Great Elm Capital 10-Q 2002 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2002

OR

¨ 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.)

1400 Seaport Blvd.

Redwood City, California 94063

(Address of principal executive offices, including zip code)

(650) 480-8000

(Registrant’s telephone number, including area code)

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

As of April 30, 2002 there were 173,976,578 shares of the registrant’s Common Stock outstanding.

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

INDEX

PART I. FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001	3
	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2002 and 2001	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2002 and 2001	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitive and Qualitative Disclosures about Market Risks	38
PART II. Other Information
Item 1.	Legal Proceedings	39
Item 2.	Changes in Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Submission of Matters to a vote of Security Holders	41
Item 5.	Other Information	41
Item 6.	Exhibits and Reports on Form 8-k	42
SIGNATURE		43

2

PART I—FINANCIAL INFORMATION

Item 1.—Condensed Consolidated Financial Statements

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31, 2002			June 30, 2001
	(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	117,679		$	161,987
Short-term investments		85,955			186,506
Accounts receivable, net		110,574			153,701
Prepaid and other current assets		7,407			14,364
Total current assets		321,615			516,558
Property and equipment, net		83,168			98,582
Long-term and restricted cash and investments		132,392			41,873
Deposits and other assets		11,207			11,774
Goodwill and other intangible assets, net		438,169			1,056,928
	$	986,551		$	1,725,715
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portions of capital lease obligations and long-term debt	$	295		$	1,776
Accounts payable		7,225			20,600
Accrued liabilities		53,155			54,370
Restructuring reserve		13,881			—
Deferred revenue		53,868			90,262
Total current liabilities		128,424			167,008
Capital lease obligations and long-term debt, less current portion		—			754
Total liabilities		128,424			167,762
Commitments and contingencies
Stockholders’ equity:
Common stock		174			170
Additional paid-in capital		2,732,068			2,623,466
Deferred stock-based compensation		(9,735	)		(6,079	)
Treasury stock		(18,739	)		—
Accumulated other comprehensive loss		(373	)		(247	)
Notes receivable from stockholders		(589	)		(684	)
Accumulated deficit		(1,844,679	)		(1,058,673	)
Total stockholders’ equity		858,127			1,557,953
	$	986,551		$	1,725,715

See accompanying notes to condensed consolidated financial statements.

3

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,						Nine Months Ended March 31,
	2002			2001			2002			2001
	(In thousands, except per share data)
Revenue:
License	$	53,111		$	98,021		$	204,800		$	235,081
Maintenance and support services		19,200			15,891			57,899			39,734
Professional services		10,846			17,457			32,001			48,400
Total revenues		83,157			131,369			294,700			323,215
Cost of revenues:
License		1,315			4,334			7,985			16,186
Maintenance and support services		6,859			7,421			23,440			20,798
Professional services		7,232			12,435			20,355			30,755
Total cost of revenues		15,406			24,190			51,780			67,739
Gross profit		67,751			107,179			242,920			255,476
Operating expenses:
Research and development		31,063			37,628			104,817			96,228
Sales and marketing		37,863			37,769			125,747			104,762
General and administrative		11,082			16,645			43,650			39,673
Restructuring costs		238			—			34,362			—
Stock-based compensation*		2,898			1,405			12,307			7,641
Amortization and impairment of goodwill and other intangible assets		98,334			159,309			698,914			477,454
Accelerated amortization related to planned facility closings		—			—			1,931			—
Merger costs		—			234			570			79,799
Integration costs		—			5,522			—			9,051
Total operating expenses		181,478			258,512			1,022,298			814,608
Operating loss		(113,727	)		(151,333	)		(779,378	)		(599,132	)
Interest and other income, net		3,057			3,848			4,158			19,339
Loss before income taxes	��	(110,670	)		(147,485	)		(775,220	)		(539,793	)
Income taxes		5,006			3,672			10,786			8,010
Net loss	$	(115,676	)	$	(151,157	)	$	(786,006	)	$	(547,803	)
Basic and diluted net loss per share	$	(.67	)	$	(.91	)	$	(4.55	)	$	(3.34	)
Shares used in computing basic and diluted net loss per share		173,270			166,943			172,840			164,143
*   Stock-based compensation by category
Research and Development	$	1,645		$	1,199		$	7,290		$	5,220
Sales and Marketing		203			206			639			2,421
General and Administrative		1,050			—			4,378			—
	$	2,898		$	1,405		$	12,307		$	7,641

See accompanying notes to the condensed consolidated financial statements.

4

OPENWAVE SYSTEMS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended March 31,
	2002			2001
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(786,006	)	$	(547,803	)
Adjustments to reconcile net loss to net cash used for operating activities:
Loss on sale or disposal of assets		693			—
Depreciation and amortization		447,258			490,405
Amortization of stock-based compensation		11,922			3,680
Nonemployee stock-based compensation		263			1,539
Employee stock-based compensation		—			2,422
Stock-based compensation settled in cash		(2,548	)		(2,548	)
Provision for (recovery of) doubtful accounts		(1,900	)		6,587
Impairment of goodwill and other intangible assets		279,474			—
Write-down of nonmarketable equity securities		5,202			1,000
Changes in operating assets and liabilities:
Restructuring reserve		21,045			—
Accounts receivable		45,028			(46,856	)
Prepaid expenses and other assets		3,386			(2,843	)
Accounts payable		(13,475	)		(6,869	)
Accrued liabilities		(494	)		24,409
Deferred revenue		(36,394	)		(16,235	)
Net cash used for operating activities		(26,546	)		(93,112	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Initial security registration.		(497	)		—
Purchases of property and equipment		(18,444	)		(70,153	)
Restricted cash and investments		(1,649	)		—
Businesses acquired, net of cash received		2,298			(25,321	)
Investment in nonmarketable equity securities		(2,000	)		(4,464	)
Purchases of short-term investments		(76,988	)		(332,381	)
Proceeds from sales and maturities of short-term investments		177,550			540,987
Purchases of long-term investments		(104,145	)		—
Proceeds from sales and maturities of long-term investments		15,000			—
Net cash provided by (used for) investing activities		(8,875	)		108,668
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock		7,990			32,214
Net proceeds from put warrants		3,865			—
Repurchase of treasury stock		(18,739	)		—
Repayment of notes receivable from stockholders		95			344
Repayments of capital lease obligations and long-term debt		(2,235	)		(2,548	)
Net cash provided by (used for) financing activities		(9,024	)		30,010
Effect of exchange rate on cash and cash equivalents		137			(87	)
Net increase (decrease) in cash and cash equivalents		(44,308	)		45,479
Cash and cash equivalents at beginning of period		161,987			120,585
Cash and cash equivalents at end of period	$	117,679			166,064
Supplemental disclosures of cash flow information:
Cash paid for income taxes	$	9,984		$	5,967
Cash paid for interest	$	333		$	927
Noncash investing and financing activities:
Common stock issued and options assumed in acquisition	$	96,410		$	—
Deferred stock-based compensation	$	3,682			—
Common stock issued to officers and employees in exchange for note receivable	$	—		$	361
Warrants received for revenue deferred	$	—		$	2,324

See accompanying notes to condensed consolidated financial statements.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2002 and 2001

(1)    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of the Company’s management (Management), the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of March 31, 2002 and June 30, 2001, and the results of operations for the three and nine month periods ended March 31, 2002 and 2001, and cash flows for the nine months ended March 31, 2002 and 2001. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2001.

On November 17, 2000, a subsidiary of the Company merged with and into Software.com, Inc. (Software.com). The merger was accounted for as a pooling of interests. Accordingly, the consolidated financial information has been restated to reflect the combined financial position and operations of the Company and Software.com for all dates and periods presented.

(2)    Revenue Recognition

The Company’s three primary revenue categories consist of application software products, which include messaging products; infrastructure software, which include the Company’s Mobile Access Gateway; and customer services, which include maintenance and support and professional services.

The Company licenses its software products primarily to communication service providers through its direct sales and channel partners. These license arrangements, which do not provide for right of return, are primarily perpetual licenses. As part of its license arrangements with communication service providers, the Company offers new version coverage, which is an optional program that grants licensees the right to receive minor and major version releases of the product made during the applicable new version coverage term. Customers receive error and bug fix releases as part of their maintenance and support arrangements.

Cost of license revenues consists primarily of third-party license and support fees. Cost of maintenance and support services revenues consists of compensation and related overhead costs for personnel engaged in training and support services to

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

communication service providers and wireless device manufacturers. Cost of professional services revenues consists of compensation and independent consultant costs for personnel engaged in the professional services operations and related overhead costs.

The Company recognizes revenue in accordance with Statement of Position 97-2,Software Revenue Recognition(SOP 97-2), as amended by SOP 98-9, and generally recognizes revenue when all of the following criteria are met as set forth in paragraph 8 of SOP 97-2: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is fixed or determinable and (4) collectibility is probable. The Company defines each of the four criteria above as follows:

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

Delivery has occurred.    The Company’s software may be either physically or electronically delivered to the customer. Delivery is deemed to have occurred upon the earlier of notification by the customer of acceptance or commercial launch of the software product by the customer. If undelivered products or services exist in an arrangement that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services are delivered.

The fee is fixed or determinable.    The Company’s communication service provider customers generally pay a per subscriber fee for the Company’s products which is negotiated at the outset of an arrangement. In these arrangements, the communications service provider generally licenses the right to activate a specified minimum number of their subscribers to use the Company’s software products. Arrangement fees are generally due and payable at least 80% within one year or less, regardless of the number of customers the communications service provider has activated. Arrangements with payment terms extending beyond these customary payment terms are considered not to be fixed or determinable and revenue from such arrangements is recognized as payments become due and payable. As the communications service providers activate customers beyond the minimum number specified in the arrangement, additional per-subscriber fees become due.

Collectibility is probable.    Collectibility is assessed on a customer-by-customer basis. The Company typically sells to customers for whom there is a history of successful collection. New customers are subjected to a credit review process, which evaluates the customers’ financial positions and ultimately their ability to pay. If it is determined from the outset of an arrangement that collectibility is not probable based upon the Company’s credit review process, revenue is recognized on a cash-collected basis.

The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (VSOE). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to new version coverage, maintenance and support services and professional services components of its perpetual license arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from new version coverage and maintenance and support services is recognized ratably over their respective terms with new version coverage being included in license revenues. The Company recognizes revenue from time-based licenses over the license term.

The Company’s professional services generally are not essential to the functionality of the software. The Company’s software products are typically fully functional upon delivery and implementation and do not require any significant modification or alteration. Customers typically purchase professional services from the Company to facilitate the adoption of the Company’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately and independently from professional services, which are generally billed on a time-and-materials or milestone-achieved basis. The Company generally recognizes revenue from professional services as the services are performed.

The Company also licenses its Mobile Browser software to wireless device manufacturers through its direct sales force and certain third parties. These license arrangements generally give the rights to receive product releases for porting to an unlimited unspecified number of devices. In addition, the Company provides technical support services and compliance verification. The arrangment fees are generally recognized ratably over the contract period.

The Company also enters into certain perpetual license arrangements where the license revenue is not recognized upon delivery:

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

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

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

• Certain arrangements permit the customer to pay the Company maintenance and support fees based only on the number of active subscribers using the Company’s software products, rather than the number of active subscribers to which the customer has committed to purchase under the license agreement. Such arrangements cause an implied maintenance and support obligation for the Company relating to unactivated subscribers. The Company, based upon the customer’s prior subscriber activation experience or other relevant factors, assesses whether a reasonable estimate can be made of the customer’s subscriber activation over the deployment period for the arrangement. If such a deployment estimate can be made, the Company defers revenue equal to the difference between the VSOE of maintenance and support for the total commitment and the expected deployment period. If such an estimate cannot be made, the Company defers revenue equal to the VSOE of maintenance and support for the total commitment for the entire deployment period. In either case, this additional deferral of maintenance and support revenue results in a smaller amount of residual license revenue to be recognized upon delivery. If such an arrangement also provides for fee terms that are not fixed or determinable, license fees are recognized as the customer increases its active subscribers but limited to the aggregate amounts due and payable.

(3)    Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141Business Combinations(SFAS No. 141) and SFAS No. 142Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for using the purchase method of accounting; therefore, the pooling-of-interests method of accounting is prohibited. SFAS No. 141 also requires that an intangible asset acquired in a business combination be recognized apart from goodwill if: (i) the intangible asset arises from contractual or other legal rights or (ii) the acquired intangible asset is capable of being separated from the acquired enterprise, as defined in SFAS No. 141. SFAS No. 141 is effective for all business combinations completed after June 30, 2001.

For business combinations completed prior to July 1, 2001 and accounted for by the purchase method, SFAS No. 141 provides that intangible assets that do not meet the separate identifiable intangible asset criteria prescribed by this pronouncement (e.g., assembled workforce, among others) be reclassified to goodwill as of the date of adoption of SFAS No. 142. Conversely, if a portion of the purchase price had been assigned to an intangible asset that meets the criteria for recognition apart from goodwill and that intangible asset is classified as part of goodwill for financial reporting purposes, the carrying amount of that intangible asset must be reclassified and reported separately from goodwill as of the date of adoption of SFAS No. 142 (July 1, 2002).

The Company applied the requirements of SFAS No. 141 to its acquisition of Avogadro, Inc. during the quarter ended September 30, 2001 and will apply SFAS No. 141 to all future acquisitions, if any.

SFAS No. 142 requires that goodwill not be amortized but rather tested for impairment at the “reporting unit level” (Reporting Unit) at least annually and more frequently upon the occurrence of certain events, as defined by SFAS No. 142. A Reporting Unit is the same level as or one level below an “operating segment,” as defined by SFAS No. 131Disclosures About Segments of an Enterprise and Related Information.The Company’s identifiable intangible assets are required to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Goodwill is not tested for impairment under SFAS No. 121, but instead is tested for impairment as prescribed in SFAS No. 142.

SFAS No. 142 requires that goodwill be tested for impairment in a two-step process. First, a company must compare the “estimated fair value” of a Reporting Unit to its carrying amount, including goodwill, to determine if the fair value of the Reporting Unit is less than the carrying amount, which would indicate that goodwill is impaired. If the Company determines that goodwill is impaired, the Company must compare the “implied fair value” of the goodwill to its carrying amount to determine if there is an impairment loss. The “implied fair value” is calculated by allocating the fair value of the Reporting Unit to all assets and liabilities as if the Reporting Unit had been acquired in a business combination and accounted for under SFAS No. 141.

For goodwill and intangible assets acquired in business combinations completed prior to July 1, 2001, SFAS No. 142 is effective for the Company beginning on July 1, 2002. However, goodwill and intangible assets acquired in a business combination

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

completed after June 30, 2001 are required to be accounted for in accordance with the provisions of SFAS No. 142 from the date of the acquisition.

As of March 31, 2002, the Company had net goodwill and other intangibles of approximately $438.2 million. During the nine months ended March 31, 2002, the Company acquired Avogadro, Inc. and recorded goodwill of approximately $79.4 million and acquired intangibles of $2.3 million. The Company is currently evaluating the impact the adoption of SFAS No. 142 may have on its financial position and results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No.144,Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes both SFAS Statement No. 121 and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30,Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of APB No. 30 on how to present discontinued operations in the statement of operations but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 does not address the impairment of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142. The Company is required to adopt SFAS No. 144 no later than the fiscal year beginning after December 15, 2001, and plans to adopt its provisions as of July 1, 2002. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Company’s financial statements related to long-lived assets held for use because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No. 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities.

In November 2001, the FASB issued Topic D-103Income Statement Characterization of Reimbursements Received for ‘out-of-pocket’ Expenses Incurred, whereby the FASB concluded that reimbursements received for “out-of-pocket” expenses should be characterized as revenue in the income statement. The Company adopted the accounting requirements of Topic D-103 during the three months ended March 31, 2002 and recorded an additional $492,000 of professional services revenues as well as their related costs. As required under Topic D-103, the Company reclassified prior periods to reflect the required adoption. For the three months ended March 31, 2001, professional services revenues as well as their related costs increased by $1.3 million. For the nine months ended March 31, 2002 and 2001, professional services revenues and their related costs increased by $1.0 million and $2.6 million, respectively.

(4)    Derivative Financial Instruments

The Company operates internationally and thus is exposed to potentially adverse movements in foreign currency rate changes. The Company manages its foreign currency exchange rate risk by entering into contracts to sell or buy foreign currency at the time a foreign currency receivable or payable is generated. When the foreign currency asset or liability is extinguished, the contract is liquidated, and the resulting gain or loss on the contract mitigates the exchange rate risk of the associated asset or liability. The Company has entered into foreign exchange forward contracts to reduce its exposure to foreign currency rate changes on cumulative net monetary balance sheet positions and underlying asset amounts. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on the Company’s operating results. These contracts require the Company to exchange currencies at rates agreed upon at the inception of the contracts. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange forward contracts. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from changes in currency exchange rates. The Company does not designate its foreign exchange forward contracts as “accounting hedges” and, accordingly, adjusts these instruments to fair value through earnings in the period of change in their fair value.

As of March 31, 2002, the Company had forward contracts in Japanese Yen and British Pound Sterling outstanding. The forward contracts are accounted for on a mark-to-market basis, with gains or losses recognized in the consolidated statements of operations. The future value of these contracts is subject to exchange rate risk resulting from foreign exchange rate volatility. Current market rates at the consolidated balance sheet dates were used to estimate the fair value of foreign currency forward contracts.

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

The following summarizes the Company’s foreign currency forward contracts, which mature through May 2002, by currency as of March 31, 2002:

	Contract Amount (Local Currency)	Contract Amount		FairValue at March 31 2002 (US$)
	(in thousands)
Foreign Currency Spot Contracts: Contract to pay Yen/receive US$	(YEN)82,100	US$	708	$	24
Contract to pay Yen/receive US$	(YEN)11,500	US$	89		3
Contract to pay GBP/receive US$	(GBP)  4,100	US$	5,877		—
Contract to pay GBP/receive US$	(GBP)     800	US$	1,138		22

In the event of nonperformance by counterparties, the Company is exposed to credit loss. However, the Company does not anticipate this event to occur.

In connection with the Company’s stock repurchase program, the Company has also sold put options on the Company’s common stock and has the option to settle in the Company’s stock, and thus the put options have been recorded as equity under guidance EITF 00-19 (see Note 13).

(5)    Business Combinations

(a)    Pooling-of-Interests

Software.com

On November 17, 2000, the Company merged with Software.com in a transaction that was accounted for as a pooling-of-interests. Accordingly, the financial information presented reflects the combined financial position and operations of the Company and Software.com for all dates and periods presented. Software.com was incorporated in October 1994. Software.com developed Internet infrastructure software based on open standards and protocols for Internet and telecommunications service providers. The Company issued 94,506,060 shares of its common stock in exchange for all of the issued and outstanding common stock of Software.com. The Company also reserved 12,520,161 shares for issuance in connection with the assumption of Software.com’s outstanding options, and employee stock purchase plan. In connection with the merger, the Company and Software.com have incurred approximately $89.4 million in merger and integration expenses through the sixteen months ended March 31, 2002, of which $570,000 were incurred during the nine months ended March 31, 2002.

Separate operating results of the combined entities prior to their date of combination for the three and nine months ended March 31, 2001 are shown below.

	Three Months Ended March 31, 2001			Nine Months Ended March 31, 2001
	(in thousands)
Revenues:
Openwave	$	131,369		$	251,323
Software.com		—			71,892
Combined		131,369		$	323,215
Net loss:
Openwave	$	(151,157	)	$	(513,085	)
Software.com		—			(34,718	)
Combined	$	(151,157	)	$	(547,803	)

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

The above data exclude revenue and cost of revenue between the combined entities for the nine months ended March 31, 2001 of $4.5 million and $2.3 million, respectively.

(b)    Purchase Acquisition

On July 13, 2001, the Company consummated an agreement to acquire 100% of the outstanding common stock of Avogadro, Inc. (Avogadro), a telecommunications infrastructure software developer. Based in Seattle, Washington, Avogadro developed an instant messaging product to provide communication service providers the ability to deliver the next generation communications services in a multi-device environment. The Company expects to deliver an open, standards-based approach to communications, bringing together the best possible mobile messaging experience with a carrier-grade server infrastructure. The acquisition was accounted for as a purchase and, accordingly, the operations of Avogadro have been included in the consolidated financial statements since that date. The total purchase price of the acquisition was allocated as follows (in thousands):

Allocated Purchase Price Components
Purchase Price	Goodwill	Developed Technology	Deferred Stock-Based Compensation	Net Tangible Assets Acquired
$97,514	$79,414	$2,270	$11,900	$3,930

The net tangible assets of approximately $3.9 million are comprised of cash of $3.6 million, prepaids of $140,000 and fixed assets of $420,000 offset by assumed liabilities of $260,000.

The developed technology is being amortized either on a straight-line basis, or on the basis of each product’s projected revenues, whichever results in greater amortization, over the remaining estimated economic life of the product, which is estimated to be three years. The Company also acquired the majority of the employees of Avogadro, including its engineering switch team, and expects to generate revenue from future products derived from the acquired developed technology and related maintenance and support services. Avogadro possessed a skilled assembled workforce, with a number of employees considered key to the success of the instant messaging product. Additionally, the Company believes that significant value exists both in the technology to be developed in the future and in the maintenance and support services revenues derived from the existing developed technology. However, under SFAS No. 141, the fair value of each of these identified intangibles does not meet the criteria for separate recognition and thus are included as part of the goodwill acquired. The Company paid the following in connection with its acquisition of Avogadro (in thousands):

Purchase Price
Common Stock		Assumption of Stock Options		Closing and related costs	Total
Shares	Amount	Shares	Amount
2,628	$94,002	72	$2,258	$1,254	$97,514

For accounting purposes, the value of the common stock issued was determined based on the average market price of the Company’s common stock over the five trading day period beginning two trading days prior to the announcement date of the acquisition. The options assumed in the above acquisitions were valued using the Black-Scholes option pricing model with the following weighted average assumptions: expected life of 2 years; 0% dividend yield; 129% volatility and risk-free interest rate of 5.5%.

The following table shows unaudited pro forma revenue, net loss and basic and diluted net loss per share of the Company, including the results of Avogadro as if Avogadro had been acquired as of July 1, 2000 (in thousands, except per share data). Pro forma net loss for the three months ended March 31, 2002 and 2001 and the nine months ended March 31, 2002 and 2001 includes the impact of amortization of goodwill and intangible assets and deferred stock-based compensation of $(1.0) million and $3.1 million, and $(3.0) million and $8.8 million, respectively.

	For the Three Months Ended March 31,						For the Nine Months Ended March 31,
	2002			2001			2002			2001
	(in thousands, except per share data)
Revenue	$	83,157		$	131,369		$	294,700		$	323,215
Net loss	$	(114,655	)	$	(154,251	)	$	(782,998	)	$	(556,583	)
Basic and diluted net loss per share	$	(0.66	)	$	(0.91	)	$	(4.53	)	$	(3.34	)
Shares used in pro forma basic and diluted per share computation		173,270			169,643			172,840			166,843

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the periods presented. In addition, they are not intended to be a projection of future results and do not reflect any synergies that might be achieved from combined operations.

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

The Company performs an impairment assessment of goodwill and identifiable assets whenever events or changes in circumstances indicate that the carrying value of goodwill and other intangible assets may not be recoverable. In October 2001, the Company began a series of detailed functional reviews to determine a new strategy in light of the deterioration in the telecommunications industry, contributing to longer selling cycles and restricted capital for communication service providers. During this evaluation period, Management examined products, customer base and geography with a focus on significantly improving the Company’s cost structure and profitability. As a result of these extensive reviews, the Company determined which products it will continue to support and sell and which assets will continue to have future strategic value and benefit.

As a result of this analysis, the Company identified certain product technologies and other acquisition-related intangible assets where the carrying value of goodwill and other intangible assets may not be recoverable. These assets were grouped at product level, which was the lowest level for which there were identifiable cash flows. For those assets that were acquired in a business combination accounted for using the purchase method, the goodwill that arose in that transaction was included as part of the asset grouping in determining recoverability in accordance with SFAS No. 121. If the sum of the expected future cash flows, which is the estimated future cash flows expected to result from the use of the assets and their eventual disposition, was less than the carrying amount of the assets, the Company recorded an impairment loss measured as the amount by which the carrying amount of the asset exceeds the fair value. The fair value was based upon the present value of the estimated expected future cash flows using a discount rate of 26.3%. The assumptions supporting the estimated cash flows, including the discount rate and an estimated terminal value, reflect Management’s best estimates. The discount rate was based upon the average of the long-term and short-term cost of capital using the risk-free rate, the expected return on the market portfolio and the Company’s beta. In addition, where all of the assets related to a specific acquisition had been abandoned, the goodwill and intangible asset balances relating to that acquisition were recorded as an impairment loss in accordance with Accounting Principles Board Opinion No. 17. As a result of the impairment analysis, the Company recorded a $279.5 million impairment charge during the three months ended December 31, 2001 within “Amortization and impairment of goodwill and other intangible assets” in the Company’s condensed consolidated statements of operations. The $438.2 million of goodwill and intangible assets remaining on the Company’s balance sheet at March 31, 2002 includes $263.6 million of goodwill and intangible assets related to the Onebox acquisition. The Company determined that these assets were not impaired as certain technologies acquired in this acquisition are included as part of the Company’s unified messaging product line.

The Company regularly performs an impairment assessment of its strategic equity investments. In performing an impairment assessment, the Company considers the following factors, among others, in connection with the businesses in which investments have been made: the business’ current solvency and its access to future capital. As a result of the impairment analysis, the Company determined that three investments, aggregating $5.2 million, in privately-held companies had incurred a decline in value that was considered other-than-temporary. Substantially all of this charge was included within “Interest and other income , net” in the Company’s results from operations during the three months ended December 31, 2001. As of March 31, 2002, the remaining book value of strategic investments was approximately $4.5 million, and is recorded as deposits and other assets on the balance sheet.

(7)    Geographic, Segment, Significant Customer Information

The Company’s chief operating decision makers are the Company’s Chief Executive Officer (CEO) and Chief Operating Officer (COO). The CEO and COO review financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product for purposes of making operating decisions and assessing financial performance. The Company operates in one operating segment: the development and delivery of applications, infrastructure software, and customer services for communication service providers. The disaggregated information reviewed on a product category basis by the CEO and COO include: Applications, Infrastructure Software and Customer Services.

The Company’s applications enable end users to exchange electronic mail, facsimile, voice mail, instant messaging and multimedia messages from personal computers (PC’s), wireline telephones and mobile devices. The Company’s applications include, but are not limited to, e-mail, mobile e-mail, instant messaging, multimedia messaging and unified messaging products.

The Company’s infrastructure software contains the foundation software required to enable Internet connectivity to mobile devices and to build a rich set of applications for mobile users. One set of the Company’s infrastructure software products, including Mobile Access Gateway and Mobile Browser among others, enables Internet connectivity and Web browsing from

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

mobile devices and synchronization of information among networks, mobile devices and PC’s using a variety of protocols. Another set of the infrastructure software provides provisioning and download capabilities and a directory that serves as a standards-based repository of information about users and devices in the network.

Finally, the Company provides Customer Services to help its customers design, install, deploy, manage, maintain and support the Company’s products and overall Internet implementations.

The disaggregated information reviewed on a product basis by the CEO and COO follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2002		2001		2002		2001
	(in thousands)
Revenues:
Applications	$	16,607	$	38,450	$	89,483	$	95,459
Infrastructure software		36,504		59,571		115,317		139,622
Customer services		30,046		33,348		89,900		88,134
Total revenues	$	83,157	$	131,369	$	294,700	$	323,215

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2002		2001		2002		2001
	(in thousands)
Revenues:
Americas	$	33,748	$	53,927	$	117,250	$	136,807
Europe, Middle East, Africa		17,857		34,244		72,083		90,616
Japan		21,850		31,168		79,937		68,467
Asia Pacific		9,702		12,030		25,430		27,325
Total revenues	$	83,157	$	131,369	$	294,700	$	323,215

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2002		2001		2002		2001
	(in thousands)
Revenues:
United States	$	23,427	$	43,531	$	89,090	$	113,306
Japan		21,850		31,168		79,937		68,467
United Kingdom		6,820		19,983		29,835		48,214
Other foreign countries		31,060		36,687		95,838		93,228
Total revenues	$	83,157	$	131,369	$	294,700	$	323,215

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

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

Significant customer information is as follows:

	% of Total Revenue
Customer	Three Months Ended March 31,		Three Months Ended March 31,		Nine Months Ended March 31,		Nine Months Ended March 31,		% of Total Accounts Receivable March 31,
	2002		2001		2002		2001		2002
KDDI	18	%	17	%	21	%	15	%	8	%
mmO2	8	%	12	%	9	%	12	%	3	%

(8)    Net Loss Per Share

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

	March 31
	2002		2001
	(in thousands)
Shares issuable under stock options	38,284	(a)	41,922
Shares of restricted stock subject to repurchase	911		1,208
Shares issuable pursuant to warrants to purchase common stock	232		232

(a) Included from the calculation of shares issuable under stock options are the shares resulting from the stock option exchange program described in Note 12, whereby on April 9, 2002, the Company granted replacement options to acquire 14.7 million shares of the Company’s common stock. Also included in the shares issuable under stock options are the 5.3 million shares granted in October 2001 to the CEO as described in Note 14.

The weighted-average exercise price of stock options outstanding was $13.65 and $45.94 as of March 31, 2002 and 2001, respectively. The weighted-average purchase price of restricted stock subject to repurchase was $0.95 and $0.15 as of March 31, 2002 and 2001, respectively. The weighted-average exercise price of warrants was $2.44 and $2.44 as of March 31, 2002 and 2001.

(9)    Long-term and restricted cash and investments

The Company classifies all of its long-term investments as available-for-sale and, accordingly, records them at fair value.

The following summarizes the Company’s long-term investments and restricted cash and investments at fair value:

	March 31, 2002		June 30, 2001
	(in thousands)
Unrestricted investments (various maturities through year ending June 30, 2004)		110,043	$	21,173
Restricted cash and investments		22,349		20,700
Total	$	132,392	$	41,873

The increase of approximately $88.9 million in unrestricted investments was due to the Company investing in longer-term investments in order to achieve higher returns.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2002 and 2001

(10)    Accounts Receivable, net

Accounts receivable is recorded net of allowance for doubtful accounts totaling $8.6 million and $10.5 million as of March 31, 2002 and June 30, 2001, respectively.

(11)    Other Comprehensive Loss

Other comprehensive loss includes net loss, unrealized gains on investments available-for-sale, and foreign currency translation adjustments.

Other comprehensive loss is comprised of:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2002			2001			2002			2001
	(in thousands)
Net loss	$	(115,676	)	$	(151,157	)	$	(786,006	)	$	(547,803	)
Other comprehensive loss:
Change in accumulated foreign currency translation adjustment		—			(113	)		138			(87	)
Change in accumulated unrealized gain (loss) on available-for-sale securities		(1,162	)		(314	)		(264	)		509
Total comprehensive loss	$	(116,838	)	$	(151,584	)	$	(786,132	)	$	(547,381	)

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

	March 31, 2002			June 30, 2001
	(in thousands)
Unrealized gain (loss) on investments	$	(187	)	$	76
Cumulative translation adjustments		(186	)		(323	)
Accumulated other comprehensive loss	$	(373	)	$	(247	)

(12)    Tender Offer

On August 2, 2001, the Company announced a voluntary stock option exchange program for its employees, except for the Company’s Chief Executive Officer and employees located in Australia, where such programs have certain undesirable tax consequences. Members of the Company’s Board of Directors and consultants holding options also were ineligible to participate. Under the program, Company employees had the opportunity to surrender previously granted outstanding stock options in exchange for an equal or lesser number of replacement options to be granted at a future date. Options to acquire a total of 35,832,309 shares of the Company’s common stock with exercise prices ranging from $163.13 to $0.01 were eligible to be exchanged under the program.

The program required a participant electing to exchange any options to also exchange any other options granted to him or her during the six months before or after the expiration of the tender offer. The stock option exchange program was designed to comply with Financial Accounting Standards Board Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, and is not expected to result in any additional compensation charges or variable award accounting.            

On April 9, 2002, the Company granted replacement options to acquire 14.7 million shares of the Company’s common stock. The exercise price of the replacement options of $5.39 (except for Italy where the price was marginally higher) was equal to the fair market value of the Company’s common stock on April 9, 2002, which was the date of grant determined by the Compensation Committee of the Board of Directors.

(13)    Openwave Stock Repurchase Program

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In September 2001, the Company announced that its Board of Directors had authorized a stock repurchase program of up to five million shares of common stock. Any purchases under the Company stock repurchase program may be made in open market, in privately negotiated transactions or through the use of derivative securities. As of March 31, 2002, the Company had repurchased 1.7 million shares at a weighted-average price of $8.75, net of put option proceeds discussed below, and, therefore, had 3.3 million shares still available for repurchase under the current plan. During the quarter ended December 31, 2001, the Company repurchased 700,000 shares at a weighted-average price of $8.40 on the open market. During the same quarter, the Company also sold 3.5 million put options under the stock repurchase program that entitles the holder of each option to sell to the Company, for cash, by physical delivery or net share settlement at the Company’s election, one share of common stock at a specified price. The cumulative net proceeds to the Company from the sale of these put options were recorded as additional paid-in capital at the fair value of $10.5 million as required under the provisions of Emerging Issues Task Force 00-19. During the quarter ended March 31, 2002, 1.0 million of the options were exercised, and the Company acquired shares for $12.8 million and recorded the acquired shares as treasury stock. Additionally, 1.0 million put options were called by the holder of the options as a result of the closing price of the Company’s stock falling below the contractual minimum. The Company chose the option to pay $6.6 million to settle the obligation and recorded a decrease in additional paid-in-capital. The remaining 1.5 million put options were renegotiated to require settlement of the put options if the stock fell below certain minimum prices. On April 23, 2002, the Company’s closing price fell below the contractual minimum on the remaining 1.5 million put options, and the Company bought 1.5 million shares for $19.4 million and recorded the repurchased shares as treasury stock. Thus, as of April 23, 2002, the Company has repurchased a total of 3.2 million shares under the stock repurchase program at a weighted-average price of $10.69, net of option proceeds.

(14)    Executive Stock Compensation

During the quarter ended September 30, 2001, the Compensation Committee of the Board of Directors of the Company granted 210,000 restricted shares of the Company’s common stock to certain executive officers. The restricted shares will vest through July 2003. During the nine months ended March 31, 2002, the Company recorded deferred stock-based compensation totaling $3.6 million. The deferred stock-based compensation consists of $3.15 million resulting from the grant of the 210,000 restricted shares, and the remaining $450,000 arising from a loan to an employee in connection with the grant of stock options. The loan guarantees an intrinsic value of the stock options in March 2005 of $450,000. This has been accounted for as compensation cost over the service period equal to the loan amount.

In April 2001, in consideration of the Chief Executive Officer’s prior cancellation of options to purchase a total of 6 million shares of the Company’s common stock, the Compensation Committee of the Board had agreed to grant the CEO options to purchase a total of 5.8 million shares of the Company’s common stock on a date that falls between 6 and 7 months from the April 12, 2001 cancellation date. In October 2001, the CEO waived his right to the new options with respect to 500,000 shares of the Company’s common stock. Therefore, in satisfaction of the Company’s obligation to grant additional shares to the CEO, the Company granted options to him to purchase a total of 5.3 million shares of the Company’s common stock. The new options have an exercise price equal to the fair market value on the date of grant and the same 4-year vesting schedule and vesting commencement date in September 2000 as the cancelled options. The vesting of these shares are subject to acceleration in connection with a change of control as provided in the CEO’s employment agreement dated September 18, 2000.

(15)    Commitments and Contingencies

On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation, Civil Action No. 01-0065, was filed in the U.S. District Court for the district of Delaware against the Company and certain other companies. The complaint alleges that the defendants have infringed claims of one or more patents that Mr. Stambler asserts have been granted to him. On March 26, 2001, the Company responded to the complaint. The Company denied the allegations that the Company has infringed any claim in either of the patents asserted against the Company. In addition, the Company asserted counterclaims against Mr. Stambler seeking a declaratory judgment that the asserted patents are not infringed by the Company and that the patents are also invalid and unenforceable. Based on the facts known to date, the Company believes that it has meritorious defenses and claims, and does not believe resolution of this matter will have a material adverse effect on the financial condition of the Company.

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

16

stages, the Company believes the claims are without merit, intends to defend the arbitration vigorously and does not believe this matter will have a material adverse effect on the financial condition of the Company.

On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S. District Court for the Northern District of California against the Company and a former affiliate of the Company. The complaint alleged that the Company had infringed claims of a common law trademark that Opuswave Networks asserted it had acquired. The Company and Opuswave Networks settled this action on February 15, 2002 for a deminimis amount.

Based upon certain publicly available information, on November 5, 2001, a purported securities fraud class action complaint was filed in the United States District Court for the Southern District of New York. The case is now captioned as In re Openwave Systems, Inc. (sic) Initial Public Offering Securities Litigation, Civ. No. 01-9744 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). The Company and one of its officers were served with the complaint, only after the 120 days for service allowed under the Federal Rules of Civil Procedure. On April 22, 2002, plaintiffs electronically served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased the Company’s common stock from June 11, 1999 through December 6, 2000. It names as defendants the Company; five of its present and former officers; and several investment banking firms that served as underwriters of the Company’s initial public offering and secondary public offering. The amended complaint alleges liability as to all defendants under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. Certain of these claims (including claims against the Company and its present or former officers under the Securities Exchange Act of 1934) had not been asserted in the initial complaint filed November 5, 2001. No specific damages are claimed. The Company is aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. Defendants’ time to respond to the complaints has been stayed pending a plan for further coordination. Based upon the Company’s current understanding of the facts, the Company believes that the complaint is without merit, intends to defend against it vigorously and does not believe resolution of this matter will have a material adverse effect on the financial condition of the Company.

Based on certain information in the public record, on May 3, 2002, the Company received notice of the pending filing of a purported shareholder derivative lawsuit in the Superior Court of California, County of San Mateo, titled Lefort v. Black et al. The lawsuit purports to be filed on behalf of the Company, asserting claims against the officers and directors at the time of the Company’s initial public offering. The allegations are similar to the allegations in the securities class action case described above. In the derivative case, however, plaintiff asserts that the alleged conduct injured the Company because the Company’s shares were not sold for as high a price in the IPO as they otherwise could have been. The Company is aware that similar allegations have been made in other derivative lawsuits involving issuers that also have been sued in the Southern District of New York securities class action cases, and that plaintiffs’ lawyers have indicated that they intend to file additional derivative lawsuits. Based upon the Company’s current understanding of the facts, the Company believes that the complaint is without merit, intends to defend against it vigorously and does not believe resolution of this matter will have a material adverse effect on the financial condition of the Company.

(16)    Restructuring and Related Costs

As a result of the Company’s change in strategy and its desire to improve its cost structure and profitability discussed in Note 6 above, the Company announced a restructuring plan that reduced the Company’s workforce by approximately 400 employees during the nine months ended March 31, 2002. In connection with implementation of the restructuring plan, the Company incurred restructuring charges of $34.4 million to cover the costs of severance, elimination of excess facilities and related leasehold improvements and other restructuring-related charges. In addition, the Company incurred accelerated depreciation charges in the amount of $1.9 million for assets related to the planned facility closings. The following table sets forth the restructuring activity through March 31, 2002:

	Restructuring and other Charges		Cash Payments			Noncash Charges			Accrual Balance at March 31, 2002
	(in thousands)
Facility and equipment costs	$	20,881	$	(3,536	)	$	(5,339	)	$	12,006
Severance and employment related charges		10,689		(8,512	)		(355	)		1,822
Other charges		2,792		(1,269	)		(1,470	)		53
	$	34,362	$	(13,317	)	$	(7,164	)	$	13,881

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Facility and equipment costs primarily represent remaining lease liabilities related to offices in Asia Pacific, Europe, and North America that were vacated as part of the restructuring program. As of March 31, 2002, the remaining $12.0 million accrual of lease termination costs, net of estimated sublease income, is expected to be paid through various dates by November 2012. The noncash charges in the amount of $5.3 million include the write-off of leasehold improvements on facilities vacated as part of the restructuring plan.

Severance and employment-related charges consist primarily of severance, health benefits, other termination costs and legal costs as a result of the termination of approximately 400 employees, of which 49% were working in research and development, 41% in sales and marketing, and 10% in general and administrative functions. The accrual balance of $1.8 million as of March 31, 2002 is expected to be paid by June 30, 2002.

Other charges consist of fees resulting from the termination of software license arrangements and other fees. The noncash charges in the amount of $1.5 million include the write-off of certain software license arrangements.

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

Forward-Looking Statements

The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based upon current expectations and beliefs of our management and are subject to certain risks and uncertainties, including economic and market variables. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially include those set forth in the risks discussed below under the subheading “Risk Factors”. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the risk factors described in this section below and in other documents the Company files from time to time with the U.S. Securities and Exchange Commission (SEC) including, but not limited to, the Company’s mostly recently filed annual report on Form 10-K for the fiscal year ended June 30, 2001, quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2001, quarterly report on Form 10-Q for the fiscal quarter ended December 31, 2001, and any other reports filed by the Company after June 30, 2001.

Overview

We are a leading provider of applications, infrastructure software and services that enable the convergence of the Internet and wireless communications. We were incorporated in Delaware in 1994. Our customers are primarily communication service providers, including wireless and wireline carriers, Internet service providers, portals and broadband providers worldwide. Our Openwave^™ Services Operating System (Services OS) is a suite of Internet protocol (IP)-based software products designed to be installed on communication service providers’ systems. Services OS^™ is designed to provide carrier-class scalability and reliability and work with industry standards, such as WAP, XHTML, SyncML and VoiceXML, to allow our operator customers to deploy our products and to integrate our offerings into existing installed technology.

Using our software, communication service providers can offer Internet services to their wireless and wireline subscribers, and wireless device manufacturers can turn their mass-market mobile phones, personal digital assistants and other wireless devices into mobile Internet appliances. Wireless subscribers thus can gain access to Internet- and corporate intranet-based services, including e-mail, news, stocks, weather, travel and sports. In addition, subscribers can gain access via their wireless devices to communication service providers’ intranet-based telephony services, which can include over-the-air activation, call management, billing history information, pricing plan subscription and voice message management. As of March 31, 2002, we had 36.2 million active mobile subscribers.

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Communication service providers using our software can also provide their subscribers with a variety of messaging applications, including e-mail, mobile e-mail, instant messaging, multimedia messaging, unified messaging (single inbox for e-mail, voice mail, and facsimile) and short messaging services. As of March 31, 2002, we had 89.5 million active mailbox seats down from 97.0 million as of December 31, 2001. In the March quarter we revised our active seats downward by 15.4 million as a result of an adjustment made for companies who have either gone out of business or who have moved to a different vendor as a result of mergers and acquisitions. Without this adjustment, our active seats would have grown by 7.9 million to 104.9 million. The adjustment did not have an impact on revenues previously recognized.

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

The majority of our sales have been to a limited number of customers and our sales are highly concentrated. Sales to KDDI accounted for approximately 18% and 17% of total revenue for the three months ended March 31, 2002 and 2001, respectively, and 21% and 15% of total revenue for the nine months ended March 31, 2002 and 2001, respectively. Sales related to KDDI for the prior periods ended March 31, 2001 have been adjusted to reflect all sales to KDDI, both direct and indirect through our channel partners. Sales to mmO2 plc (formerly, British Telecommunications plc) and its related entities accounted for approximately 8% and 12% of total revenue for the three months ended March 31, 2002 and 2001, respectively, and 9% and 12% of total revenue for the nine months ended March 31, 2002 and 2001, respectively. No other customers have accounted for 10% or more of total revenue for the three and nine months ended March 31, 2002 and 2001.

On August 8, 2000, Phone.com, Inc. and Software.com, Inc, signed an agreement to merge the two companies subject to stockholder approval, regulatory reviews and other conditions. On November 17, 2000, pursuant to the agreement, a wholly-owned subsidiary of Phone.com was merged with and into Software.com so that Software.com became a wholly-owned subsidiary of Phone.com. At the same time, Phone.com changed its name to Openwave Systems Inc. The merger was accounted for as a pooling-of-interests.

Donald Listwin, formerly an Executive Vice President of Cisco Systems, Inc., became the President and Chief Executive Officer of our combined company. In June 2001, Mr. Listwin also became Chairman of the Board, replacing Alain Rossmann, former Chief Executive Officer of Phone.com, who resigned from our Company that same month.

In August 2001, Kevin Kennedy, former senior vice president of Cisco Systems joined the Company to fill the newly-created position of Chief Operating Officer (COO). At the same time, John MacFarlane, the former Executive Vice President of Product Development was appointed to the newly-created position of Chief Technology Officer (CTO).

In April 2002, we named Bo Hedfors to the Board of Directors and appointed Bernard Puckett, an existing member of the board, as Vice Chairman of the Board of Directors.

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Critical Accounting Policies and Judgments

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

• Revenue recognition

• Allowance for doubtful accounts

• Impairment assessments

• Restructuring assessment

These policies, and our procedures related to these policies, are described in detail below. In addition, please refer to Notes 2, 6, 10 and 16 of the notes to the consolidated financial statements for further discussion of our accounting policies.

Revenue Recognition

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

One critical accounting policy falls within the “collectibility is probable” portion of SOP 97-2. The recognition of revenue is partly based on our assessment of the probability of collecting the related accounts receivable balance on a customer-by-customer basis. As a result, the timing or amount of revenue recognition may have been different if different assessments of the probability of collection had been made at the time the transactions were recorded in revenue.

Another revenue-related critical accounting policy relates to maintenance and support revenues. Certain arrangements permit the customer to pay us maintenance and support fees based only on the number of active subscribers using our software product, rather than the number of active subscribers to which the customer has committed to purchase under the license agreement. Such arrangements cause an implied maintenance and support obligation for us relating to unactivated subscribers. Based upon the customer’s prior subscriber activation experience, knowledge about the customer’s marketing plans or other relevant factors, we assess whether a reasonable estimate can be made of the customer’s subscriber activation over the deployment period for the arrangement. If such a deployment estimate can be made, we defer revenue equal to the difference between the VSOE of maintenance and support for the total commitment and the expected deployment period. The deployment estimates are reviewed each period and revenue amounts adjusted as necessary. If such an estimate cannot be made, we defer revenue equal to the VSOE of maintenance and support for the total commitment for the entire deployment period. In either case, this additional deferral of maintenance and support revenue results in a smaller amount of residual license revenue to be recognized upon delivery. If such an arrangement also provides for fee terms that are not fixed or determinable, license fees are recognized as the customer increases its active subscribers, but limited to the aggregate amounts due and payable.

Allowance for Doubtful Accounts

We regularly review the adequacy of our allowance for doubtful accounts after considering the accounts receivable aging, the age of each invoice, each customer’s expected ability to pay and our collection history with each customer. We review any invoice greater than 60 days past due to determine if an allowance is appropriate based on the risk category. In addition, we maintain a general reserve for all invoices by applying a percentage based on the age category. The allowance for doubtful accounts represents our best estimate, but changes in circumstances relating to accounts receivable may result in a requirement for either more or less allowances in the near future.

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

Impairment Assessments

We perform an impairment assessment of goodwill and identifiable assets whenever events or changes in circumstances indicate that the carrying value of goodwill and other intangible assets may not be recoverable. Significant changes in circumstances can be both internal to our strategic and financial direction, as well as changes to the competitive and economic landscape. Past changes in circumstances that were considered important for asset impairment include, but are not limited to, contraction of the telecommunications industry, reduction or elimination of geographic economic growth, reductions in forecasted Company growth and significant changes to operating costs.

As part of our impairment assessment, we examine products, customer base and geography with a focus on significantly improving our cost structure and profitability. Based on these criteria, we determine which products we will continue to support and sell and, thereby, determine which assets will continue to have future strategic value and benefit. We then estimate the value of the goodwill based on the sum of the expected future cash flows, which is the estimated future cash flows expected to result from the use of the assets and their eventual disposition. If future cash flows are less than the estimates made during the impairment assessment, additional impairment charges may be required in the future.

In addition, strategic investments are regularly evaluated based on two primary criteria: financial solvency and access to future capital. A committee comprised of our financial and operation leaders evaluate each investment based on the previous criteria. Closely involved in the future strategic direction of the Company, the committee members apply the criteria based on our current information, as well as on developments in the industry at large. If it is determined that value of the investment has been impaired, an estimate is made using the projected future cash flows. If such estimates deviate from actual results, the value of the investments may be different.

Restructuring Assessment

As a result of our change in strategy and our desire to improve our cost structure and profitability discussed above, we announced a restructuring plan that reduced our workforce by approximately 400 employees during the nine months ended March 31, 2002. In connection with the implementation of the restructuring plan, we incurred $34.4 million in restructuring costs and an additional $1.9 million in accelerated depreciation charges related to the planned closing of certain facilities under the restructuring plan. The restructuring costs included costs of severance, elimination of excess facilities and related leasehold improvements, and other restructuring-related charges. We expect to pay $3.8 million in the fourth quarter of fiscal year 2002, and $10.1 million thereafter through the year ending 2012. Our estimate of costs associated with abandonment of facilities includes real estate broker estimates of sublease income that take into consideration the type and condition of the subject property, the local commercial real estate market, expectations about time to obtain a sublessee, among other considerations. It is possible that the actual sublease income may differ materially for those estimates resulting in additional charges in future periods. The restructuring effort lead to a $25 to $30 million cost savings during the quarter ended March 31, 2002, of which 10% was realized in cost of revenues, 35% was realized in the research and development departments, 30% in the sales and marketing departments, and 25% in the general and administrative departments.

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Results of Operations

Three and Nine Months ended March 31, 2001 and 2002

Revenues

We generate three different types of revenue. License revenues are primarily associated with the licensing of our application and infrastructure software products to communication service providers; maintenance and support revenues are derived from providing support services to wireless device manufacturers and communication services providers; and professional services revenues, which are primarily a result of providing deployment and integration consulting services to communication service providers. The following table presents selected revenue information for the three and nine months ended March 31, 2002 and 2001, respectively:

	Three Months Ended March 31								Nine Months Ended March 31
	2002			2001			Percent Change		2002			2001			Percent Change
	(in thousands)
License	$	53,111		$	98,021		(45.8	%)	$	204,800		$	235,081		(12.9	%)
Maintenance and support		19,200			15,891		20.8	%		57,899			39,734		45.7	%
Professional services		10,846			17,457		(37.9	%)		32,001			48,400		(33.9	%)
Total revenues	$	83,157		$	131,369				$	294,700		$	323,215
Percent of Revenues
License		63.9	%		74.6	%				69.5	%		72.7	%
Maintenance and support		23.1	%		12.1	%				19.6	%		12.3	%
Professional services		13.0	%		13.3	%				10.9	%		15.0	%
Total revenues		100.0	%		100.0	%				100.0	%		100.0	%

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License Revenues

License revenues decreased 45.8% and 12.9% for the three and nine months ended March 31, 2002 as compared to the respective prior year periods. The decrease in license revenue was primarily attributed to the economic downturn, resulting in a reduced number of new contracts.

Maintenance and Support Services Revenues

Maintenance and support services revenues increased 20.8% and 45.7% for the three and nine months ended March 31, 2002 as compared to the respective prior year periods. The increase in maintenance and support services revenues primarily reflects the continued growth of the overall customer base.

Professional Services Revenues

Professional services revenues decreased 37.9% and 33.9% for the three and nine months ended March 31, 2002 as compared to the respective prior year periods. The decrease in professional services revenue was primarily due to a decrease in the number of new commercial launches of our technology, as more of our license revenue comes from existing customers purchasing additional licenses.

Cost of Revenue

The following table presents cost of revenue as a percentage of related revenue type for the three and nine months ended March 31, 2002 and 2001, respectively:

	Three Months Ended March 31,						Percent Change		Nine Months Ended March 31,						Percent Change
	2002			2001					2002			2001
	(in thousands)
License	$	1,315		$	4,334		(69.7	%)	$	7,985		$	16,186		(50.7	%)
Maintenance and support services		6,859			7,421		(7.6	%)		23,440			20,798		12.7	%
Professional services		7,232			12,435		(41.8	%)		20,355			30,755		(33.8	%)
Total cost of revenue	$	15,406		$	24,190		(36.3	%)	$	51,780		$	67,739		(23.6	%)
Percent of related revenue:
License		2.5	%		4.4	%	(1.9	)		3.9	%		6.9	%	(3.0	)
Maintenance and support services		35.7	%		46.7	%	(11.0	)		40.5	%		52.3	%	(11.8	)
Professional services		66.7	%		71.2	%	(4.5	)		63.6	%		63.5	%	.1
Gross Margin per related revenue:
License		97.5	%		95.6	%				96.1	%		93.1	%
Maintenance and support Services		64.3	%		53.3	%				59.5	%		47.7	%
Professional services		33.3	%		28.8	%				36.4	%		36.5	%
Total gross margin		81.5	%		81.6	%				82.4	%		79.0	%

Gross Margin

Our long-term financial models project our total gross margin will be between 83%-85%.

Cost of License Revenues

Cost of license revenues consists primarily of third-party license and related support fees.Cost of licenses decreased 69.7% and 50.7% for the three and nine months ended March 31, 2002 as compared to the respective prior year periods. The decrease was primarily associated with our exit from the ASP business. As a percentage of the license revenues, cost of license revenues

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remained relatively flat during the three and nine months ended March 31, 2002 as compared to the respective prior year periods.We anticipate that the cost of license revenues as a percentage of related revenues will remain relatively flat in the near term.

Cost of Maintenance and Support Services Revenues

Cost of maintenance and support services revenues consists of compensation and related overhead costs for personnel engaged in training and support services to wireless device manufacturers and communication service providers. Cost of maintenance and support services decreased 7.6% and increased by 12.7% for the three and nine months ended March 31, 2002, as compared to the respective prior year periods. Cost of maintenance and support services as a percentage of related revenues decreased by 11.0 and 11.8 percentage points for the three and nine months ended March 31, 2002 as compared to the prior year periods due primarily to the product realignment and restructuring effort. We anticipate that the cost of maintenance and support services will remain relatively constant as a percentage of related revenues in the near term.

Cost of Professional Services Revenues

Cost of professional services revenues consists of compensation and independent consultant costs for personnel engaged in our professional services operations and related overhead. Cost of professional services revenues decreased 41.8% and 33.8% for the three and nine months ended March 31, 2002 as compared to the respective prior year periods. As a percentage of professional services revenues, cost of professional services revenues decreased 4.5 percentage points for the three months ended March 31, 2002 as compared to the respective prior year period, primarily due to the cost reduction in connection with the restructuring plan, and remained relatively flat for the nine months ended March 31, 2002 as compared to the respective prior year period. We anticipate that the gross profit margin on professional services will increase slightly in the near term as we increase the productivity of the professional services organization.

Operating Expenses

The following table represents operating expenses for the three and nine months ended March 31, 2002 and 2001, respectively:

	Three Months Ended March 31,								Nine Months Ended March 31,
	2002			2001			Percent Change		2002			2001			Percent Change
	(in thousands)
Research and development	$	31,063		$	37,628		(17.4	)%	$	104,817		$	96,228		8.9	%
Sales and marketing		37,863			37,769		0.2	%		125,747			104,762		20.0	%
General and administrative		11,082			16,645		(33.4	)%		43,650			39,673		10.0	%
Restructuring costs		238			—		—			34,362			—		—
Stock-based compensation		2,898			1,405		106.3	%		12,307			7,641		61.1	%
Amortization and impairment of goodwill and other intangible assets		98,334			159,309		(38.3	)%		698,914			477,454		46.4	%
Accelerated amortization related to planned facility closings		—					—			1,931					—
Merger costs		—			234		(100.0	)%		570			79,799		(99.3	)%
Integration costs		—			5,522		(100.0	)%		—			9,051		(100.0	)%
Total operating expenses	$	181,478		$	258,512		(29.9	)%	$	1,022,298		$	814,608		25.5	%
Percent of Revenues
Research and development		37.4	%		28.6	%	8.8			35.6	%		29.8	%	5.8
Sales and marketing		45.5	%		28.8	%	16.7			42.7	%		32.4	%	10.3
General and administrative		13.3	%		12.7	%	0.6			14.8	%		12.3	%	2.5
Restructuring costs		*			*					*
Stock-based compensation		*			*					*			*
Amortization and impairment of goodwill and other intangible assets		*			*					*			*
Accelerated amortization related to planned facility closings		*			*					*			*
Merger costs		*			*					*			*
Integration costs		*			*					*			*		—
Total operating expenses		96.2	%		70.1	%	26.1	%		93.1	%		74.5	%	18.6	%

* not meaningful

Research and Development Expenses

Research and development expenses consist primarily of compensation and related costs for research and development personnel. As a result of our product realignment and restructuring plan that occurred during the quarter ended December 31, 2001, research and development expenses decreased 17.4% for the three months ended March 31, 2002 as compared to the prior year period. The increase in research and development expenses of 8.9% for the nine months ended March 31, 2002, as compared to the respective prior year period, was due primarily to higher labor costs associated with the increase in average headcount from approximately 600 to 830 during the six-month period offset by the third quarter impact of the product realignment and restructuring plan. As a percentage of revenues, research and development expenses increased 8.8 and 5.8 percentage points during the three and nine months ended March 31, 2002, as compared to the prior year periods, due primarily to decreases in overall revenue. Our long-term financial models project our research and development expense to be within a range of 22% to 25% of total revenues.

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Sales and Marketing Expenses

Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, sales commissions, marketing programs, travel expenses, public relations, promotional materials and trade show exhibit expenses. Sales and marketing expenses remained constant for the three months ended March 31, 2002 and 2001, and increased by 20% for the nine months ended March 31, 2002, as compared to prior year period, due primarily to the majority of the benefits from our product realignment and restructuring plan not being realized until the third quarter of 2002. As a percentage of revenues, sales and marketing expenses increased 16.7 and 10.3 percentage points for the three and nine months ended March 31, 2002 as compared to the prior year periods primarily due to decreases in overall revenue. Our long-term financial models project our sales and marketing expense to be within a range of 22% to 25% of total revenues.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related expenses, accounting, legal and administrative expenses, professional service fees, provision for doubtful accounts and other general corporate expenses. For the three months ended March 31, 2002, general and administrative expenses decreased over the prior period by 33.4%, primarily due to a reduction in provision for doubtful accounts during the period. For the nine months ended March 31, 2002, general and administrative expenses increased over the prior year by 10.0%, primarily due to an increase in the provision for doubtful accounts made during the year. As a percentage of revenues, general and administrative expenses remained relatively constant for the three and nine months ended March 31, 2002. Our long-term financial models project our general and administrative expenses to be within a range of 10% to 12% of total revenues.

Stock-Based Compensation

Stock-based compensation by category

	Three Months Ended March 31,				Nine Months Ended March 31,
	2002		2001		2002		2001
Research and Development	57	%	85	%	59	%	68	%
Sales and Marketing	7	%	15	%	5	%	32	%
General and Administrative	36	%	—		36	%	—

Stock-based compensation expense totaled $2.9 million and $1.4 million for the three months ended March 31, 2002 and 2001, respectively, and $12.3 million and $7.6 million for the nine months ended March 31, 2002 and 2001, respectively. All stock-based compensation expense is being amortized in a manner consistent with Financial Accounting Board Interpretation No. 28. The increase in stock-based compensation during the quarter ended March 31, 2002 as compared to the quarter ended March 31, 2001 was primarily due to the Avogadro acquisition, as well as to restricted shares issued during the three months ended September 30, 2001. Stock-based compensation consisted of continued amortization of the deferred stock-based compensation related to acquisitions, as well as compensation expense recognized on warrants, and restricted stock granted to executives. We expect our stock-based compensation expense to moderately decline in the future operating period.

Amortization and Impairment of Goodwill and Intangible Assets

Amortization and impairment of goodwill and intangible assets totaled $98.3 million and $159.3 million for the three months ended March 31, 2002 and 2001, respectively, and $698.9 million and $477.5 million for the nine months ended March 31, 2002

25

and 2001, respectively. Goodwill amortization is primarily the result of our acquisitions of Telarc, APiON and Angelica in October 1999, Paragon in March 2000, Onebox in April 2000, bCandid and MyAble in June 2000. Amortization of goodwill and other intangible assets is computed using the straight-line basis over three to five years. During the nine months ended March 31, 2002, we recorded an impairment charge of $279.5 million . Consistent with FAS No. 142, goodwill resulting from the acquisition of Avogadro will not be amortized.

Merger and Integration costs

As a result of the merger with Software.com, we recorded merger and integration costs of approximately $88.9 million during the fiscal year ended June 30, 2001. Merger costs, which totaled approximately $79.8 million, were comprised of banker’s fees of $73.4 million, regulatory fees of $2.2 million, and professional services of $4.2 million. Integration costs of approximately $9.1 million related to the merger with Software.com included costs associated with our name change and other consulting fees. During the nine months ended March 31, 2002, we increased merger and integration costs by $570,000 to a total of $89.5 million for the entire merger, as a result of additional professional services fees associated with the merger.

Interest and Other Income, Net

Interest and other income, net decreased from $3.8 million for the three months ended March 31 2001, to $3.1 million for the three months ended March 31, 2002, and from $19.3 million for the nine months ended March 31, 2001 to $4.2 million for the nine months ended March 31, 2002. The decrease in interest income was primarily a result of a $5.2 million write-down of certain strategic investments, as well as an overall decrease in interest income due to a decrease in cash of approximately $45.0 million during the period from March 31, 2001 to March 31, 2002 and a decrease in interest rates, from an average of 6.03% during the three months ended March 31, 2001 compared to an average of 3.1% during the three months ended March 31, 2002. We expect that interest income will continue to decline in the near term.

Income Taxes

Income tax expense totaled $3.7 million and $5.0 million for the three months ended March 31, 2001 and 2002, respectively, and $8.0 million and $10.8 million for the nine months ended March 31, 2001 and 2002, respectively. Income taxes in all periods presented consisted primarily of foreign withholding and foreign income taxes. Foreign withholding taxes fluctuate from quarter to quarter based both on geographical mix of our billings and the variation of billings from one quarter to the next. The withholding tax expense for the three months ended March 31, 2002 was higher than normal as a result of our efforts to audit our past billings to customers in jurisdictions that levy withholding taxes. This work effort yielded additional withholding taxes that were both billable to customers and correspondingly payable to the respective taxing authorities. We expect to incur withholding and foreign corporate income taxes on an ongoing basis of approximately 2% to 3% of revenues per quarter.

Liquidity and Capital Resources

The following table presents selected financial information and statistics for the periods ended March 31, 2002 and 2001, respectively:

	Periods Ended March 31,
	2002		Percent Change		2001
	(in thousands)
	$	193,191	(43.8	)	$	344,034
Cash and cash investments:
Cash and cash equivalents		117,679	(29.1	%)		166,064
Short-term investments		85,955	(55.8	%)		194,314
Long-term investments		110,043	100.0	%		—
Restricted cash		22,349	8.0	%		20,700
Total cash and cash investments	$	336,026	(11.8	%)	$	381,078

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Working capital as of March 31, 2002 was 43.8% lower than at the end of the corresponding prior year period, due primarily to a change in the Company’s investment policy that resulted in a shift of investments from short-term to long-term in order to obtain higher interest rate returns.

The negative cash flows used for operating activities during the first nine months of fiscal 2002, excluding cash paid for restructuring, totaled $13.2 million and related primarily to the net loss excluding noncash items. The negative cash flows used for operating activities during the first nine months of fiscal 2001 is primarily related to a net loss for the period and an increase in trade receivables. We expect that operational cash flows, excluding cash paid for restructuring costs, will result in a modestly negative impact to the cash flow in the near term.

The negative cash flows generated from investing activities during the nine months of fiscal 2002 were primarily attributable to purchases of property and equipment offset by net proceeds from short and long-term investments. The positive cash flows generated from investing activities during the first nine months of fiscal 2001 were primarily attributable to proceeds from sales of investments in order to finance operations offset by purchases of equipment. We expect that cash flows from investing activities will not be significant in the near term.

The negative cash flows from financing activities during the nine months of fiscal 2002 primarily reflected the repurchases of treasury stock. The positive cash flows provided by financing activities during the first nine months of fiscal 2001 primarily reflected the issuance of common stock. We expect that cash flows from financing activities during the next quarter will be negative due to $19.4 million in treasury stock that was purchased April 2002 as discussed below.

In September 2001, the Company announced that its Board of Directors had authorized a stock repurchase program of up to five million shares of common stock. Any purchases under the Company stock repurchase program may be made in the open market, in privately negotiated transactions or through the use of derivative securities. As of March 31, 2002, we had repurchased 1.7 million shares at a weighted-average price of $8.75, net of put option proceeds discussed below, and, therefore, had 3.3 million shares still available for repurchase under the current plan. During the quarter ended December 31, 2001, we repurchased 700,000 shares at a weighted-average price of $8.40 on the open market. During the same quarter, we also sold 3.5 million put options under the stock repurchase program the entitles the holder of each option to sell to us, for cash, by physical delivery or net share settlement at our election, one share of common stock at a specified price. The cumulative net proceeds to us from the sale of these put options were recorded as additional paid-in capital at the fair value of $10.5 million as required under the provisions of Emerging Issues Task Force 00-19. During the quarter ended March 31, 2002, 1.0 million of the options were exercised, and we acquired shares for $12.8 million and recorded the acquired shares as treasury stock. Additionally, 1.0 million put options were called by the holder of the options as a result of our closing price falling below the contractual minimum. We chose the option to pay $6.6 million to settle the obligation and recorded a decrease in additional paid-in capital. The remaining 1.5 million put options were renegotiated to require settlement of the put options if the stock fell below certain minimum prices. On April 23, 2002, our closing price fell below the contractual minimum on the remaining 1.5 million put options, and we bought 1.5 million shares for $19.4 million and recorded the repurchased shares as treasury stock. Thus, as of April 23, 2002, we have repurchased a total of 3.2 million shares under the stock repurchase program at a weighted-average price of $10.69, net of option proceeds.

As of March 31, 2002, our principal commitments consisted of obligations outstanding under operating leases and our equipment loans, capitalized lease obligations, and obligations under certain put options. On March 30, 2000, we entered into a lease for approximately 280,000 square feet of office space in Redwood City, California. The lease commenced upon completion of construction in the fourth quarter of fiscal year ended June 30, 2001. The lease requires a base rent of $3.25 per square foot per month and will increase by 3.5% annually. The lease term is for a period of 12 years from the commencement date of the lease. The lease required that we pay leasehold improvements that totaled $29.3 million at March 31, 2002. The agreement further required that we provide a letter of credit in the amount of $16.5 million.As of June 30, 2000, we guaranteed the letter of credit and pledged approximately $20.7 million, or 125% of the letter of credit. During the nine months ended March 31, 2002, we guaranteed additional letters of credit and pledged approximately $1.6 million for additional new locations outside Redwood City, California. The restricted cash and investments held in trust under these agreements are earning approximately 2.3% interest, and the resulting income earned is not subject to any restrictions.

We obtained a majority of our cash and investments from prior public offerings. Except for the put option agreement discussed above that was settled on April 23, 2002, we do not have any off-balance-sheet arrangements and are currently not dependent on debt financing. All contractual obligations and commercial commitments have been reflected in the financials.

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

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Risk Factors

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

Because we have a limited operating history, it is difficult to evaluate our business.

Because we commenced operation in 1994 and commercially released our first products in 1996, we only have a limited operating history on which you can base your evaluation of our business.

We may not continue to grow our business or reach profitability.

We face a number of risks encountered by early stage companies in the wireless telecommunications and Internet software industries, including:

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

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

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

• our dependence on a limited number of customers;

• our ability to anticipate and respond to market competition;

• our dependence upon key personnel;

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

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

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

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

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

• our pricing policies and those of our competitors; and

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

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

We may not achieve or sustain our revenue or profit goals.

Because we expect to continue to incur significant product development, sales and marketing and administrative expenses, we will need to generate significant revenues to become profitable and sustain profitability on a quarterly or annual basis. We may not achieve or sustain our revenue or profit goals, and our ability to do so depends on a number of factors outside of our control, including the extent to which:

• there is market acceptance of commercial services utilizing our products;

• our competitors announce and develop, or lower the prices of, competing products; and

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• our strategic partners dedicate resources to selling our products and services.

As a result, we may not be able to increase revenue or achieve profitability on a quarterly or annual basis.

Our operating results are subject to significant fluctuations, and our stock price may decline if we do not meet expectations of investors and analysts.

Our revenues and operating results are difficult to predict and may fluctuate significantly from period to period due to a number of factors, many of which are outside of our control. These factors include, but are not limited to:

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

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

• our lengthy sales and implementation cycles;

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

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

• delays in developing and introducing new products and services;

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

• changes in our mix of domestic and international sales;

• risks inherent in international operations;

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

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

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

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

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

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

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

In October 2001, we initiated a plan to streamline operations and reduce expenses, which included cuts in discretionary spending, reductions in capital expenditures, reductions in the work force and consolidation of certain office locations, as well as other steps to reduce expenses. In connection with the restructuring, we were required to make certain product and product development tradeoffs with limited information regarding the future demand for our various products. There can be no assurance that in connection with the restructuring, we decided to pursue the correct product offerings to take advantage of future market opportunities. Furthermore, the implementation of our restructuring plan has placed, and may continue to place, a significant

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strain on our managerial, operational, financial, employee and other resources. Additionally, the restructuring may negatively affect our employee turnover, recruiting and retention of important employees. It is possible that these reductions could impair our marketing, sales and customer support efforts or alter our product development plans. If we experience difficulties in carrying out the restructuring plan, our expenses could increase more quickly than we expect. If we find that our planned restructuring does not achieve our objectives, it may be necessary to implement further streamlining of our expenses, to perform additional reductions in our headcount, or to undertake additional restructurings of our business.

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

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

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

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

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

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

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

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

We may not be able to identify future suitable acquisition or business combination candidates, and even if we do identify suitable candidates, we may not be able to make these transactions on commercially acceptable terms, or at all. If we do acquire companies, businesses, or technologies or combine with other companies, we may not be able to realize the benefits we expected to achieve at the time of entering into the transaction. As a result, we may incur unexpected integration and product development expenses which could harm our results of operations. Further, we may have to utilize cash reserves, incur debt or issue equity securities to pay for any future acquisitions, the issuance of which could be dilutive to our existing stockholders.

Our goodwill and other intangible assets may become further impaired.

Due to rapidly changing market conditions, our goodwill and other intangible assets may become further impaired such that their carrying amounts may not be recoverable, and we may be required to record additional impairment charges impacting our financial position. We performed an impairment analysis and recorded a $279.5 million impairment charge during the three months ended December 31, 2001 within “Amortization and impairment of goodwill and other intangible assets” in our results from operations relating to certain long-lived assets and identifiable intangibles. As of March 31, 2002, we had approximately $438.2 million of goodwill and other intangible assets remaining, and it is possible that part of the remaining goodwill may become impaired in the future. Asset impairment charges of the foregoing nature could be large and could have a material adverse effect on our financial position and reported results of operations.

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

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

We may not be successful in our strategic investments.

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We have made, and in the future, we may continue to make strategic investments in other companies. These investments have been made in, and future investments will likely be made in, immature businesses with unproven track records and technologies. Such investments have a high degree of risk, with the possibility that we may lose the total amount of our investments. We may not be able to identify suitable investment candidates, and, even if we do, we may not be able to make those investments on acceptable terms, or at all. In addition, even if we make investments, we may not gain strategic benefits from those investments, and, therefore, we may need to record an impairment charge to write-off the strategic investments to our operations as was the case during the nine months ended March 31, 2002. As a result of regular monitoring of our strategic investments for evidence of impairment, we recorded $5.2 million impairment charge for the nine months ended March 31, 2002. There can be no assurance that we may not experience future material impairment charges with respect to our existing or future strategic investments.

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

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

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

Our future success depends on our ability to increase revenues from sales of our applications, infrastructure software and services to communication service providers. This dependence is exacerbated by the relatively small number of communication service providers worldwide whose willingness to purchase our products is critical to our success. To date, only a limited number of communication service providers have implemented and deployed services based on our products. Furthermore, we are dependent upon the carriers having growth in subscriber adoption. We cannot assure you that communication service providers will widely deploy or successfully market services based on our products, or that large numbers of subscribers will use these services.

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

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

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

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

To date, a significant portion of our revenues in any particular period has been attributable to a limited number of customers, comprised primarily of communication service providers. Sales to KDDI and its related entities accounted for approximately 18% and 17% of total revenue for the three months ended March 31, 2002 and 2001, respectively, and 21% and 15% of total revenue for the nine months ended March 31, 2002 and 2001, respectively. Sales to mmO2 (formerly British Telecommunications) accounted for approximately 8% and 12% of total revenue for the three months ended March 31, 2002 and 2001, respectively, and 9% and 12%% of total revenue for the nine months ended March 31, 2002 and 2001, respectively. We believe that we will continue to depend upon a limited number of customers for a significant portion of our revenues from each

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period for the foreseeable future. Any failure by us to capture a significant share of these customers could materially harm our business. We believe that the telecommunications industry is entering a period of consolidation. To the extent that our customer base consolidates, we will have increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.

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

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

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

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

Because our current software offers enhanced features and functionality that are not currently covered by the specifications promulgated by the WAP Forum, subscribers currently must use wireless devices enabled with our browser in order to fully utilize these features and functionality. Additionally, we expect that future versions of our software and related server-based software will offer features and functionality that are compatible with the specifications promulgated by the WAP Forum. Our business could suffer materially if widespread integration of our browser or WAP-compliant third-party browser software in wireless devices does not occur. All of our agreements with wireless device manufacturers are nonexclusive, so they may choose to embed a browser other than ours in their wireless devices. We may not succeed in maintaining and developing relationships with wireless device manufacturers, and any arrangements may be terminated early or not renewed at expiration. In addition, wireless device manufacturers may not produce products using our browser in a timely manner, in sufficient quantities, or with sufficient quality, if at all.

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

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

If unified messaging and instant messaging are not widely adopted by wireless device subscribers, our business could suffer.

We have focused a significant amount of efforts on the development of unified messaging and instant messaging applications for use on a variety of devices and specifically, wireless devices. If our customers do not adopt our technology, our business will suffer materially. If mobile individuals do not adopt unified messaging and instant messaging applications as a means of communicating, our business would suffer materially.

If the GSM Association (GSMA) M–Services initiative is not successful, our business could suffer.

The GSMA M–Services initiative is an attempt by European communication service providers to reduce market fragmentation and offer advanced services in Europe. If the GSMA M–Services initiative is not adopted in sufficient numbers, then there could be less demand for our products in Europe and our business could suffer.

The market for our products and services is highly competitive.

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

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

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

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

• systems integrators, such as CMG plc;

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

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

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

• Wireless Knowledge, a subsidiary of Qualcomm;

• communication service providers, such as NTT DoCoMo; and

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

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

Nokia markets a WAP server to communication service providers, corporate customers and content providers. This brings Nokia into direct and indirect competition with Openwave. Nokia’s corporate WAP server is designed to enable wireless device subscribers to directly access applications and services provided by these customers, rather than through gateways provided by communication service providers’ WAP servers. If Nokia’s WAP server is widely adopted by corporate customers and content providers, it could undermine the need for communication service providers to purchase WAP servers. Nokia also competes directly with Openwave in the area of messaging, offering end-to-end solutions, based on EMS and MMS, to communication service providers.

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

As we enter new markets and introduce new services, we will face additional competitors.

In the unified messaging market, we face competition from established voice mail providers such as CMG, Comverse and Internet-based unified messaging providers such as Critical Path. In the portal framework market, a number of companies have introduced products and services relating to mobile portals that compete with our products and services. These existing and potential competitors may include telecommunications companies such as Lucent Technologies, traditional Internet portals such as AOL, InfoSpace, Microsoft MSN and Yahoo!, Internet infrastructure software companies and several private mobile Internet portal companies.

In addition to the existing competitors listed above, we expect that voice mail solution providers will be competitors in the unified messaging market because of their existing relationships with service providers and ownership of technologies for the conversion of voice to data. If we are unable to compete effectively against existing or emerging competitors our business, financial condition and operating results could suffer.

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

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

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

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

We may fail to support our operations.

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

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

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

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

• continue to expand and upgrade core technologies;

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

• successfully integrate the businesses of our acquired companies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our products are integrated with communication service providers’ systems and wireless devices. If we are unable to continue to successfully integrate our platform products with these third-party technologies, our business could suffer. For example, if, as a result of technology enhancements or upgrades of these systems or devices, we are unable to integrate our products with these systems or devices, we could be required to redesign our software products. Moreover, many communication service providers use legacy, or custom-made, systems for their general network management software. Legacy systems and certain custom-made

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systems are typically very difficult to integrate with new server software. We may not be able to redesign our products or develop redesigned products that achieve market acceptance.

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

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

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

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

We generally enter into confidentiality and nondisclosure agreements with our employees, consultants, prospective customers, licensees and corporate partners. In addition, we control access to and distribution of our software, documentation and other proprietary information. Except for certain limited escrow arrangements with respect to certain of our products, we do not provide customers with access to the source code for our products. Despite our efforts to protect our intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Effectively policing the unauthorized use of our products and trademarks is time-consuming and costly, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology or trademarks, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States.

If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing and licensing our products.

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

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

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

International sale of product licenses and services accounted for 72% of our total revenues for the three months ended March 31, 2002. We expect international sales to continue to account for a significant portion of our revenues, although the percentage of our total revenues derived from international sales may vary. Risks inherent in conducting business internationally include:

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

• fluctuations in currency exchange rates;

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• any imposition of currency exchange controls;

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

• difficulties and costs of staffing and managing international operations;

• differing technology standards;

• export restrictions on encryption and other technologies;

• difficulties in collecting accounts receivable and longer collection periods;

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

• political instability, acts of terrorism or war;

• economic downturns;

• potentially adverse tax consequences;

• reduced protection for intellectual property rights in certain countries;

• costs of localizing our products for foreign markets;

• contractual provisions governed by foreign laws; and

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

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

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

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

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

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

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Our stock price, like that of many companies in the Internet and telecommunications software industries, may be volatile.

Our stock price has experienced significant volatility. We expect that the market price of our common stock also will fluctuate in the future as a result of variations in our operating results. These fluctuations may be exaggerated if the trading volume of our common stock is low. In addition, due to the technology-intensive and emerging nature of our business, the market price of our common stock may rise and fall in response to:

• announcements or technological or competitive developments;

• acquisitions or strategic alliances by us or our competitors;

• the gain or loss of a significant customer or order;

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

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

In addition, we currently have little visibility into our customers purchasing decisions, which may accentuate swings in our stock price.

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

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The tables below provide information about our derivative financial instruments and financial instruments that are subject to market risk. These include: a foreign currency forward contract used to hedge a foreign currency deposit, which is subject to exchange rate risk, and available-for-sale short-term and long-term investments, which are subject to interest rate risk.

We operate internationally and thus are exposed to potentially adverse movements in foreign currency rate changes. We manage our foreign currency exchange rate risk by entering into contracts to sell or buy foreign currency at the time a foreign currency receivable or payable is generated. When the foreign currency asset or liability is extinguished, the contract is liquidated, and the resulting gain or loss on the contract mitigates the exchange rate risk of the associated asset or liability. We have entered into foreign exchange forward contracts to reduce our exposure to foreign currency rate changes on cumulative net monetary balance sheet positions and within individual balance sheet transactions. The objective of these contracts is to neutralize the impact of foreign currency exchange rate movements on our operating results. These contracts require us to exchange currencies at rates agreed upon at the inception of the contracts. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally offset with the gains and losses of the foreign exchange forward contracts. Because the impact of movements in currency exchange rates on forward contracts offsets the related impact on the underlying items being hedged, these financial instruments help alleviate the risk that might otherwise result from changes in currency exchange rates. We do not designate our foreign exchange forward contracts as “accounting hedges” and, accordingly, we adjust these instruments to fair value through earnings in the period of change in their fair value.

As of March 31, 2002, we had forward contracts in Japanese Yen and British Pound Sterling outstanding. The forward contracts are accounted for on a mark-to-market basis, with gains or losses recognized in the consolidated statements of operations. The future value of these contracts is subject to exchange rate risk resulting from foreign exchange rate volatility. Current market rates at the consolidated balance sheet dates were used to estimate the fair value of foreign currency forward contracts.

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The following summarizes our foreign currency forward contract, which mature through May 2002, by currency, as of March 31, 2002:

	Contract Amount (Local Currency)	Contract Amount		Fair Value at March 31 2002 (US$)
	(in thousands)
Foreign Currency Spot Contracts:
Contract to pay Yen/receive US$	(YEN)82,100	US$	708	$24
Contract to pay Yen/receive US$	(YEN)11,500	US$	89	3
Contract to pay GBP/receive US$	(GBP)  4,100	US$	5,877	—
Contract to pay GBP/receive US$	(GBP)     800	US$	1,138	22

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

	Expected maturity date for the year ending June 30,											Cost Value		Fair Value
	2002			2003		2004		2005		2006		Mar 31, 2002 Total		Mar 31, 2002 Total
Corporate Bonds	$	21,088		$	71,783	$	15,546	$	—	$	—	$	108,407	$	108,585
Commercial Paper		—			4,937		—		—		—		4,937		4,937
Federal Agencies		9,922			15,063		65,248		—		—		90,233		89,865
Taxable Auction Rate Securities		4,000							—		—		4,000		4,000
Sovereign Debts		5,033			—		—		—		—		5,033		5,046
Total	$	40,043		$	91,783	$	80,794	$	—	$	—	$	212,620	$	212,433
Weighted-average interest rate		3.06	%

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

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

PART II

OTHER INFORMATION

Item 1.    Legal Proceedings

On February 2, 2001, a complaint, Leon Stambler v. RSA Security Inc., Verisign Inc., First Data Corporation, Openwave Systems Inc. and Omnisky Corporation, Civil Action No. 01-00065, was filed in the U.S. District Court for the district of Delaware against us and certain other companies. The complaint alleges that the defendants have infringed claims of one or more patents that Mr. Stambler asserts have been granted to him. On March 26, 2001, we responded to the complaint. We denied the allegations that we have infringed any claim in either of the patents asserted against us. In addition, we asserted counterclaims against Mr. Stambler

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seeking a declaratory judgment that the asserted patents are not infringed by us and that the patents are also invalid and unenforceable. Based on the facts known to date, we believe that we have meritorious defenses and claims. We do not believe resolution of this matter will have a material adverse effect on the financial condition of us.

A former employee commenced an arbitration against us in February 2002 alleging various claims for misrepresentation in connection with his employment agreement and for tortious constructive discharge from his employment. The demand for arbitration asks for an award of damages in excess of $25 million. Although the arbitration is in its preliminary stages, we believe the claims are without merit, we intend to defend the arbitration vigorously and do not believe this matter will have a material adverse effect on the financial condition of our Company.

On April 30, 2001, a complaint, Opuswave Networks, Inc. v. Openwave Systems Inc. and Alain Rossmann, Civil Action No. 01-1681, was filed in the U.S. District Court for the Northern District of California against us and a former affiliate. The complaint alleged that we had infringed claims of a common law trademark that Opuswave Networks asserted it had acquired. We have settled this action with Opuswave Networks on February 15, 2002 for a deminimis amount.

Based upon certain publicly available information, on November 5, 2001, a purported securities fraud class action complaint was filed in the United States District Court for the Southern District of New York. The case is now captioned as In re Openwave Systems, Inc. (sic) Initial Public Offering Securities Litigation, Civ. No. 01-9744 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). Openwave and one of our officers were served with the complaint, only after the 120 days for service allowed under the Federal Rules of Civil Procedure. On April 22, 2002, plaintiffs electronically served an amended complaint. The amended complaint is brought purportedly on behalf of all persons who purchased our common stock from June 11, 1999 through December 6, 2000. It names as defendants our Company; five of our present and former officers; and several investment banking firms that served as underwriters of our initial public offering and secondary public offering. The amended complaint alleges liability as to all defendants under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. Certain of these claims (including claims against us and our present or former officers under the Securities Exchange Act of 1934) had not been asserted in the initial complaint filed November 5, 2001. No specific damages are claimed. We are aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. Defendants’ time to respond to the complaints has been stayed pending a plan for further coordination. Based upon our current understanding of the facts, we believe that the complaint is without merit, we intend to defend against it vigorously and we do not believe resolution of this matter will have a material adverse effect on the financial condition of our Company.

Based on certain information in the public record, on May 3, 2002, we received notice of the pending filing of a purported shareholder derivative lawsuit in the Superior Court of California, County of San Mateo, titled Lefort v. Black et al. The lawsuit purports to be filed on behalf of our Company, asserting claims against the officers and directors at the time of our initial public offering. The allegations are similar to the allegations in the securities class action case described above. In the derivative case, however, plaintiff asserts that the alleged conduct injured our Company because our shares were not sold for as high a price in the IPO as they otherwise could have been. We are aware that similar allegations have been made in other derivative lawsuits involving issuers that also have been sued in the Southern District of New York securities class action cases, and that plaintiffs’ lawyers have indicated that they intend to file additional derivative lawsuits. Based upon the our current understanding of the facts, we believe that the complaint is without merit, we intend to defend against it vigorously and we do not believe resolution of this matter will have a material adverse effect on the financial condition of our Company.

Item 2.    Changes in Securities and Use of Proceeds

On October 15, 2001, in connection with the acquisition of software and related intellectual property from a small privately-held company, we issued approximately 19,000 shares of our common stock to the company. We have the right to repurchase approximately 13,000 shares at $0.01 per share, which repurchase right lapses upon the meeting of certain milestones. We believe that the transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, under Section 4(2) or other applicable exemption.

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Item 3.    Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5.    Other Information

In January 2002, the disinterested members of the Board amended and restated the Openwave Systems Inc. 1999 Directors’ Stock Plan in accordance with the recommendations of an independent compensation consulting firm to align the option grants under the plan with current market practice. Directors who are employees of the Company are not eligible to receive option grants under this plan.

The following changes were made to the amended and restated plan: (1) Initial grants to new directors were reduced from an option to purchase 66,000 shares of the Company with immediate full vesting to an option to purchase 60,000 shares of the Company with vesting contingent on continued service on the Board over four years as follows: 25% of the shares vesting on the first anniversary after appointment to the Board and the remaining shares vesting ratably on a monthly basis over the next three years. (2) Subsequent option grants to directors in the calendar year(s) following their initial selection to the Board were changed from one option each quarter to purchase 5,000 shares (i.e., 20,000 shares annually) vesting immediately upon grant, to one annual option grant to purchase 36,000 shares of the Company, which vests ratably over four years on a monthly basis based on continued service on the Board. (3) The vesting of all options now accelerate upon the dismissal of the director from the Board within 24 months following a change of control of the Company (such a provision was unnecessary previously since all the option grants were previously vested immediately upon grant). All options granted under the amended and restated plan will continue to be granted with an exercise price equal to 100% of the fair market value of the Company’s stock at the time of grant.

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Item 6.    Exhibits and Reports on Form 8-K

(a)  Exhibits

Exhibit Number	Description
10.1	Openwave Systems Inc. 1999 Director’s Stock Option Plan, as Amended and Restated effective January 1, 2002
10.2	Openwave Systems Inc. 1999 Employee Stock Purchase Plan (Amended and Effective as of April 11, 2002)

(b)  Reports on Form 8-K

None.

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SIGNATURE

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

Date: May 15, 2002

OPENWAVE SYSTEMS INC.
By:	/s/    ALAN BLACK
	Alan Black Senior Vice President, Corporate Affairs and Chief Financial Officer

(Principal and Financial Accounting Officer)

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