	$	58,438


	September 30, 2010
	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value
U.S. Government Agencies	$	18,534	$	—	$	—		$	18,534
Commercial Paper		7,343		—		—			7,343
Certificates of Deposit		940		—		—			940
Corporate Bonds		22,211		140		(9	)		22,342
Auction Rate Securities		11,069		—		(1,790	)		9,279

	$	60,097	$	140	$	(1,799	)	$	58,438


	June 30, 2010
	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value
U.S. Government Agencies	$	18,094	$	15	$	(3	)	$	18,106
Commercial Paper		8,094		—		—			8,094
Certificates of Deposit		1,930		—		—			1,930
Corporate Bonds		22,613		81		(47	)		22,647
Auction Rate Securities		11,069		—		(1,790	)		9,279

	$	61,800	$	96	$	(1,840	)	$	60,056

Temporary and Other-Than-Temporary Impairments On Available-For-Sale Securities

The Company reviews its investments in an unrealized loss position as of each balance sheet date for impairment in accordance with guidance issued by the FASB and the SEC in order to determine whether an impairment is temporary or other-than-temporary (“OTTI”). When an unrealized loss on a security is considered temporary, the Company records the unrealized loss in other comprehensive income (loss) and not in earnings.

An OTTI occurs when it is anticipated that the amortized cost will not be recovered for a security in an unrealized loss position. In such situations, the amount of OTTI recorded in earnings is the entire difference between the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

security’s amortized cost and its fair value when either: (i) the Company has the intent to sell the security; or (ii) it is more likely than not that the Company will be required to sell the security before recovery of the decline in fair value below amortized cost. If neither of these two conditions exists, only the difference between the amortized cost basis of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI charge in earnings (“credit loss”). If the fair value is less than the present value of projected future cash flows expected to be collected, this portion of OTTI relates to other-than credit factors (“noncredit loss”) and is recorded as other comprehensive income (loss) within stockholders’ equity.

During the three months ended September 30, 2010 there were no OTTI charged in earnings. During the three months ended September 30, 2009, the Company had OTTI charges in earnings of $1.5 million recorded in other expense, net.

The following tables show the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):


	As of September 30, 2010
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate Bonds	$	13,163	$	(8	)	$	1,202	$	(1	)	$	14,365	$	(9	)
Auction Rate Securities		—		—			9,279		(1,790	)		9,279		(1,790	)

	$	13,163	$	(8	)	$	10,481	$	(1,791	)	$	23,644	$	(1,799	)

As of September 30, 2010, the Company had 24 investments in an unrealized loss position.


	As of June 30, 2010
	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government Agencies	$	3,803	$	(3	)	$	—	$	—		$	3,803	$	(3	)
Corporate Bonds		16,311		(43	)		1,214		(4	)		17,525		(47	)
Auction Rate Securities		—		—			9,279		(1,790	)		9,279		(1,790	)

	$	20,114	$	(46	)	$	10,493	$	(1,794	)	$	30,607	$	(1,840	)

As of June 30, 2010, the Company had 32 investments in an unrealized loss position.

The table below presents activity related to the credit loss component recognized in earnings (in thousands):


Cumulative OTTI credit losses recognized as of June 30, 2010	$	(7,791	)
OTTI charges related to securities with previous credit losses		—

Cumulative OTTI credit losses recognized as of September 30, 2010	$	(7,791	)

The redemption of an enhanced cash money market fund resulted in proceeds of $1.4 million and the recognition of realized gains of $0.1 million in the first quarter of fiscal 2010. There were no realized gains or realized losses recorded during the three months ended September 30, 2010 from the sales of available-for-sale securities. Realized gains and losses are included in other expense, net in the condensed consolidated statement of operations.

Fair Value Measurement

The FASB has established a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The following are the hierarchical levels of inputs to measure fair value:

•

Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

•

Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•

Level 3: Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy:


	Fair value of securities as of September 30, 2010
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Money Market Funds	$	52,407	$	—	$	—	$	52,407
Certificates of Deposit		940		357		—		1,297
Corporate Bonds		22,051		—		292		22,343
Commercial Paper		7,343		—		—		7,343
U.S. Government Agencies		18,534		—		—		18,534
Auction Rate Securities		—		—		9,279		9,279

	$	101,275	$	357	$	9,571	$	111,203

The table above includes $0.4 million of restricted cash related to the Level 2 Certificates of Deposit.

Auction Rate Securities

As of September 30, 2010, $9.3 million in auction rate securities, recorded in long-term investments on the consolidated balance sheet, were considered illiquid based upon a lack of auction results beginning in fiscal 2008. The Company estimated the fair value of these auction rate securities based on probabilities of potential scenarios: (1) successful auction/early redemption; (2) failing auctions until maturity; or (3) default and the estimated cash flows for each scenario. Other factors were considered, such as the value of the investments held by the issuer and the financial condition and credit ratings of the issuer, insurers, and parent companies, as applicable.

These ARS were issued by four different entities and are held by two investment firms on the Company’s behalf. Three of these securities are “Triple X” structured obligations of special purpose reinsurance entities associated with life insurance companies. One ARS is related to federal education student loans programs. As of September 30, 2010, these instruments were all rated A, A-, and BBB by Standard and Poor’s and Aaa by Moody’s and all of the $12.5 million par value of these illiquid investments is insured against defaults of principal and interest by third party insurance companies.

The Company’s ARS were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended September 30, 2010 (in thousands). The fair value was $9.3 million as of both September 30, 2010 and June 30, 2010.

(7) Borrowings

Credit Agreement

On January 23, 2009, the Company and Silicon Valley Bank entered into a secured revolving credit facility for up to $40.0 million. On January 20, 2010, the Company entered into two amendments to the $40.0 million revolving credit facility with Silicon Valley Bank to modify the definition of EBITDA. Additionally, on April 14, 2010, the Company entered into another amendment to the $40.0 million revolving credit facility with Silicon Valley Bank to extend the maturity date to January 23, 2012, as well as to modify the commitment fee and several definitions, including EBITDA, Borrowing Base, and Investments. The Company may borrow, repay and re-borrow under the revolving

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

credit facility at any time up to the maturity date. As of September 30, 2010, the revolving credit facility bears interest at 4% per annum. Monthly, the Company is required to pay a fee of 0.03% on any undrawn amounts under the revolving credit facility. For each letter of credit issued, the Company is required to pay 0.75% per annum on the face amount of the letter of credit. Annually, the Company is required to pay a commitment fee to the lender. In January 2010, the Company paid a $0.2 million commitment fee to the lender. In January 2011, the Company will pay a $0.1 million commitment fee to the lender.

As of September 30, 2010, the Company had letters of credit outstanding against the revolving credit facility totaling $18.1 million, reducing the available borrowings on the revolving credit facility. The revolving credit facility requires a monthly borrowing base calculation to determine the amount of the revolving credit facility available for the Company to borrow (“Borrowing Base”). The Borrowing Base calculation is $30.0 million plus 75% of accounts receivables defined as eligible in the credit agreement. As of September 30, 2010, the Borrowing Base was $37.8 million and the total available for the Company to borrow on the revolving credit facility was $19.7 million, which is the difference between the Borrowing Base calculation of $37.8 million and the amount of outstanding letters of credit amount of $18.1 million.

The revolving credit line is secured by a blanket lien on all of the Company’s assets and contains certain financial and reporting covenants customary to these types of credit facilities agreements which the Company is required to satisfy as a condition of the agreement. In particular, the revolving credit facility requires that the Company meet certain minimum four quarter EBITDA amounts, as well as meet a minimum monthly liquidity ratio. In addition, the revolving credit facility requires the Company to provide to the bank annual financial projections, promptly report any material legal actions, and timely pay material taxes and file all required tax returns and reports. Further, without the bank’s consent, the Company cannot take certain material actions, such as change any material line of business, sell the Company’s business, acquire other entities, incur liens, make capital expenditures beyond a certain threshold, or engage in transactions with affiliates. As of September 30, 2010, the Company was in compliance with all debt covenants.

(8) Commitments and Contingencies

Litigation

IPO securities class action

On November 5, 2001, a 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. 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 shares of 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 (the “Securities Act”) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), 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 by Credit Suisse First Boston, Hambrecht & Quist, Robertson Stephens, and Piper Jaffray. 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 had accepted a settlement proposal presented to all issuer defendants. Under such settlement proposal, plaintiffs would have dismissed and released 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

Defendants would 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 required approval of the Court, which could not be assured, after class members were given the opportunity to object to or opt out of the settlement. The Court held a hearing on April 24, 2006 to consider whether final approval should be granted. Subsequently, the United States Court of Appeals for the Second Circuit vacated the class certification of plaintiffs’ claims against the underwriters in six cases designated as focus or test cases. Miles v. Merrill Lynch & Co. (In re Initial Public Offering Securities Litigation), 471 F.3d 24 (2d Cir. 2006). Thereafter, the District Court ordered a stay of all proceedings in all of the lawsuits pending the outcome of plaintiffs’ petition to the Second Circuit for rehearing en banc and resolution of the class certification issue. On April 6, 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but clarified that the plaintiffs may seek to certify a more limited class in the District Court. Accordingly, the parties withdrew the prior settlement, and Plaintiffs submitted amended complaints in designated focus or test cases with a revised class definition, in an attempt to comply with the Second Circuit’s ruling.

On April 2, 2009, the parties in all the lawsuits submitted a settlement for the Court’s approval. Under the settlement, the Openwave Defendants would not be required to make any cash payment. On October 6, 2009, the Court approved the settlement, under which the Openwave Defendants are not required to contribute any cash. Subsequently, the Court entered a judgment on the settlement. Several notices of appeal have been filed by putative class members, challenging the settlement and the judgment. The Company believes a loss is not probable or reasonably estimable. Therefore no amount has been accrued as of September 30, 2010.

Simmonds v. Credit Suisse Group, et al.,

On October 3, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed suit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, Bank of America Corporation, and JPMorgan Chase & Co., the lead underwriters of the Company’s initial public offering in June 1999, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). The complaint seeks to recover from the lead underwriters any “short-swing profits” obtained by them in violation of Section 16(b). The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company. Simmonds filed an Amended Complaint on February 25, 2008 (the “Amended Complaint”), naming as defendants Credit Suisse Securities (USA), Robertson Stephens, Inc., J.P. Morgan Securities, Inc., and again naming Bank of America Corporation. The Amended Complaint asserts substantially similar claims as those set forth in the initial complaint. On July 25, 2008, 29 issuers filed the Issuer Defendants’ Joint Motion to Dismiss. Underwriter Defendants also filed a Joint Motion to Dismiss on July 25, 2008. Plaintiff filed oppositions to both motions on September 8, 2008. All replies in support of the motions to dismiss were filed on October 23, 2008. The Company joined the Issuer Defendants’ Joint Motion to Dismiss on December 1, 2008.

On March 12, 2009, the Court granted the Issuer Defendants’ Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that the Plaintiff had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the Court stated it would not permit the Plaintiff to amend her demand letters while pursuing her claims in the litigation. Because the Court dismissed the case on the ground that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether Plaintiff’s claims were barred by the applicable statute of limitations. However, the Court also granted the Underwriters’ Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred by the applicable statute of limitations because the issuers’ shareholders had notice of the potential claims more than five years prior to filing suit. On April 10, 2009, the Plaintiff filed a Notice of Appeal, and the underwriters subsequently filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under the applicable statute of limitations. The Plaintiff’s opening brief on appeal was filed on August 26, 2009; the Issuer and Underwriter Defendants’ opposition briefs and the Underwriter Defendants’ brief supporting their cross-appeals were filed on October 2, 2009; Simmonds’ reply brief and opposition to the Underwriter Defendants’ cross-appeals were filed on November 2, 2009; and the Underwriter Defendants’ reply brief in support of their cross-appeals was filed on November 17, 2009. On October 5, 2010, the Ninth Circuit Court of Appeals heard oral arguments regarding this matter. No amount has been accrued as of September 30, 2010, as a loss is not considered probable or reasonably estimable.

OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

From time to time, the Company may be involved in litigation or other legal proceedings, including those noted above, relating to or arising out of its day-to-day operations or otherwise. Litigation is inherently uncertain, and the Company could experience unfavorable rulings. Should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations, cash flows or on its business for the period in which the ruling occurs and/or in future periods.

Indemnification claims

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. As of September 30, 2010, no amount is accrued for indemnifications as there were no existing claims where a loss is considered probable. Historically, costs related to these indemnification provisions have been infrequent and the Company is unable to estimate the maximum potential impact of these indemnification provisions on its future results of operations.

(9) Restructuring and Other Related Costs

As a result of the Company’s change in strategy and its desire to improve its cost structure, the Company announced a restructuring plan during fiscal year 2010, and various other restructurings in fiscal years 2002 through 2009.

The Company implemented the FY2010 Restructuring to consolidate the Company’s resources, primarily in development, and improve operating efficiencies. As such, during the three months ended December 31, 2009, the Company incurred approximately $0.8 million in pre-tax restructuring and related charges associated with the FY2010 Restructuring’s employee termination benefits and $0.2 million in accelerated depreciation on fixed assets associated with a facility identified for restructuring. The Company expects to pay the current accrued charges for employee termination benefits by December 31, 2010. During the third and fourth quarters of fiscal 2010, the Company recognized $1.3 million in facilities charges associated with a facility the Company exited during the year as a result of the FY2010 Restructuring. The lease payments will be paid over the term of the remaining lease. Of the remaining $0.9 million facilities related accrual, the Company expects to pay $0.6 million through June 30, 2011 and $0.3 million from July 2011 through January 2014.

The following table sets forth the restructuring liability activity from June 30, 2010 through September 30, 2010 (in thousands):


	FY 02 to FY 06 Restructuring Plans			FY 08 Restructuring Plan		FY 09 Restructuring Plan			FY 09 Restructuring Plan			FY 10 Restructuring Plan			FY 10 Restructuring Plan			Total Accrual
	Facility			Facility		Facility			Severance			Facility			Severance			Total Accrual
Accrual balances as of June 30, 2010	$	33,814		$	188	$	3,655		$	65		$	1,110		$	116		$	38,948
New charges		—			8		423						(30	)		—			401
Accretion expense		289			—		21			—			5			—			315
Cash paid, net of sublease income		(2,954	)		—		(561	)		(8	)		(172	)		(94	)		(3,789	)

Balance as of September 30, 2010	$	31,149		$	196	$	3,538		$	57		$	913		$	22		$	35,875

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—UNAUDITED—(Continued)

As of September 30, 2010, the Company has sublease contracts in place for all but three of its exited facilities, which provide for approximately $17.0 million of future sublease income from third parties out of total estimated sublease income of $20.5 million. Future minimum lease payments under non-cancelable operating leases, associated with exited facilities, with terms in excess of one year and future contractual sublease income were as follows at September 30, 2010 (in thousands):


Year ending June 30,	Contractual Cash Obligation		Estimated Sublease Income			Contractual Sublease Income			Estimated Future Net Cash Outflow
2011 (remaining)	$	16,634	$	(154	)	$	(5,099	)	$	11,381
2012		21,054		(911	)		(6,818	)		13,325
2013		18,304		(1,174	)		(5,126	)		12,004
2014		1,565		(992	)		—			573
2015		450		(240	)		—			210

	$	58,007	$	(3,471	)	$	(17,043	)	$	37,493

Our restructuring liabilities are recorded at net present value. Over time, the net present value increases to equal the amount of the net future cash payments, removing the need for time-based discounting. Accretion expense reflects the increase in the net present value during the relevant period. Future accretion expense on the restructured facility obligations above is $1.7 million, which will be recorded as restructuring expense over the life of the respective leases.

(10) Income Taxes

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

In light of the Company’s history of operating losses, the Company recorded a full valuation allowance for its U.S. federal and state deferred tax assets. The Company intends to maintain this valuation allowance until there is sufficient evidence to conclude that it is more likely than not that the federal and state deferred tax assets will be realized. As of September 30, 2010, the Company has net foreign deferred tax assets recorded of approximately $2.8 million, which consists of $3.0 million of realizable deferred tax assets in selected countries based upon the Company’s conclusion that it is more likely than not that these foreign subsidiaries will earn future taxable profit through transfer pricing; this is offset by $0.2 million of deferred tax liabilities recorded with respect to acquisitions for which the amortization expense of acquired intangibles is not deductible for tax purposes.

The unrecognized tax benefits activity is as follows (in thousands):


Balance as of July 1, 2010	$	4,173
Additions based on tax positions related to the current year		30
Additions based on tax positions related to prior years		62
Foreign currency fluctuations		140

Balance as of September 30, 2010	$	4,405

The total amount of gross unrecognized tax benefits was $4.4 million as of September 30, 2010. Of this $4.4 million, $1.1 million would affect the effective tax rate if realized, and $3.3 million would be recorded as net income from discontinued operations if realized. Although timing of the resolution and/or closure on the Company’s unrecognized tax benefits is highly uncertain, the Company does not believe it is reasonably possible that the unrecognized tax benefits would materially change in the next 12 months.

The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties was $0.5 million as of both September 30, 2010 and June 30, 2010.

The Company files U.S. federal, U.S. state and foreign tax returns. For federal returns, the Company is generally no longer subject to examinations for years prior to the fiscal year ended June 30, 2008. Because of net operating loss carryforwards, substantially all of the Company’s tax years, from fiscal year 1995 through fiscal year 2007, remain open to state tax examinations with the exception of Alabama, Massachusetts and Texas. Most of the Company’s foreign jurisdictions have three or four tax years open to examinations at any point in time.

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

Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based upon current expectations and beliefs of management and are subject to risks and uncertainties that may cause actual events, results or performance to differ materially from those indicated by these statements. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify forward-looking statements. Forward-looking statements include, among other things, statements regarding our ability to attract and retain customers, our ability to obtain and expand market acceptance for our products and services, our expectations concerning our future financial performance and potential or expected competition and growth in our markets and markets in which we expect to compete, our business strategy, projected plans and objectives, anticipated cost savings from restructurings, our ability to realize anticipated benefits of our acquisitions on a timely basis, our estimates with respect to future operating results, including, without limitation, earnings, cash flow and revenue and any statements of assumptions underlying the foregoing. These forward-looking statements are only predictions. Risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements include the limited number of potential customers, the highly competitive market for our products and services, technological changes and developments, potential delays in software development and technical difficulties that may be encountered in the development or use of our software, patent litigation, our ability to retain management and key personnel, and the other risks discussed under the subheading “Risk Factors” in Item 1A, Part II of this Current Report on Form 10-Q, as well as elsewhere in this report. The occurrence of the events described in “Risk Factors” could harm our business, results of operations and financial condition. These forward-looking statements are made as of the date of this Quarterly Report on Form 10-Q and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements except as required by law. Readers should carefully review the risk factors described in this section and in “Risk Factors” below and other risks identified from time to time in the Openwave’s public statements and reports filed with the Securities and Exchange Commission.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, which was filed with the Securities and Exchange Commission on September 7, 2010, and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q.

Overview of Our Business and Products

Openwave is a global software innovator delivering context-aware mediation and messaging solutions that enable communication service providers and the broader ecosystem to create and deliver smarter services. Over the past few years, we have streamlined our business by selling non-core operations such as our prior Content product line, referred to by the entity name “Musiwave”, in December 2007 and our prior Client operations which provided software for the mobile handset, in June 2008. In fiscal 2009 and fiscal 2010, we also consolidated the number of engineering facilities in order to improve efficiency, coordination, quality, and time-to-market. Although the divestitures of discontinued operations and the cautious spending environment have reduced our revenues over the last year, we intend to grow our business by introducing new products to market, expanding our customer base in new regions, adding a new tier of service provider customers, and monetizing our portfolio of intellectual property. Our success or failure in these endeavors could have a material effect on our financial condition.

We see demand building for mobile data as traditional voice revenues continue to flatten. This demand for data is fueling the growth of the mobile web, with application stores, social networking and video leading the way. The continuous introduction of new devices such as smartphones, tablets and other mobile internet-capable devices encourages users to consume more data. The increase in demand for mobile data may not result in an immediate or

direct impact on our financial results, as we are dependent upon how and when the mobile carriers respond to these trends and how, whether, and when they invest in the required infrastructure. Additionally, the sales cycle generally lasts several quarters, and often can be more than one year.

The key performance measures that we use in assessing our business include bookings, backlog, gross margins, operating cash flows and disciplined management of operating expenses. Our goal is to maintain, over time, a book-to-bill ratio of 1:1 or better. This in turn builds backlog and, therefore, predictability of future revenues. Periodically, we book support or hosting agreements that cover multiple years, which can contribute to the variability in the quarterly amount of bookings achieved.

We also strive to maintain gross margins of approximately 60% or better. However, our gross margin will continue to fluctuate from quarter to quarter, depending on the mix of software, services, patent licensing and hardware delivered during the quarter, which is subject to our customers’ schedules and demands. During the three months ended September 30, 2010, our overall gross margin was 67.8%, compared to 54.4% in the three months ended September 30, 2009. The improvement in the gross margin percentage from the prior year’s period is a reflection of a decline in the services mix of total revenue from 47.4% to 27.0%, and an increase in the license mix from 20.9% to 29.7%. Additionally, patents revenue impacted overall gross margin during the three months ended September 30, 2010 by 9.6%.

The other key metrics we utilize for purposes of making operating decisions and assessing financial performance include bookings and backlog. Bookings comprise the aggregate value of all new arrangements executed during a period, net of any backlog replaced by new arrangements booked in the current quarter. We define backlog as the aggregate value of all existing arrangements less revenue recognized to date. Many of our bookings include the ability of customers to cancel orders, generally related to services or maintenance. Cancellations of bookings from prior quarters are not recorded as a reduction in bookings in the quarter of cancellation. Instead, such cancellations are treated as a reduction in backlog.

Since its inception in 1994, Openwave and its predecessor companies have invested in and patented certain intellectual property for the mobile internet industry. We have commenced plans to monetize this intellectual property. For example during the three month period ended September 30, 2010 we licensed certain patents to a customer which generated $4.0 million in patent revenue for the period. As we execute our monetization plans, we anticipate the related patent revenue in future periods to be unpredictable and volatile.

Overview of Financial Results During the Three Months Ended September 30, 2010

The following table represents a summary of our operating results from continuing operations for the first three months of fiscal 2011 compared with the first three months of fiscal 2010 (dollars in thousands):


	Three Months Ended September 30,						Percent Change
	2010			2009			Percent Change
	(unaudited)
Revenues	$	41,528		$	49,842			-17	%
Cost of revenues		13,478			22,739			-41	%

Gross profit		28,050			27,103			3	%
Operating expenses		29,571			28,922			2	%

Operating loss		(1,521	)		(1,819	)		-16	%
Interest and other expense, net		37			(1,209	)		-103	%
Income tax expense		681			498			37	%

Net loss from continuing operations	$	(2,165	)	$	(3,526	)		-39	%

Revenues decreased during the three months ended September 30, 2010 compared to the corresponding period of the prior year. Revenues during the three months ended September 30, 2010 included $4.0 million in Patent revenue. See discussion of Revenues below under the Summary of Operating Results.

Overall, operating expenses increased $0.6 million during the three months ended September 30, 2010 compared with the corresponding period of the prior year. This increase can be primarily attributed to increases in research and development spending, offset by decreases in general and administrative spending, as discussed in further detail under Summary of Operating Results below.

Operating Environment During the Three Months Ended September 30, 2010

Although mobile data services revenues are growing, the average revenue per user, commonly referred to as ARPU, has remained flat over the last several years for many of Openwave’s mobile operator customers. Many operators have moved to flat rate mobile data revenue plans to drive mobile data usage, and the upside is that data usage is on the rise. This increased demand is fueling the dramatic growth of the mobile web, with application stores, social networking and video leading the way. The continuous introduction of new devices (Android-based smartphones, iPhones, tablets and other mobile-capable devices) encourages users to consume more data, driving ever-increasing levels of traffic to mobile networks.

Mobile networks were built and managed on the underlying assumption of predictable consumption. Current networks are not ready to efficiently handle the expected increase in mobile data usage. Although mobile operators have announced their planned migrations to next generation 4G networks, upgrades of their software infrastructure continue to be incremental, with minimal commitment and smaller capacity purchases.

In the infrastructure market overall, we believe that we will see continued, but cautious, capital equipment spending levels by the operators. We believe that some of the products Openwave and our competitors sell will continue to be viewed by operators as necessary costs that will maintain, but not grow, monthly ARPU. Other Openwave products and those of our competitors are being viewed as a source for driving revenue by increasing and catering to the needs of mobile internet subscribers.

Selected customer and product highlights during the quarter ended September 30, 2010 include:

•

This past quarter we signed a deal with a deal with a Tier 1 operator in Japan to route all of their IP traffic through Integra. Their decision to flow all IP traffic through Integra was based upon the value of mediating directly in the data path. Openwave^® Integra acts as a central control point for traffic management and can enable operators to more efficiently control their networks and better leverage subscriber data to create new monetization opportunities.

•

Building upon our initial success last year with Bouygues Telecom, a leading French mobile operator, we signed a new agreement with Bouygues Telecom for our next-generation IP traffic mediation solution which combines our powerful workflow engine with a flexible policy management system. The solution gives Bouygues the ability to enrich the user experience and manage their network more efficiently by enabling them to potentially offer a variety of tiered subscriber data plans that reflect actual usage.

•

During the quarter we announced via press release that Telefónica España, a leading European mobile operator, selected Openwave^® Integra, a next generation traffic mediation and policy management solution designed to allow Telefónica to effectively manage, monitor and monetize mobile traffic. Telefónica chose to upgrade to Integra from Openwave^®’s Mobile Access Gateway (MAG) to accommodate mobile data traffic that has increased for the operator by nearly 80 percent since calendar year 2009.

•

We are seeing uptake in our media and web optimization trial program. As of October 28, 2010, we have 34 service providers who have completed or are committed to an optimization trial with Openwave. These trials are allowing our current and prospective customers to witness firsthand that they can maximize bandwidth and reduce costs with our video optimization solution, without degrading the user experience. We have completed a total of 14 trials, 8 of which were completed during the first quarter of fiscal 2011.

•

We began to execute on our program to monetize our intellectual property portfolio. Since Openwave’s inception the company has developed or acquired an intellectual property library containing systems and methods for connecting mobile devices to the Internet.

Critical Accounting Policies and Judgments

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

•

Revenue recognition;

•

Allowance for doubtful accounts;

•

Impairment assessment of goodwill and identifiable intangible assets;

•

Stock-based compensation;

•

Valuation of investments; and

•

Restructuring-related assessments.

Revenue Recognition

With the exception of the adoption of several accounting pronouncements related to revenue recognition, discussed in Note 1 in the Notes to the condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates since our fiscal year end on June 30, 2010. 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

During the first quarter of fiscal 2011, we entered into a license agreement with a competitor whereby we licensed method claim rights to certain of our patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010 through the life of the patents. As part of our strategy for fiscal 2011 and beyond, we intend to seek monetization opportunities for our intellectual property. This could include licensing our patents as well as seeking damages for past infringements. However, there can be no guarantee that our patent licensing or enforcement efforts will be successful. Further, effectively policing and enforcing our intellectual property is time consuming and costly.

Summary of Operating Results

Three Months Ended September 30, 2010 and 2009

Revenues

We generate four different types of revenues: license revenues are primarily associated with the licensing of our software products to communication service providers; maintenance and support revenues are derived from providing support services to communication service providers; services revenues are primarily a result of providing deployment and integration consulting services to communication service providers; and patents revenues are derived from licensing our intellectual property. Service revenues may include a limited amount of packaged solution elements which may be comprised of our software licenses, professional services, third-party software and hardware.

The majority of our revenues have been from a limited number of customers and our sales are concentrated in a single industry segment. During the periods noted below we had two significant customers, as shown in the following table:


	% of Total Revenue Three Months Ended September 30,
	2010			2009
Customer:
Sprint Nextel		21	%		39	%
AT&T		4	%		10	%

We derived a significant portion of our revenues from sales to U.S. based customers during the three months ended September 30, 2010 and 2009, which itself primarily consists of sales to Sprint Nextel and AT&T as reflected immediately above. Although we intend to broaden our markets, there can be no assurance that this objective will be achieved.

The following table presents key revenue information (dollars in thousands):


	Three Months Ended September 30,						Percent Change
	2010			2009			Percent Change
Revenues:
License	$	12,332		$	10,425			18	%
Maintenance and support		13,993			15,798			-11	%
Services		11,203			23,619			-53	%
Patents		4,000			—			100	%

Total Revenues	$	41,528		$	49,842			-17	%

Percent of revenues:
License		30	%		21	%
Maintenance and support		33	%		32	%
Services		27	%		47	%
Patents		10	%		—

Total Revenues		100	%		100	%

License Revenues

License revenues increased by 18% during the three months ended September 30, 2010 as compared with the corresponding period of the prior year. The increase in license revenues is indicative of the variability in revenue recognition of current and prior bookings, and is primarily related to an unusually low amount of license revenue in the prior year period in which certain large projects contributed primarily to services revenue as opposed to a mix of both services and license revenue.

Maintenance and Support Revenues

Maintenance and support revenues decreased by 11% during the three months ended September 30, 2010, as compared with the corresponding periods of the prior year. The decrease in the three months ended September 30, 2010, was primarily a result of non-renewals in some cases, as a large customer upgraded to our new platform technology and therefore reduced its maintenance requirements.

Services Revenues

Services revenue decreased by 53% for the three months ended September 30, 2010, as compared with the corresponding period of the prior year. The decrease in the three months ended September 30, 2010, was primarily due to the completion of various projects since the prior year period.

Patents Revenues

During the first quarter of fiscal 2011, we entered into a license agreement with a competitor whereby we licensed rights to certain of our patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010.

Other Key Revenue Metrics

The other key metrics we utilize for purposes of making operating decisions and assessing financial performance include bookings and backlog. 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 under these arrangements. Several of our bookings include the ability for customers to cancel licenses, services or maintenance. Cancellations of bookings from prior quarters, if any, are treated as a reduction in backlog. For the first quarter of fiscal 2011, bookings were approximately $42.4 million, down $4.9 million, or 10%, from approximately $47.3 million for the first quarter of fiscal 2010. Backlog was approximately $173.6 million as of September 30, 2010, down from $192.5 million as of September 30, 2009. Bookings related to royalty or usage arrangements are recognized concurrently with the related revenue and therefore do not impact backlog. Revenue resulting from bookings is generally recognized over the subsequent 12 to 18 months, in accordance with our revenue recognition policy.

Cost of Revenues

The following table presents cost of revenues in dollars, as well as gross margin, by revenue type (dollars in thousands):


	Three Months Ended September 30,				Percent Change
	2010		2009		Percent Change
Cost of revenues:
License	$	439	$	639		-31	%
Maintenance and support		4,152		4,327		-4	%
Services		8,887		17,773		-50	%

Total Cost of Revenues	$	13,478	$	22,739		-41	%


	Three Months Ended September 30,
	2010			2009
Gross margin per related revenue category:
License		96	%		94	%
Maintenance and support		70	%		73	%
Services		21	%		25	%
Patents		100	%		n/a
Total Gross Margin		68	%		54	%

Cost of License Revenues

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

Costs of license revenues decreased by 31% during the three months ended September 30, 2010, compared with the corresponding period of the prior year. The decrease in cost of license revenues relates to the mix of licenses sold, whereby fewer licenses with third-party royalties were sold during the three months ended September 30, 2010 as compared with the corresponding period of the prior year.

Cost of Maintenance and Support Revenues

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

Cost of maintenance and support decreased by 4% during the three months ended September 30, 2010, as compared with the corresponding period of the prior year. The decrease in cost of maintenance and support revenues is primarily related to lower contingent worker costs in the current quarter due to the decline in maintenance and support revenues.

Cost of Services Revenues

Cost of services revenues consist of compensation and independent consultant costs for personnel engaged in performing professional services, hardware purchased for resale, and related overhead.

Cost of services decreased by 50% during the three months ended September 30, 2010, as compared with the corresponding period of the prior year. This decrease is primarily in third-party costs and is in-line with the decrease in services revenue of 53% during the same period.

Cost of Patents Revenues

Openwave has invested in and patented certain intellectual property for the mobile internet industry. The administrative cost of filing these patents has not been material. The cost of creating the intellectual property has been reflected in research and development costs over the years as incurred, with the primary purpose of developing intellectual property for sale in the form of enterprise software. Additionally, we recently entered into a significant contract to license the use of our patents to one customer in the quarter ended September 30, 2010 as described above. Contract negotiation costs on all contracts are primarily incurred by our legal department and are reflected in general and administrative costs as incurred. As such, the gross margin on patents is 100% as any direct or indirect associated costs have been expensed as incurred in operating expenses.

Operating Expenses

The following table represents operating expenses for the three months ended September 30, 2010 and 2009, respectively (dollars in thousands):


	Three Months Ended September 30,						Percent Change
	2010			2009			Percent Change
Operating expenses:
Research and development	$	11,430		$	9,864			16	%
Sales and marketing		10,821			10,711			1	%
General and administrative		6,612			7,925			-17	%
Restructuring and other related costs		708			422			68	%

Total Operating Expenses	$	29,571		$	28,922			2	%

Percent of Revenues:
Research and development		28	%		20	%
Sales and marketing		26	%		21	%
General and administrative		16	%		16	%

Research and Development Expenses

Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development. We believe that investments in research and development, including recruiting and hiring of software developers, are critical to remain competitive in the marketplace and directly relate to continued development of new and enhanced products.

During the three months ended September 30, 2010, research and development costs increased 16% as compared with the corresponding period in the prior year. This increase is attributable to an increase of approximately $1.4 million in contingent worker and consulting expense, as we increased spending on developing and enhancing products.

Sales and Marketing Expenses

Sales and marketing expenses include salary and benefit expenses, sales commissions, travel expenses, and related facility costs for our sales and marketing personnel, 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 September 30, 2010, sales and marketing costs remained consistent, as compared with the corresponding period of the prior year.

General and Administrative Expenses

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 September 30, 2010, general and administrative costs decreased 17% compared with the corresponding period in the prior year. This decrease is primarily attributed to a decline of $0.5 million in professional fees due to lower audit and legal costs, and a $0.5 million decline in facilities related costs associated with certain assets having become fully depreciated from the prior year.

Restructuring and Other Related Costs

Restructuring and other related costs for the three months ended September 30, 2010, increased by 68% over the same period in the prior year. This increase is primarily attributed to a revision to the estimated sublease terms associated with a facility that was exited under a restructuring plan implemented in fiscal year 2009, which resulted in an additional restructuring charge of $0.4 million in the fiscal 2011 quarter with no such comparable charge in the prior year’s period.

Refer to Note 9 in the notes to the condensed consolidated financial statements for more information.

Amortization of Intangible Assets and Goodwill Impairment

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


	Three Months Ended September 30,
	2010		2009
Developed and core technology	$	409	$	409
Customer contracts—support		11		11

Total amortization of intangible assets		420		420

Amortization in the first quarter of fiscal 2011 was consistent with the prior year’s period.

Amortization of developed and core technology and customer contracts for licenses is included in cost of license revenue in our condensed consolidated statements of operations. These assets are being amortized over an average useful life of four years.

Amortization of acquired customer support contracts is included in Cost of revenues—Maintenance and support. These assets are being amortized over an approximate useful life of three years.

Interest Income

Interest income was approximately $0.2 million for the three months ended September 30, 2010, as compared with $0.3 million for the corresponding period of the prior year. The decrease in interest income is primarily attributed to lower interest rates.

Interest Expense

Interest expense was approximately $0.1 million for both the three months ended September 30, 2010 and 2009. The majority of our interest expense relates to the line of credit facility entered into during the third quarter of fiscal 2009.

Other Expense, net

Other expense, net was approximately $40,000 during the three months ended September 30, 2010, and $1.4 million during the corresponding period of the prior year. Other expense, net for the three months ended September 30, 2009 includes other-than-temporary impairments of $1.5 million recorded on some investments, with no such comparable charges in the current year’s period. The remaining amounts primarily relate to foreign exchange gains and losses on foreign denominated assets and liabilities.

Income Taxes

Income tax expense consisted of foreign withholding tax, foreign corporate tax and foreign deferred 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 our quarterly effective tax rate.

The increase in income tax expense for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, is the result of increased foreign withholding taxes during the three months ended September 30, 2010 associated with the increase in international revenues.

In light of our history of operating losses we continue to maintain a full valuation allowance for our U.S. federal and state deferred tax assets. We intend to maintain this valuation allowance until there is sufficient evidence to conclude that it is more likely than not that the federal and state deferred tax assets will be realized. As of September 30, 2010, we have foreign deferred tax assets recorded of approximately $3.0 million in selected countries based upon our conclusion that it is more likely than not that the foreign subsidiaries in the respective countries will earn future taxable profits enabling the realization of their respective deferred tax assets. As of September 30, 2010, we have approximately $0.2 million of deferred tax liabilities recorded with respect to acquisitions for which the amortization expense of acquired intangibles is not deductible for tax purposes.

Discontinued Operations

During fiscal 2008, we sold our Client operations to Purple Labs, a private company based in Chambéry, France. During the first quarter of fiscal 2011, $2.0 million of the escrowed funds associated with the sale was distributed to Myriad AG (formerly Purple Labs) and the remaining $2.2 million was released to us, and was recorded as an additional $2.2 million gain on sale of discontinued operation in the condensed consolidated statement of operations.

On December 31, 2007, we sold Musiwave to Microsoft Corporation (“Microsoft”). During the first quarter of fiscal 2010, the escrowed funds associated with the sale were distributed, resulting in a gain on sale of discontinued operations of $4.5 million.

Operating Lease Obligations and Contractual Obligations

There has been no material change to our contractual obligations during the first three months of fiscal year 2011. As such, see our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 for a description of our facility leases and Note 9 in the notes to the condensed consolidated financial statements. We currently have subleased a portion of our restructured facilities which will generate contractual sublease income in aggregate of approximately $17.0 million, resulting in a net future obligation on these properties of approximately $41.0 million through our fiscal year 2013. The decrease in our liability for restructured facilities since the fiscal year ended June 30, 2010, relates primarily to payments made in the normal course of business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Liquidity and Capital Resources

Working Capital and Cash Flows

The following table presents selected financial information and statistics as of and for the three months ended September 30, 2010 and June 30, 2010 (dollars in thousands):


	September 30, 2010		June 30, 2010		Percent Change
Working capital	$	80,968	$	79,822		1	%
Cash and cash investments:
Cash and cash equivalents	$	60,286	$	60,935		-1	%
Short-term investments		45,395		45,211		0	%
Long-term investments		11,444		12,865		-11	%
Restricted cash and investments		357		357		0	%

Total cash and cash investments	$	117,482	$	119,368		-2	%


	Three Months Ended September 30,
	2010			2009
Cash used for operating activities	$	(2,865	)	$	(8,789	)
Cash provided by investing activities	$	2,146		$	3,628
Cash provided by financing activities	$	70		$	81

We have obtained a majority of our cash and investments through public offerings of common stock, including a common stock offering in December 2005 which raised $277.8 million in net proceeds. In fiscal 2008, we sold Musiwave and our Client operations, resulting in $56.0 million of proceeds in fiscal 2008 and $11.7 million in fiscal 2009. We also entered into a $40.0 million revolving credit facility on January 23, 2009, which we have amended several times, which has a maturity date of January 23, 2012.

As of September 30, 2010 and June 30, 2010, we had letters of credit outstanding against the revolving credit facility totaling $18.1 million and $17.9 million, respectively, reducing the available borrowings on the revolving credit

facility. The revolving credit facility requires a monthly borrowing base calculation to determine the amount of the revolving credit facility available for us to borrow (“Borrowing Base”). The Borrowing Base calculation is $30.0 million plus 75% of accounts receivables defined as eligible in the credit agreement. As of September 30, 2010, the Borrowing Base was $37.8 million and the total available for us to borrow on the revolving credit facility was $19.7 million, which is the difference between the Borrowing Base calculation of $37.8 million and the amount of outstanding letters of credit amount of $18.1 million. As of June 30, 2010, the Borrowing Base was $35.4 million and the total available for us to borrow on the revolving credit facility was $17.5 million, which is the difference between the Borrowing Base calculation of $35.4 million and the amount of outstanding letters of credit amount of $17.9 million. The revolving credit line is secured by a blanket lien on all of our assets and contains certain financial and reporting covenants customary to these types of credit facilities agreements which we are required to satisfy as a condition of the agreement. In particular, the revolving credit facility requires that we meet certain minimum four quarter trailing EBITDA amounts, as well as meet a minimum monthly liquidity ratio. In addition, the revolving credit facility requires us to provide to the bank annual financial projections, promptly report any material legal actions, and timely pay material taxes and file all required tax returns and reports. Further, without the bank’s consent, we cannot take certain material actions, such as change any material line of business, sell our business, acquire other entities, incur liens, make capital expenditures beyond a certain threshold, or engage in transactions with affiliates. As of September 30, 2010, we were in compliance with all debt covenants.

While we believe that our current working capital and anticipated cash flows from operations, together with amounts available to us under our credit facility, 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, 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 meantime, we will continue to manage our cash and investment portfolio in a manner designed to facilitate adequate cash and cash equivalents to fund our operations as well as future acquisitions, if any.

Working capital

Our working capital, defined as current assets less current liabilities, increased by approximately $1.1 million, or 1%, from June 30, 2010 to September 30, 2010. The increase in working capital balances is primarily attributed to the $2.6 million increase in the net accounts receivable balance, which was a result of timing differences in certain billings. Additionally, we experienced a $1.2 million increase in prepaid and other costs which is a result of the timing of hardware purchases on behalf of customers. Offsetting these working capital increases was an increase in the current portion of deferred revenue of $2.8 million, which was a result of some large maintenance renewal billings during the first quarter of fiscal 2011.

Cash used for operating activities

Cash used for operating activities was $2.9 million during the three months ended September 30, 2010. This use of cash primarily represents $3.4 million of payments on restructuring plans and a $2.4 million increase in accounts receivable, offset in part by an increase of $2.7 million in deferred revenue, each for the reasons described above under “Working capital.”

Cash provided by investing activities

Net cash provided by investing activities during the three months ended September 30, 2010 was $2.2 million, which primarily was due to the $2.2 million payment received from the release of escrowed funds related to the sale of the Client operations.

Cash flows provided by financing activities

Net cash provided by financing activities during the three months ended September 30, 2010 was $70,000, from the exercise of stock options during the period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

(a) Foreign Currency Risk

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 accounting hedges and, accordingly, we adjust these instruments to fair value through earnings in the period of change in their fair value. Net foreign exchange transaction losses included in Other expense, net in the accompanying condensed consolidated statements of operations totaled $40,000 for the three months ended September 30, 2010. As of September 30, 2010, we have the following forward contracts (notional amounts in thousands):


Currency	Notional Amount		Foreign Currency per USD		Date of Maturity
AUD		1,300		1.04		10/29/2010
CAD		1,200		1.03		10/29/2010
EUR		825		0.74		10/29/2010
JPY		265,000		83.80		10/29/2010

As of September 30, 2010, the nominal value multiplied by the USD exchange rate of these forward contracts was $6.7 million. Our mark-to-market net unrealized gain on these contracts as of September 30, 2010 was $25,000.

In comparison, as of June 30, 2010, we had the following forward contracts (in thousands):


Currency	Notional Amount		Foreign Currency per USD		Date of Maturity
AUD		3,300		1.15		7/30/2010
CAD		1,200		1.04		7/30/2010
EUR		1,300		0.81		7/30/2010
JPY		180,000		89.15		7/30/2010

As of June 30, 2010, the nominal value multiplied by the USD exchange rate of these forward contracts was $7.6 million. Our mark-to-market net unrealized gain on these contracts as of June 30, 2010 was $0.1 million.

(b) Interest Rate Risk

As of September 30, 2010, we had cash and cash equivalents, short-term and long-term investments, and restricted cash and investments of $117.5 million compared to $119.4 million at June 30, 2010. Our exposure to market risks

for changes in interest rates relates primarily to money market accounts, certificates of deposit, corporate bonds, government securities, and auction rate securities. We place our investments with high credit quality issuers that have a rating by Moody’s of A2 or higher and Standard & Poors of A 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 are classified as available-for-sale and considered to be long-term investments.

The following is a chart of the principal amounts of short-term investments and long-term investments by expected maturity at September 30, 2010 (in thousands):


	Expected maturity for the year ending June 30,							Cost Value		Fair Value
	2011		2012		Thereafter			September 30, 2010 Total		September 30, 2010 Total
U.S. Government Agencies	$	15,372	$	3,162	$	—		$	18,534	$	18,534
Certificates of Deposit		940		—		—			940		940
Commercial Paper		7,343		—		—			7,343		7,343
Corporate Bonds		19,571		2,471		169			22,211		22,342
Auction Rate Securities		—		—		11,069			11,069		9,279

	$	43,226	$	5,633	$	11,238		$	60,097	$	58,438

Weighted-average interest rate						0.8	%

Additionally, we had $0.4 million of restricted investments that were included within long-term restricted cash and investments on the condensed consolidated balance sheet as of September 30, 2010. $0.2 million of the restricted investments comprised a certificate of deposit to collateralize letters of credit for facility leases and $0.2 million comprised a restricted investment to secure a warranty bond pursuant to a customer contract. The weighted average interest rate on our restricted investments was 0.3% at September 30, 2010. There have been no significant changes in risk exposure since September 30, 2010.

In comparison, the following is a table of the principal amounts of short-term investments and long-term investments by expected maturity at June 30, 2010 (in thousands):


	Expected maturity for the year ending June 30,							Cost Value		Fair Value
	2011		2012			Thereafter		June 30, 2010 Total		June 30, 2010 Total
U.S. Government Agencies	$	16,739	$	1,355		$	—	$	18,094	$	18,106
Certificates of Deposit		1,930		—			—		1,930		1,930
Commercial Paper		8,094		—			—		8,094		8,094
Corporate Bonds		20,482		1,962			169		22,613		22,647
Auction Rate Securities		—		—			11,069		11,069		9,279

Total	$	47,245	$	3,317		$	11,238	$	61,800	$	60,056

Weighted-average interest rate				1.0	%

Additionally, we had $0.4 million of restricted investments that were included within long term restricted cash and investments in the consolidated balance sheet as of June 30, 2010. $0.2 million comprised a restricted investment to secure a warranty bond pursuant to a customer contract. Additionally, $0.2 million of the restricted investments comprised a certificate of deposit to collateralize letters of credit for facility leases. The weighted average interest rate on our restricted investments was 0.3% at June 30, 2010.

As of September 30, 2010, $9.3 million in ARS, recorded in long-term investments on the condensed consolidated balance sheet, were considered illiquid based upon recent auction results, which remained unchanged from June 30, 2010. These ARS were issued by four different entities and are held by two investment firms on our behalf. Three of these securities are “Triple X” structured obligations of special purpose reinsurance entities associated with life insurance companies. One ARS is related to federal education student loan programs. We estimated the fair value of these auction rate securities based on probabilities of potential scenarios: 1) successful auction/early redemption, 2) failing auctions until maturity or 3) default and the estimated cash flows for each scenario. Other factors were considered, such as the value of the investments held by the issuer and the financial condition and credit ratings of the issuer, insurers, and parent companies as applicable. We recorded a $1.5 million other-than-temporary loss in the condensed consolidated statements of operations during the three months ended September 30, 2009 related to these securities. As of September 30, 2010 these instruments were all rated A, A-, and BBB by Standard and Poor’s and Aaa by Moody’s and all of the $12.5 million par value of these illiquid investments are insured against defaults of principal and interest by third party insurance companies.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of September 30, 2010. Based on their evaluation as of September 30, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Openwave have been detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our 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 three months ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II Other Information

Item 1. Legal Proceedings

See discussion of Litigation in Note 8 to the condensed consolidated financial statements included in Part I, Item 1 of this Report, which disclosure is incorporated by reference here. These matters were also discussed in Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Item 1A. Risk Factors

The following risks factors were set forth in Part I, Item 1A, “Risk Factors” in Openwave’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, which could materially affect Openwave’s business, financial condition or future results. These risks are not the only risks facing Openwave; additional risks and uncertainties may not be currently known to or may be deemed immaterial by management but could materially adversely affect Openwave’s business, financial condition, and/or operating results. These risks have not changed substantively from those set forth in Openwave’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Risks Related to Our Business

We are in a product transition phase and we may not be able to adequately develop, market or sell new products.

Revenues from our legacy products are decreasing, and we are in the process of selling our customers a migration to Openwave’s next generation software platforms and tools. The successful customer migration onto our new platforms is critical to our business, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. We also intend to continue to develop new products and services. New products or services may be delayed, and new products may not be accepted by the market, or may be accepted for a shorter period than anticipated. New product offerings may not properly integrate into existing or anticipated platforms, or meet existing or anticipated demand and the failure of these offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, or reputation. Our sales and operating results may be adversely affected if we are unable to bring new products to market, if customers delay purchases or if acceptance of the new products is slower than expected or to a smaller degree than expected, if at all.

We rely upon a small number of customers for a significant portion of our revenues, and the failure to retain and expand our relationships with these customers could adversely affect our business.

Our customer base consists of a limited number of large communications service providers, which makes us significantly dependent on their plans and the success of their products. Our success, in turn, 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. Moreover, consolidation among these service providers further limits the existing and potential pool of customers for us. Revenue recognized from arrangements with Sprint-Nextel and AT&T accounted for approximately 31% and 8%, respectively, of our total revenues during the fiscal year ended June 30, 2010, and approximately 21% and 4%, respectively, of our total revenues during the fiscal quarter ended September 30, 2010. By virtue of their size and the significant portion of our revenue that we derive from these customers, these customers are able to exert significant influence in the negotiation of our commercial arrangements and the conduct of our business with them. If we are unable to retain and expand our business with key customers on favorable terms, our business and operating results will be adversely affected.

Consolidation of communication service providers may impair our ability to attract new customers and negotiate favorable business terms.

The telecommunications industry is rapidly evolving and highly competitive. These factors combined with recent poor economic conditions, resulted in certain communications services providers having poor operating results. As a result, some of these communications service providers have consolidated or are working to consolidate or otherwise cease operations. If consolidation continues to occur, we will have a smaller number of current customers as well as a

smaller number of potential customers in which to sell our products and services. Further, our ability to negotiate favorable terms with the communications service providers could be impaired, which could increase our expenses and harm our operating results.

We have a history of losses and we may not be able to achieve or maintain consistent profitability.

We have a history of losses and may not be able to maintain consistent profitability. Except for fiscal 2006, we have incurred annual net losses since our inception. As of September 30, 2010, we had an accumulated deficit of approximately $3.1 billion, which includes approximately $2.1 billion of goodwill amortization and impairment. We expect to continue to spend significant amounts to develop, enhance or acquire products, services and technologies and to enhance sales and operational capabilities. 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.

Our industry changes rapidly as a result of technological and product developments, which may quickly render our products and services less desirable or even obsolete. If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating results may be materially adversely affected.

The industry in which we operate is subject to rapid technological change. The introduction of new technologies in the market, including the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue to have a profound effect on competitive conditions in our market. 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.

More generally, while in the past we have primarily provided specific component sales, in the future we intend to provide more integrated and comprehensive software solutions for our customers. We also intend to develop and license new products and to enter into new product markets. We may not be able to develop and license new products in accordance with our expectations, or at all, our new products may not be adopted by communication service providers, or we may be unable to succeed in new product markets which, in any case, would have a material adverse affect on our business and operating results.

Because of the rapid technological changes of our industry, our historic product, service, and enhancement offerings may have a shorter life than anticipated. Revenue from such products may decline faster than anticipated, and if our new products, services and enhancements are not accepted by our customers or the market as anticipated, if at all, our business and operating results may be materially and adversely affected.

Our 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, communications service providers have been relatively slow to implement new, complex services. In addition, communications service providers have encountered greater customer demands to support Internet-based services than they have in the past. We have limited or no control over the pace at which communications service providers implement these new Internet-based services. For instance, the Federal Communications Commission, or FCC, proposes to adopt so-called “net neutrality” rules that it describes as intended to preserve the openness of the Internet. The proposed rules, depending on whether or how they are structured, could limit the ways that a broadband Internet access service provider could manage its network and the services it could provide over the network. New rules, if adopted, could cause a decrease in data traffic, or could cause some of our domestic customers to reduce their perception of the value of some of our mediation offerings, either of which could lessen the demand for our products and services. The failure of communications service providers to introduce and support Internet-based services utilizing our products in a timely and effective manner could have a material adverse effect on our business and operating results.

Our business depends on continued investment and improvement in communication networks by our customers.

Many of our customers and other communication service providers continue to make major investments in next 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 out such networks successfully, or determine to continue to increase network capacity and support more complex applications by investment in additional hardware infrastructure rather than software solutions such as ours that optimize the use of existing hardware infrastructure, there could be less demand for our products and services than we expect, which could adversely affect our business and operating results.

In addition, the communications industry has experienced significant fluctuations in capital expenditures and we have recently experienced significant revenue declines from historical peaks. If capital spending and technology purchasing by communication service providers does not continue to include investments in infrastructure software, our revenue would likely decline substantially.

Our market is highly competitive and our inability to compete successfully could adversely affect 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 resources have enabled them to aggressively price, finance and bundle their product offerings to attempt to gain market adoption or to increase market share. If our competitors consolidate, then they will be even larger, and may be able to compete more effectively against us than they currently do. 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 of our products and services, change our pricing models, or offer other favorable terms in order to compete successfully, which would likely reduce our margins and adversely affect operating results.

Although our efforts, on occasion, have been complicated by the marketing efforts of our competitors, we expect that we will continue to compete primarily on the basis of quality, breadth of product and service offerings, functionality, price, strength of customer relationships and time to market.

Our sales cycles are long, subjecting us to the loss or deferral of anticipated orders and related revenue.

Our sales cycle is generally long, often in excess of six months, and unpredictable due to the lengthy evaluation and customer approval process for our products, including internal reviews and capital expenditure approvals. Moreover, the evolving nature of the market for data services via mobile devices may lead prospective customers to postpone their purchasing decisions pending resolution of standards or adoption of technology by others. Accordingly, we may not close sales as anticipated during a given quarter which may lead to a shortfall in revenue or bookings anticipated by us or securities analysts or investors.

Our business is subject to the risks of international operations since we depend on international sales, and any decrease in international sales would adversely affect our operating results.

International sales accounted for approximately 54%, 51% and 46% of our total revenues for the quarter ended September 30, 2010 and fiscal year’s ended June 30, 2010 and 2009, respectively. We currently maintain offices outside of the United States and have sales, engineering and professional services personnel in several countries. Approximately one-half of our employees are located internationally, with 25% of our employees based in our facilities in Belfast, Northern Ireland. We have limited experience operating in foreign jurisdictions and are expanding our international operations into areas in which we have little or no operating history. Our ability to manage a global organization is difficult, time consuming and expensive and is subject to a number of risks including, but not limited to:

•

Localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;

•

Lack of familiarity with and unexpected changes in foreign regulatory requirements;

•

Longer accounts receivables payment cycles and difficulties in collecting accounts receivables;

•

Difficulties in managing and staffing international operations;

•

Currency exchange rate fluctuations and our ability to manage these fluctuations under our foreign exchange hedging policy;

•

Potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;

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Dependence on certain third parties, including channel partners with whom we have limited experience;

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Import and export requirements that may prevent us from shipping products or providing services to a particular market and may increase our operating costs;

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Political, social and economic instability abroad, terrorist attacks and security concerns in general; and

•

Reduced or varied protection for intellectual property rights in some countries.

Operating in international markets requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Changes in foreign currency exchange rates could negatively affect our operating results.

Our primary exposure to movements in foreign currency exchange rates relate to non-U.S. dollar denominated sales in Europe, Japan, Australia, Canada, and certain parts of Asia, as well as non-U.S. dollar denominated operating expenses incurred throughout the world. Weakening of foreign currencies relative to the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally will lead us to raise international pricing, potentially reducing demand for our products. In some circumstances, due to competition or other reasons, we may decide not to raise local prices to the full extent of the dollar’s strengthening, or at all, which would adversely affect the U.S. dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies, while generally beneficial to our foreign currency-denominated sales and earnings, could cause us to reduce international pricing, thereby limiting the benefit; as strengthening of foreign currencies may also increase our cost of product components denominated in those currencies.

We have used derivative instruments, such as foreign exchange forward and option positions, to hedge certain exposures to fluctuations in foreign currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Margins on sales of our products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. Accordingly, changes in foreign currency exchange rates relative to the U.S. Dollar could negatively affect our operating results.

Our customer contracts lack uniformity and often are particularly complex, which subjects us to business and other risks.

Our customers are typically large communications service providers. Their substantial purchasing power and negotiating leverage limits our ability to negotiate uniform business terms. As a result, we typically negotiate contracts on a customer-by-customer basis and sometimes determine to accept contract terms not favorable to us in order to close a transaction, including indemnity, limitation of liability, refund, penalty or other terms that expose us to significant risk. We may need to provide indemnification relating to third party components that we provide, and we may or may not have sufficient indemnification provisions from the third parties to fully cover for this risk. The lack of uniformity and the complexity of the terms of these contracts may also create difficulties with respect to ensuring timely and accurate accounting and billing under these contracts. If we are unable to effectively negotiate, enforce and accurately or timely account and bill for contracts with our customers, our business and operating results may be adversely affected.

We rely on estimates to determine arrangement fee revenue recognition for a particular reporting period. If our estimates change, or our customers do not accept deliverables, future expected revenues could adversely change.

We apply the percentage-of-completion method as a primary accounting method to account for revenue from arrangements subject to contract accounting. Applying the percentage-of-completion method requires that we estimate progress on our professional service revenues for a particular period. If, in a particular period, our estimates to project completion change or we estimate project overruns, revenue recognition for such projects in the period may be less than expected or even negative, which could cause us to fail to realize anticipated operating results in a given period. Additionally, a portion of the payments under some of our professional services arrangements are based on customer acceptance of deliverables. If a customer fails to accept the applicable deliverable, we may not be able to recognize the related revenue or receive payment for work that we have already completed, which could adversely affect our business and operating results.

Demand for our technology depends in part on operators maintaining a central role in the mobile value chain, and not being circumvented by emerging players who offer services directly to subscribers.

Our products and services are currently sold almost exclusively for use by mobile and broadband operators. As the industry moves to more open standards, services and applications have emerged from content providers that bypass the mobile and broadband operator and are sold directly to consumers. The threat of operators being disintermediated could have a negative impact to our business, if Openwave does not diversify its customer base beyond the operator community and if the consumer uptake of these new services dilutes operators’ customer relationship. For Openwave, the loss of operator control over the subscriber experience could threaten our ability to intermediate and add value, and ultimately, lessen demand for our products and services.

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

Our business strategy depends in part on forming or maintaining strategic alliances with other companies. We may not be able to form the alliances that are necessary 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. We may be unable to maintain existing relationships with other companies, to identify the best alliances for our business 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, our sales opportunities could deteriorate, which could have a material adverse effect on our business and operating results.

If our channel partners are unable to successfully market and sell our services to their customers, then our revenues and business may be adversely affected.

Historically, we have sold our products and services directly through our sales force. In the future, in addition to our direct sales efforts, we intend to sell our products and services indirectly through our channel partners which will enable us to bring our technologies to emerging markets. Our business will depend on the efforts and the success of these channel partners in marketing and selling our products and services in emerging markets and markets in which we have a limited presence. If our channel partners fail to market and sell our services effectively, our ability to grow our revenue could be reduced and our business may be harmed.

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

The software we develop and the associated professional services we offer are complex and must meet stringent technical requirements of our customers. We must develop our products quickly to keep pace with the rapidly changing Internet software and telecommunications markets. Our software products and services may 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. In addition, some of our customer contracts provide for penalties if we fail to meet specific milestones as well as a period during

which our products and services are subject to acceptance testing. Failure to achieve acceptance could result in a delay in, or inability to, receive payment. 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.

Our efforts to monetize our patents may not be successful and our technology could be misappropriated, which may lead to 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 just as essential to maintaining a technology leadership position. We also rely on trademark law to protect the value of our corporate brand and reputation. In addition, we have recently placed increased emphasis on monetizing our patents by pursuing patent licensing agreements. These efforts may not result in additional revenues, and may also result in counter-claims being raised by third parties.

Despite our efforts to license and protect our intellectual property and proprietary rights, unauthorized parties may copy or otherwise obtain and use our products, technology or trademarks. Effectively policing and enforcing our intellectual property is time consuming and costly, and the steps taken by us may not 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.

Our products may infringe the intellectual property rights of others, subjecting us to claims for infringement, payment of license royalties or other damages.

Our products or solutions, including third party elements, may be alleged to infringe the intellectual property rights of others, subjecting us to claims for infringement, payment of license royalties or other remedies. As the number of our products, solutions, and services increases and their features and content continue to expand, we may increasingly become subject to infringement and other intellectual property claims by third parties. From time to time, we and our customers have received and may receive in the future, offers to license or claims alleging infringement of intellectual property rights, or may become aware of certain third party patents that may relate to our products. For example, a number of parties have asserted to standards bodies such as OMA that they own intellectual property rights which may be essential for the implementation of specifications developed by those standards bodies. A number of our products are designed to conform to OMA specifications or those of other standards bodies, and have been, and may in the future be, subject to offers to license or claims of infringement on that basis by individuals, intellectual property licensing entities and other companies, including companies in the telecommunications field with greater financial resources and larger intellectual property portfolios than our own.

Additionally, our customer agreements require that we indemnify our customers for infringement of our intellectual property embedded in their products. In the past we have elected, and in the future we may elect, to take a license or otherwise settle claims of infringement at the request of our customers or otherwise. Any litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved, and the number of parties holding intellectual property within the wireless industry, increase the risks associated with intellectual property litigation. Moreover, patent litigation has increased due to the increased number of cases asserted by intellectual property licensing entities as well as increasing competition and overlap of product functionality in our markets. Royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Any infringement claim successfully asserted against us or against a customer for which we have an obligation to defend could result in costly litigation as well as the payment of substantial damages or an injunction.

We may be unable to effectively manage future growth, if any, that we may achieve.

As a result of our efforts to control costs through restructurings and otherwise, our ability to effectively manage and control any future growth may be limited. To manage any growth, our management must continue to improve our operational, information and financial systems, procedures and controls and expand, train, retain and manage our employees. If our systems, procedures and controls are inadequate to support our operations, any expansion could decrease or stop, and investors may lose confidence in our operations or financial results. If we are unable to manage growth effectively, our business and operating results could be adversely affected, and any failure to develop and maintain adequate internal controls could cause the trading price of our shares to decline substantially.

We may pursue acquisitions or investments in complementary technologies and businesses, which could harm our operating results and may disrupt our business.

In the future, we may pursue acquisitions of, or investments in, complementary technologies and businesses. Acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations, increase our operating costs and reduce the value to us of the acquired company. If we make acquisitions, we may not be able to integrate the acquired businesses, products or technologies into our existing business and products. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our management’s attention and require considerable cash outlays at the expense of our existing operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability.

Foreign acquisitions involve special risks, including those related to integration of operations across different cultures, languages, and legal systems, currency risks, and the particular economic, political, and regulatory risks associated with specific countries. In addition, we may incur significant transaction fees and expenses, including expenses for transactions that may not be consummated. In any event, as a result of future acquisitions, we might need to issue additional equity securities, spend our cash, or incur debt or assume significant liabilities, any of which could adversely affect our business 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.

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. The occurrence or perception of security breaches could harm our business, financial condition and operating results.

Natural or manmade disasters, business interruptions and health epidemics could delay our ability to receive or ship our products, or otherwise disrupt our business.

Our worldwide operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, health epidemics and other natural or manmade disasters or business interruptions. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our research and development activities, are located in Redwood City, California near major earthquake faults. The destruction of our facilities could harm our business. Although we have established a comprehensive disaster recovery plan, our back-up operations may be inadequate and our business interruption insurance may not be enough to compensate us for any losses that may occur. A significant business interruption could result in losses or damages and harm our business.

Our business in countries with a history of corruption and transactions with foreign governments, including with government owned or controlled wireless carriers, increases the risks associated with our international activities.

As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations, deal with carriers and make sales in countries known to experience corruption, particularly certain emerging countries in East Asia, Eastern Europe and Latin America, and further international expansion may involve more of these countries. Our activities in these countries create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws including the FCPA, even though these parties are not always subject to our control. We have attempted to implement safeguards to prevent these practices by our employees, consultants, sales agents and resellers. However, our existing safeguards and any future improvements may prove to be less than effective, and our employees, consultants, sales agents or distributors may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition.

Compliance with laws, rules and regulations relating to corporate governance and public disclosure may result in additional expenses.

Federal securities laws, rules and regulations, as well as NASDAQ rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their Chief Executive Officers, Chief Financial Officers and directors for securities law violations. These laws, rules and regulations and the interpretation of these requirements are evolving, and we are making investments to evaluate current practices and to continue to achieve compliance. As a result, our compliance programs have increased and will continue to increase general and administrative expenses and have diverted and will continue to divert management’s time and attention from revenue-generating activities. Further, in July 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act’) which includes various provisions requiring the Securities and Exchange Commission to adopt new rules and regulations with respect to enhanced investor protection, corporate governance and executive compensation. We expect the Dodd-Frank Act and the rules and regulations promulgated there under to increase our legal and financial compliance costs and to make some activities more time consuming and costly.

We face litigation risks that could have a material adverse effect on our company.

We may be the subject of private or government actions. For example, in the past we have been the subject of several shareholder derivative lawsuits relating out our past option grants and practices. Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives and an unfavorable outcome may have a material adverse effect on our business, financial condition and results of operations. Additionally, any amount that we may be required to pay to satisfy a judgment or settlement of litigation may not be covered by insurance. Under our charter and the indemnification agreements that we have entered into with our officers and directors, we are required to indemnify, and advance expenses to them in connection with their participation in proceedings arising out of their service to us. There can be no assurance that any of these payments will not be material.

Our investments in marketable securities are subject to market risks which may cause losses and affect the liquidity of these investments.

At June 30, 2010, and September 30, 2010, we held auction-rate securities with a fair market value of approximately $9.3 million and a par value of $12.5 million. Between September 30, 2008 and December 31, 2009, we determined

that the declines in the fair value of these investments were other-than-temporary and recorded impairment charges equal to $1.4 million, based on our estimate of fair value in our consolidated statement of operations for the corresponding quarters. If the global credit market continues to deteriorate and broker-dealers do not renew their support of auctions for auction-rate securities, our investment portfolio may continue to be impacted, and we could determine that some of these investments are further impaired. In addition, if we were to liquidate our position in these securities, the amount realized could be materially different than the estimated fair value amounts at which we are carrying these investments which could have a material adverse affect on our financial condition.

Adverse changes in general economic or political conditions could adversely affect our operating results.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical and economic conditions, conditions in the financial services markets, the overall demand for our products and services and general political and economic developments. A weakening of the global economy, or economic conditions in the United States or other key markets, could cause delays in and decreases in demand for our products. For example, there is increasing uncertainty about the direction and relative strength of the United States economy because of the various challenges that are currently affecting it. If the challenging economic conditions in the United States and other key countries persist or worsen, other customers may delay or reduce spending. This could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, results of operations and financial condition.

Our revolving credit facility with Silicon Valley Bank contains certain restrictive covenants that limit our discretion in the operation of our business, which could have a materially adverse effect on our business, financial condition and results of operations.

In January 2009, we entered into a $40.0 million secured revolving credit facility with Silicon Valley Bank, as subsequently amended, which contains numerous restrictive covenants that require us to comply with and maintain certain financial tests and ratios, thereby restricting our ability to:

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Incur debt;

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Incur liens;

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Redeem or prepay subordinated debt;

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Make acquisitions of businesses or entities to sell certain assets;

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Make investments, including loans, guarantees and advances;

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Make capital expenditures beyond a certain threshold;

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Engage in transactions with affiliates;

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Pay dividends or limit the amount of stock repurchases; and

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Enter into certain restrictive agreements

Our ability to comply with covenants contained in our credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

Our current credit agreement is secured by a pledge of all of our assets. If we were to default under our current credit agreement and were unable to obtain a waiver or an amendment for such a default, the lenders would have a right to foreclose on our assets in order to satisfy our obligations under the current credit agreement and could require us to put up cash collateral for any outstanding letter of credit balances. Any such action on the part of the lenders against us could have a materially adverse impact on our business, financial condition and results of operations.

We depend on recruiting and retaining key management and technical personnel with telecommunications and Internet software experience who 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 management and other employees. In particular, our future success depends in part on the continued service of many of our current employees, including key executives and key engineers and other technical employees. Competition for qualified personnel in the telecommunications, Internet software and Internet

messaging industries is significant, especially in the San Francisco Bay Area in which we are located. We believe that there are only a limited number of persons with the requisite skills to serve in many of our key positions, and it is generally 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 restructurings, any future restructurings, and our past stock performance. Competitors and others have in the past, and, may in the future, attempt to recruit our employees. In the event of turnover within key positions, integration of new employees will require additional time and resources, which could adversely affect our business plan. If we are unable to attract or retain qualified personnel, our business could be adversely affected.

Risks Related to Owning Our Common Stock

Our quarterly operating results may fluctuate significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

We expect our revenues and operating results to vary from quarter to quarter. As a consequence, our operating results in any single quarter may not meet the expectations of securities analysts and investors, which could cause the price of our common stock to decline. 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:

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delays in or cancellation of orders from key customers;

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

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

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changes in demand and purchasing patterns of our customers for our products;

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changes in our revenue mix among license, maintenance and support and professional services;

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restructuring or impairment charges we may take;

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revenue recognition and other accounting policies;

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potential slowdowns or quality deficiencies in the introduction of new telecommunication networks, technologies or handsets for which our solutions are designed;

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development of new relationships and penetration of new markets and maintenance and enhancement of existing relationships with customers and strategic partners;

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deferral of customer contracts in anticipation of product or service enhancements;

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timing of new governmental, statutory and industry association requirements;

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the relative mix of our North America and international engagements which typically carry lower margins;

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fluctuations in currency exchange rates; and

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industry and economic conditions, including competitive pressures.

Our customers often defer execution of our agreements until the last week of the quarter if they elect to purchase our products. Approximately 75%-80% of our quarterly bookings typically occur in the last month of a quarter and the

pattern for revenue generation during that month is normally not linear. Accordingly, we may not recognize revenue as anticipated during a given quarter when customers defer orders, delay the timing of our implementation services or ultimately elect not to purchase our products. Therefore, we could be in a position where we do not achieve our financial targets for a quarter and not determine this until very late in the quarter or after the quarter is over. As a result, our visibility into our revenue to be recognized for future periods is limited.

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 largely 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. In this regard, our bookings may not be indicative of revenue that will be recognized in current or subsequent periods. Due to the foregoing factors, we believe period-to-period comparisons of our historical operating results may be of limited use. In any event, we may be unable to meet our internal projections or the projections of securities analysts and investors. If we are unable to do so, we expect that, as in the past, the trading price of our stock may fall dramatically.

In addition, we have in the past and may continue to experience periodic variations in sales to our strategic customers and international markets. These periodic variations occur throughout the year and may lead to fluctuations in our quarterly operating results depending on the impact of any given market during that quarter and could lead to volatility in our stock price.

Provisions of our corporate documents and Delaware law may discourage an acquisition of our business, which could affect our stock price.

Our charter and bylaws may inhibit changes of control that are not approved by our Board of Directors. In particular, our certificate of incorporation includes provisions for a classified Board of Directors, authorizes the Board of Directors to issue preferred stock without stockholder approval, prohibit cumulative voting in director elections and prohibit stockholders from taking action by written consent. Further, our bylaws include provisions that prohibit stockholders from calling special meetings and require advance notice for stockholder proposals or nomination of directors. We are also subject to Section 203 of the Delaware General Corporation Law, which generally prevents a person who becomes the owner of 15 percent or more of the corporation’s outstanding voting stock from engaging in specified business combinations for three years unless specified conditions are satisfied. These provisions could have the effect of delaying or preventing changes in control or management.

Our stock price has been and is likely to continue to be volatile and you may not be able to resell shares of our common stock at or above the price you paid, if at all.

The trading price of our common stock has experienced wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this Annual Report. In addition, the stock market in general has, and the NASDAQ Global Market and technology companies in particular have, experienced extreme price and volume fluctuations. These trading prices and valuations may not be sustainable. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against companies that experienced such volatility. This litigation, if instituted against us, regardless of its outcome, could result in substantial costs and a diversion of our management’s attention and resources.

Item 6. Exhibits

See the Index to Exhibits which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated here by reference.

SIGNATURES

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

Date: November 4, 2010


OPENWAVE SYSTEMS INC.

By:		/s/ ANNE BRENNAN
		Anne Brennan Chief Financial Officer (Principal Financial and Chief Accounting Officer And Duly Authorized Officer)

INDEX TO EXHIBITS


Exhibit Number		Description

3.1		Restated Certificate of Incorporation of Openwave Systems Inc. (the “Company”), (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 7, 2010 (Commission No. 001-16703)).

3.2		Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2003 (Commission No. 001-16703)).

3.3		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2010 (Commission No. 001-16703)).

4.1		Form of the Company’s Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed August 28, 2003).

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.

Great Elm Capital Group, Inc. - FORM 10-Q - November 4, 2010

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