Cti 10Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2008


o		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 0-10560

CTI GROUP (HOLDINGS) INC.

(Exact name of registrant as specified in its charter)


DELAWARE		51-0308583

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

333 North Alabama Street, Suite 240, Indianapolis, IN 46204

(Address of principal executive offices) (Zip Code)

(317) 262-4666

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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


Large accelerated filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyþ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of November 11, 2008, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,178,271. As of November 11, 2008, treasury stock constituted 140,250 shares of Class A common stock.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS


ITEM	PAGE
NO.	NO.
Forward Looking Statements		3

PART I — Financial Information
1. Financial Statements
Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007		4
Consolidated Statements of Operations (unaudited) for the nine months ended September 30, 2008 and September 30, 2007		5
Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2008 and September 30, 2007		6
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2008 and September 30, 2007		7
Notes to Consolidated Financial Statements (unaudited)		8-15
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-25
3. Quantitative and Qualitative Disclosures about Market Risk		26
4(T). Controls and Procedures		27
PART II — Other Information
1. Legal Proceedings		28
1A. Risk Factors		28
2. Unregistered Sales of Equity Securities and Use of Proceeds		28
3. Defaults Upon Senior Securities		28
4. Submission of Matters to a Vote of Security Holders		28
5. Other Information		28
6. Exhibits		28
Signatures		29
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “forward-looking” statements. CTI Group (Holdings) Inc. and its subsidiaries (the “Company”) include this cautionary statement regarding forward-looking statements for the express purpose of using protections of the safe-harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. Examples of forward-looking statements include, but are not limited to: (a) projections of revenues, capital expenditures, growth, prospects, dividends, capital structure and other financial matters; (b) statements of plans and objectives of the Company or its management or board of directors; (c) statements of future economic performance; (d) statements of assumptions underlying other statements and statements about the Company and its business relating to the future; and (e) any statements using the words “anticipate”, “expect”, “may”, “project”, “intend”, “believe”, or similar expressions.

The Company’s ability to predict projected results or the effect of certain events on the Company’s operating results is inherently uncertain. Therefore, the Company wishes to caution each reader of this Quarterly Report to carefully consider the risk factors stated in the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007, any or all of which have in the past and could in the future affect the ability of the Company to achieve its anticipated results and could cause actual results to differ materially from those discussed herein, including, but not limited to: ability to attract and retain customers to purchase its products, ability to develop or launch new software products, technological advances by third parties and competition, ability to successfully enter the Hosted Voice and over Internet Protocol applications market, ability to protect the Company’s patented technology, ability to obtain settlements in connection with its patent enforcement activities. You should not place any undue reliance on any forward-looking statements. The Company disclaims any intent or obligations to update forward-looking statements contained in this Form 10-Q.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2008			2007
	(unaudited)			(audited)
ASSETS
Cash and cash equivalents	$	643,976		$	555,839
Trade accounts receivable, less allowance for doubtful accounts of $100,045 and $71,237, respectively		6,096,246			3,230,674
Note and settlement receivable — short term		357,999			384,847
Prepaid expenses		572,595			406,578
Deferred financing costs		93,624			116,532
Other current assets		43,334			41,271

Total current assets		7,807,774			4,735,741

Long term settlement receivable — net of current portion		458,906			906,751
Property, equipment, and software, net		1,776,652			1,725,353
Deferred financing costs — long term		52,807			95,074
Intangible assets, net		4,769,619			5,289,545
Goodwill		4,896,990			4,896,990
Other assets		85,704			86,300

Total assets	$	19,848,452		$	17,735,754


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	519,996		$	577,541
Accrued expenses		2,434,240			1,724,212
Accrued wages and other compensation		1,427,132			973,700
Deferred revenue		1,321,721			1,390,228
Income tax payable		318,958			365,967
Deferred income tax liability		73,393			199,417

Total current liabilities		6,095,440			5,231,065

Note payable — long term		2,930,000			2,600,000
Lease incentive — long term		195,089			233,114
Deferred revenue — long term		2,192			10,769
Deferred income tax liability — long term		1,099,195			1,254,142

Total liabilities		10,321,916			9,329,090

Commitments and contingencies

Stockholders’ equity
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,178,271 issued and outstanding at September 30, 2008 and at December 31, 2007		291,783			291,783
Additional paid-in capital		25,811,391			25,639,384
Accumulated deficit		(16,654,279	)		(17,452,605	)
Other comprehensive income — foreign currency translation		269,784			120,245
Treasury stock, 140,250 shares at cost		(192,143	)		(192,143	)

Total stockholders’ equity		9,526,536			8,406,664

Total liabilities and stockholders’ equity	$	19,848,452		$	17,735,754

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Nine months ended
	September 30,
	2008		2007
Revenues:
Software sales, service fee and license fee revenue	$	15,441,693	$	15,604,672
Patent license fee and enforcement revenues		2,850,000		899,519


		18,291,693		16,504,191

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		3,724,238		3,843,406
Patent license fee and enforcement cost		1,580,989		1,515,339
Selling, general and administration		7,538,857		7,216,361
Research and development		2,920,129		3,005,464
Depreciation and amortization		1,208,234		1,645,276


Income / (loss) from operations		1,319,246		(721,655	)


Other expense / (income)
Interest expense, net of interest income of $91,209 and $226,267, respectively		178,636		295,843
Other expense		35,747		35,769

Total other expense / (income)		214,383		331,612

Income / (loss) before income taxes		1,104,863		(1,053,267	)

Tax expense		306,537		289,145


Net income / (loss)		798,326		(1,342,412	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		149,539		(28,862	)

Comprehensive income / (loss)	$	947,865	$	(1,371,274	)


Basic and diluted net income / (loss) per common share	$	0.03	$	(0.05	)


Basic weighted average common shares outstanding		29,038,021		29,038,021
Diluted weighted average common shares outstanding		29,109,970		29,038,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three months ended
	September 30,
	2008			2007
Revenues:
Software sales, service fee and license fee revenue	$	5,066,986		$	5,348,509
Patent license fee and enforcement revenues		2,850,000			—


		7,916,986			5,348,509

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		1,282,790			1,345,887
Patent license fee and enforcement cost		1,199,675			824,619
Selling, general and administration		2,537,189			2,240,455
Research and development		821,402			893,918
Depreciation and amortization		392,153			557,704


Income / (loss) from operations		1,683,777			(514,074	)


Other expense / (income)
Interest expense, net of interest income of $23,507 and $67,892, respectively		57,403			71,097
Other expense		(6,688	)		29,002

Total other expense / (income)		50,715			100,099

Income / (loss) before income taxes		1,633,062			(614,173	)

Tax expense		102,583			194,300


Net income / (loss)		1,530,479			(808,473	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		154,935			(15,158	)

Comprehensive income / (loss)	$	1,685,414		$	(823,631	)


Basic and diluted net income / (loss) per common share	$	0.05		$	(0.03	)


Basic and diluted weighted average common shares outstanding		29,038,021			29,038,021

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended
	September 30,
	2008			2007
Cash flows from operating activities:
Net income / (loss)	$	798,326		$	(1,342,412	)
Adjustments to reconcile net income / (loss) to net cash provided by / (used in) operating activities:
Depreciation and amortization		1,208,234			1,645,276
Provision for doubtful accounts		49,428			42,592
Provision for doubtful note receivable		206,191			—
Deferred income taxes		(145,658	)		(117,159	)
Amortization of deferred financing fees		135,888			130,073
Recognition of rent incentive benefit		(12,654	)		36,712
Stock option grant expense		172,007			133,858
Loss on disposal of property and equipment		37,327			35,769
Changes in operating assets and liabilities:
Trade receivables		(3,193,259	)		173,286
Note and settlement receivables		268,502			(360,738	)
Prepaid expenses		(198,564	)		1,051
Income taxes		(10,204	)		570,260
Other assets		(475	)		28,014
Accounts payable		(24,744	)		585,457
Accrued expenses		722,895			(878,156	)
Accrued wages and other compensation		515,745			231,837
Deferred revenue		58,170			(490,151	)

Cash provided by operating activities		587,155			425,569


Cash flows provided by / (used in) investing activities:
Additions to property, equipment, and software		(771,043	)		(612,782	)
Reduction in acquisition cost		—			40,908
Proceeds from sale of property and equipment		—			6,600
Increase in restricted cash		—			(336,229	)

Cash used in investing activities		(771,043	)		(901,503	)


Cash flows provided by / (used in) financing activities:
Borrowings under credit agreements		3,525,000			1,606,415
Repayments under credit agreements		(3,195,000	)		(2,525,000	)

Cash provided by / (used in) financing activities		330,000			(918,585	)


Effect of foreign currency exchange rates on cash and cash equivalents		(57,975	)		(42,254	)


Increase / (decrease) in cash and cash equivalents		88,137			(1,436,773	)

Cash and cash equivalents, beginning of period		555,839			1,691,349


Cash and cash equivalents, end of period	$	643,976		$	254,576

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1: Business and Basis of Presentation

CTI Group (Holdings) Inc. and subsidiaries (the “Company” or “CTI”) design, develop, market and support intelligent electronic invoice processing, enterprise communications management software and services solutions, and carrier class voice over internet protocol management applications.

The Company was originally incorporated in Pennsylvania in 1968 and reincorporated in the State of Delaware in 1988, pursuant to a merger of CTI into a wholly owned subsidiary formed as a Delaware corporation. In November 1995, the Company changed its name to CTI Group (Holdings) Inc.

The Company is comprised of the following business segments: Electronic Invoice Management (“EIM”), Telemanagement (“Telemanagement”), Hosted Voice over Internet Protocol (“VoIP”) and Patent Enforcement Activities (“Patent Enforcement”). EIM designs, develops and provides services and software tools that enable telecommunication service providers to better meet the needs of their enterprise customers. EIM software and services are provided and sold directly to telecommunication service providers who then market and distribute the software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while driving internal efficiencies into their invoice receipt, validation, approval and payment workflow processes. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase these products when upgrading or acquiring a new enterprise communications platform. The Company added VoIP as a segment in 2007. Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property, including patents.

The accompanying consolidated financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature.

Certain information in footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America, has been condensed or omitted pursuant to the rules and regulations of the SEC, although the Company believes the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements for the years ended December 31, 2007 and 2006 and the notes thereto included in the Company’s Form 10-KSB filed with the SEC.

The Company realizes patent license fee and enforcement revenues. These revenues are realized once the Company has received a signed settlement or judgment and the collection of the receivable is deemed probable. The Company recognized $2,850,000 in revenues associated with patent license fee and enforcement activities in the three and nine months ended September 30, 2008.

Amortization expense of developed software amounted to $318,197 and $628,163 for the nine months ended September 30, 2008 and 2007, respectively. Amortization expense of developed software amounted to $98,874 and $210,960 for the three months ended September 30, 2008 and 2007, respectively. Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense.

NOTE 2: Supplemental Schedule of Non-Cash Investing and Financing Activities

The Company paid $119,835 and $442,974 in interest related to the Company’s notes payable for the nine months ended September 30, 2008 and 2007, respectively.

The Company paid $403,539 during the nine months ended September 30, 2008 for prior year tax payments and $132,401 during the nine months ended September 30, 2008 for current year estimated tax payments.

NOTE 3: Long-Term Debt Obligations

The Company has available a revolving loan facility with National City Bank equal to the lesser of (a) $3,000,000, (b) the sum of 80% of eligible domestic trade accounts receivable and 90% of eligible, insured foreign trade accounts receivable or (c) four times the sum of earnings before interest, taxes, depreciation and amortization for the trailing twelve month period. Outstanding borrowings under the revolving loan bear interest at LIBOR plus 2.50% payable monthly which amounted to 5.69% as of September 30, 2008. The Company also must pay an unused revolving loan commitment fee of 0.25% of the average daily amount by which the revolving loan commitment exceeds the outstanding principal amount. The amount paid on the unused revolving loan commitment fee amounted to $1,532 and $6,116 for the three months and nine months ended September 30, 2008, respectively. The revolving loan expires on December 30, 2010. All borrowings are collateralized by substantially all assets of the Company. The outstanding balance on the revolving loan was $330,000 at September 30, 2008. Available for borrowing under the revolving loan on September 30, 2008 was $1,747,649. The carrying amount of receivables that served as collateral for borrowings totaled $2,077,649 at September 30, 2008.

Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) agreed to provide a guarantee to cure, fund or provide credit support for any over advance under the revolving loan facility. As of September 30, 2008, Fairford beneficially owned 64.0% of the Company’s outstanding Class A common stock. Mr. Osseiran, the majority holder of the Company’s Class A common stock and director of the Company, is a director of Fairford and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford.

The Company entered into an acquisition loan (the “Acquisition Loan”) agreement with National City Bank on December 22, 2006 in the amount of $2,600,000. The Acquisition Loan expires on December 21, 2009, unless extended. Borrowings under the Acquisition Loan bear interest at LIBOR plus 2.00% payable monthly (5.19% at September 30, 2008). All borrowings under the Acquisition Loan are collateralized by substantially all assets of the Company. The outstanding balance on the term loan was $2,600,000 at September 30, 2008.

Borrowings under the revolving loan and the Acquisition Loan are subject to certain financial covenants including (a) minimum consolidated funded debt ratio, (b) minimum consolidated net worth, and (c) minimum consolidated debt service coverage ratio and restrictions on indebtedness, encumbrances, investments, business combinations, and other related items. As of September 30, 2008, the Company was compliant with all covenants.

NOTE 4: New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) released Interpretation No. 48,Accounting for Uncertainty in Income Taxes(“FIN 48”). This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The adoption did not have a material effect on the Company’s financial statements. See further discussion in Note 9.

In September 2006, the FASB issued Statement No. 157,Fair Value Measurements(“FAS 157”). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”). This FSP 157-2 delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FAS 157 as it relates to financial assets and financial liabilities had no effect on the Company’s financial statements. The Company anticipates there will be no material impact of the adoption of FSP 157-2 on the Company’s financial statements. In October 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active(“FSP 157-3”), which clarifies the application of FAS 157 in an inactive market. FSP 157-3 explains that when relevant and observable market information is not available to determine the measurement of an asset’s fair value, management must use their judgment about the assumptions a market participant would use in pricing the asset in a current sale transaction. Appropriate risk adjustments that a market participant would use must also be taken into account when determining the fair value. Application of this guidance should be accounted for as a change in estimate and FSP 157-3 was effective upon issuance. Upon adoption

of FSP 157-3, the Company anticipates there will be no material impact on the Company’s condensed consolidated financial statements.

In February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

NOTE 5: Basic and Diluted Net Income Per Common Share

Net income per common share is computed in accordance with Statement on Financial Accounting Standards (“SFAS”) No. 128,Earnings Per Share. Basic earnings per share amounts are computed by dividing reported earnings available to common stockholders by the weighted average shares outstanding for the period. Diluted earnings per share amounts are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding for the period giving effect to securities considered to be potentially dilutive common shares such as stock options.


	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2008		2007			2008		2007
Net income / (loss)	$	1,530,479	$	(808,473	)	$	798,326	$	(1,342,412	)


Weighted average shares of common stock outstanding used to compute basic earnings per share		29,038,021		29,038,021			29,038,021		29,038,021
Additional common shares to be issued assuming exercise of stock options and stock warrants		—		—			71,949		—

Weighted average shares of common and common equivalent stock outstanding used to compute diluted earnings per share		29,038,021		29,038,021			29,109,970		29,038,021


Basic:
Net income / (loss) per share	$	0.05	$	(0.03	)	$	0.03	$	(0.05	)


Weighted average common shares outstanding		29,038,021		29,038,021			29,038,021		29,038,021


Diluted:
Net income / (loss) per share	$	0.05	$	(0.03	)	$	0.03	$	(0.05	)


Weighted average common and common equivalent shares outstanding		29,038,021		29,038,021			29,109,970		29,038,021

There were no additional common shares to be issued, assuming exercise of stock options and stock warrants, since all options and warrants had an exercise price higher than the average stock price for the three months ended September 30, 2008. For the three months and nine months ended September 30, 2007, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss. Additional common shares to be issued, assuming exercise of stock options for the nine and three months ended September 30, 2007, would have been 324,899 and 394,932, respectively.

NOTE 6: Stock Based Compensation

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provides for the issuance of incentive and nonqualified stock options to purchase, and restricted stock grants of, shares of the Company’s Class A common stock. Individuals eligible for participation in the Plan include designated officers and other employees (including employees who also serve as directors), non-employee directors, independent contractors and consultants who perform services for the Company. The terms of each grant under the Plan are determined by the Board of Directors, or a committee of the board administering the Plan, in accordance with the terms of the Plan. Outstanding stock options become immediately exercisable upon a change of control of the Company as in accordance with the terms of the Plan. Stock options granted under the Plan typically become exercisable over a one to five year period. Generally, the options have various vesting periods, which include immediate and term vesting periods.

On December 8, 2005, the Company’s stockholders approved the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan replaced the Plan. No new grants will be granted under the Plan. Grants that were made under the Plan prior to stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan. On May 28, 2008, the Company’s stockholders approved the increase in the aggregate number of shares of Class A common stock authorized for issuance pursuant to the Stock Incentive Plan from 3,000,000 shares to 6,000,000 shares.

The Stock Incentive Plan is administered by the Compensation Committee of the board of directors. Under the Stock Incentive Plan, the Compensation Committee is authorized to grant awards to non-employee directors, executive officers and other employees of, and consultants and advisors to, the Company or any of its subsidiaries and to determine the number and types of such awards and the terms, conditions, vesting and other limitations applicable to each such award. In addition, the Compensation Committee has the power to interpret the Stock Incentive Plan and to adopt such rules and regulations as it considers necessary or appropriate for purposes of administering the Stock Incentive Plan.

The following types of awards or any combination of them may be granted under the Stock Incentive Plan: (i) incentive stock options, (ii) non-qualified stock options, (iii) stock grants, and (iv) performance awards.

The maximum number of shares of Class A common stock with respect to which awards may be granted or measured to any individual participant under the Stock Incentive Plan during each of the Company’s fiscal years will not exceed 1,500,000 shares of Class A common stock, subject to certain adjustments.

The aggregate number of shares of Class A common stock that are reserved for awards, including shares of Class A common stock underlying stock options, to be granted under the Stock Incentive Plan is 6,000,000 shares, subject to adjustments for stock splits, recapitalizations and other specified events. Such shares may be treasury shares or authorized but unissued shares. As of September 30, 2008, there were 3,042,968 awards available for grant under the Stock Incentive Plan. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted. At September 30, 2008, there were outstanding options to purchase 30,000 shares of Class A common stock that were granted prior to February 12, 2001 and options to purchase 250,000 shares of Class A common stock that were granted outside the plan on October 9, 2007 (“Outside Plan Options”), options to purchase 1,662,500 shares of Class A common stock that were granted pursuant to the Plan and options to purchase 2,490,782 shares of Class A common stock that were granted pursuant to the Stock Incentive Plan. At September 30, 2008, options to purchase 3,133,297 shares of Class A common stock were exercisable, which included the Outside Plan Options, options to purchase 1,629,188 shares of Class A common stock that were granted pursuant to the Plan and options to purchase 1,224,109 shares of Class A common stock that were granted pursuant to the Stock Incentive Plan.

Information with respect to options is as follows:


			Exercise		Weighted
	Options		Price Range		Average
	Shares		Per Share		Exercise Price
Outstanding, December 31, 2007		4,472,282	$	0.21 - $0.50	$	0.33
Granted		—		—		—
Exercised		—		—		—
Cancelled		39,000		—		—

Outstanding, September 30, 2008		4,433,282	$	0.21 - $0.50	$	0.33

The following table summarizes options exercisable at September 30, 2008:

Exercise Price

Weighted

Aggregate

Weighted

Option

Range

Average

Intrinsic

Remaining

Per Share

Exercise Price

Value

Contractual Term

September 30, 2008

3,133,297

$0.21 — $0.50

0.33

810,171

6.93 years

The following table summarizes non-vested options:


	Option
	Shares
December 31, 2007		1,966,125
Granted		—
Cancelled		—
Vested		(666,130	)

September 30, 2008		1,299,995

The fair value of each option award is estimated on the date of grant using a closed-form option valuation model (Black-Scholes-Merton formula) that uses the assumptions noted in the foregoing table. Because closed-form valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on implied volatilities from historical volatility of the Company’s stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from general practices used by other companies in the software industry and estimates by the Company of the period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The volatility, dividend yield, risk free interest rate, and expected life used for the 1,900,000 options granted on February 16, 2007 are 67.00%, 0.00%, 4.68%, and 5 years, respectively.

On February 16, 2007, the Company and Fairford Holdings Scandinavia AB (“Fairford Scandinavia”), a wholly-owned subsidiary of Fairford, entered into the Securities Purchase Agreement (the “Agreement”), dated February 16, 2007. Pursuant to the Agreement, on February 16, 2007, the Company issued to Fairford Scandinavia a Class A common stock Purchase Warrant (the “Original Warrant”) to purchase shares of Class A Common Stock of the Company in consideration for securing the issuance of a $2.6 million letter of credit (the “Letter of Credit”) from SEB bank to National City Bank. Due to National City Bank’s receipt of the Letter of Credit, the Company was able to obtain the Acquisition Loan at a favorable cash-backed interest rate. Effective April 14, 2008, the Company entered into the Securities Purchase Agreement with Fairford Scandinavia and issued an additional warrant to Fairford Scandinavia to purchase shares of Class A common stock based on the interest rate savings (the “Additional Warrant”).

Pursuant to the Original Warrant, Fairford Scandinavia is entitled to purchase 419,495 shares of Class A common stock at the exercise price of $0.34 per share, subject to adjustments as described in the Original Warrant, at any time prior to the 10th anniversary of the date of issuance. Pursuant to the Additional Warrant, Fairford Scandinavia is entitled to purchase 620,675 shares of Class A common stock at the exercise price of $0.22 per share, subject to adjustments as described in the Additional Warrant, at any time prior to the 10th anniversary of the date of issuance. As of September 30, 2008, Fairford beneficially owned 64% of the Company’s outstanding Class A common stock and Fairford Scandinavia owned warrants to purchase 1,040,170 shares of the Company’s Class A common stock. Mr. Osseiran, the majority holder of the Company’s Class A common stock and a director of the Company, is a director of Fairford, the President of Fairford Scandinavia and a grantor and sole beneficiary of a revocable trust which is the sole stockholder of Fairford. Mr. Dahl, a director of the Company, is a director of Fairford and the Chairman of Fairford Scandinavia. The Original Warrant and Additional Warrant vested immediately upon grant. The expense related to the warrants granted to Fairford Scandinavia was charged to deferred financing fees and amortized to interest expense for the three months ended September 30, 2008 and 2007 of $21,318 and $21,318, respectively, and the nine months ended September 30, 2008 and 2007 of $63,955 and $63,955, respectively.

Included within selling, general and administrative expense for the three months ended September 30, 2008 and September 30, 2007 was $28,903 and $49,177, respectively, of stock-based compensation. Included within selling, general and administrative expense for the nine months ended September 30, 2008 and September 30, 2007 was $86,734 and $133,858, respectively, of stock-based compensation. Stock-based compensation expenses are recorded in the Corporate Allocation segment as these amounts are not included in internal measures of segment operating performance.

NOTE 7: Indemnification to Customers

The Company’s agreements with customers generally require the Company to indemnify the customer against claims that the Company’s software infringes third party patent, copyright, trademark or other proprietary rights. Such indemnification obligations are generally limited in a variety of industry-standard provisions including our right to replace the infringing product. As of September 30, 2008, the Company did not experience any material losses related to these indemnification obligations and no material claims with respect thereto were outstanding. The Company does not expect significant claims related to these indemnification obligations, and consequently, the Company has not established any related accruals.

NOTE 8: Contingencies

The Company is, from time to time, subject to claims and administrative proceedings in the ordinary course of business that are unrelated to Patent Enforcement.

NOTE 9: Income Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of September 30, 2008, the Company’s valuation allowance related only to net deferred tax assets in the United States.

The Company adopted the FIN 48 as of January 1, 2007. As a result of the implementation of FIN 48, there was no cumulative effect adjustment for unrecognized tax benefits, which would have been accounted for as an adjustment to the January 1, 2007 balance of retained earnings. As of September 30, 2008 and September 30, 2007, the Company had $37,369 and $0 of unrecognized tax benefits, respectively, all of which would favorably affect the Company’s effective tax rate if recognized. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Indiana and foreign income tax in the United Kingdom. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties as of September 30, 2008.

For the nine months ended September 30, 2008 and September 30, 2007, the Company had $306,537 and $289,145, respectively, of income tax expense and for the three months ended September 30, 2008 and September 30, 2007, the Company had $102,583 and $194,300, respectively, of income tax expense primarily related to the United Kingdom operations.

NOTE 10: Segment Information

In accordance with SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information,the Company has four reportable segments, EIM, Telemanagement, VoIP, and Patent Enforcement. These segments are managed separately because the services provided by each segment require different technology and marketing strategies.

The Company added VoIP in 2007 and continues to invest significant resources in the VoIP segment. We cannot assure you that we will be successful in our efforts selling new VoIP software products, which could result in an impairment of the value of the related capitalized software costs and corresponding adverse effect on our financial condition and operating results.

Electronic Invoice Management:EIM designs, develops and provides electronic invoice presentment, analysis and payment software that enables internet-based customer self-care for wireline, wireless and convergent providers of telecommunications services. EIM software and services are used primarily by telecommunications services providers to enhance their customer relationships while reducing the providers operational expenses related to paper-based invoice delivery and customer support relating to billing inquiries. The Company provided these services primarily through facilities located in Indianapolis, Indiana and Blackburn, United Kingdom.

Telemanagement:Through its operations in the United Kingdom and Indianapolis and the utilization of the ProteusTM products, the Company offers telemanagement software and services for end users to manage their usage of multi-media communications services and equipment.

Hosted Voice Over Internet Protocol:VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase these products when upgrading or acquiring a new enterprise communications platform.

Patent Enforcement:Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property and rights.

Reconciling items for operating income (loss) in the table below represent corporate expenses and depreciation all of which are in the United States.

The accounting policies for segment reporting are the same as those described in Note 1 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007. Summarized financial information concerning the Company’s reportable segments for the nine months and three months ended September 30, 2008 and 2007 is shown in the following table.


	For Nine Months Ended September 30, 2008
	Electronic Invoice							Patent		Corporate
	Management		Telemanagement		VoIP			Enforcement		Allocation			Consolidated

Revenues	$	10,594,053	$	4,705,569	$	142,071		$	2,850,000	$	—		$	18,291,693
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		8,998,140		2,877,439		(158,124	)		1,269,011		—			12,986,466
Depreciation and amortization		884,743		36,232		248,373			17,243		21,643			1,208,234

Income (loss) from operations		2,893,188		536,398		(2,042,045	)		1,251,768		(1,320,063	)		1,319,246
Long-lived assets		10,399,681		37,232		1,006,844			479,803		117,118			12,040,678


	For Nine Months Ended September 30, 2007
	Electronic Invoice							Patent			Corporate
	Management		Telemanagement		VoIP			Enforcement			Allocation			Consolidated

Revenues	$	10,985,505	$	4,505,154	$	114,013		$	899,519		$	—		$	16,504,191
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		9,147,537		2,690,008		(76,279	)		(615,820	)		—			11,145,446
Depreciation and amortization		1,488,212		42,994		80,201			17,243			16,626			1,645,276

Income (loss) from operations		3,050,781		556,775		(1,779,147	)		(633,063	)		(1,917,001	)		(721,655	)
Long-lived assets		11,890,633		68,948		385,910			1,011,709			207,418			13,564,618


	For Three Months Ended September 30, 2008
	Electronic Invoice							Patent		Corporate
	Management		Telemanagement		VoIP			Enforcement		Allocation			Consolidated

Revenues	$	3,315,494	$	1,713,294	$	38,198		$	2,850,000	$	—		$	7,916,986
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,807,408		1,070,392		(93,604	)		1,650,325		—			5,434,521
Depreciation and amortization		272,564		11,943		94,456			5,748		7,442			392,153

Income (loss) from operations		913,084		285,142		(605,458	)		1,644,577		(553,568	)		1,683,777
Long-lived assets		10,399,681		37,232		1,006,844			479,803		117,118			12,040,678


	For Three Months Ended September 30, 2007
	Electronic Invoice							Patent			Corporate
	Management		Telemanagement		VoIP			Enforcement			Allocation			Consolidated

Revenues	$	3,679,233	$	1,651,918	$	17,358		$	—		$	—		$	5,348,509
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		3,085,051		965,046		(47,475	)		(824,619	)		—			3,178,003
Depreciation and amortization		494,873		14,878		35,796			5,748			6,409			557,704

Income (loss) from operations		1,165,216		289,150		(597,792	)		(830,367	)		(540,281	)		(514,074	)
Long-lived assets		11,890,633		68,948		385,910			1,011,709			207,418			13,564,618

The following table presents net revenues by geographic location.


	For Nine Months Ended September 30, 2008
	United		United
	States		Kingdom		Consolidated

Revenues	$	6,680,782	$	11,610,911	$	18,291,693

Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		4,099,433		8,887,033		12,986,466
Depreciation and amortization		470,238		737,996		1,208,234
Income (loss) from operations		282,782		1,036,464		1,319,246
Long-lived assets		2,029,835		10,010,843		12,040,678


	For Nine Months Ended September 30, 2007
	United			United
	States			Kingdom		Consolidated

Revenues	$	5,073,426		$	11,430,765	$	16,504,191
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,408,443			8,737,003		11,145,446
Depreciation and amortization		796,376			848,900		1,645,276
Income / (loss) from operations		(2,483,421	)		1,761,766		(721,655	)
Long-lived assets		2,848,475			10,716,143		13,564,618


	For Three Months Ended September 30, 2008
	United		United
	States		Kingdom		Consolidated

Revenues	$	4,247,809	$	3,669,177	$	7,916,986

Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,695,548		2,738,973		5,434,521
Depreciation and amortization		148,237		243,916		392,153
Income (loss) from operations		1,449,908		233,869		1,683,777
Long-lived assets		2,029,835		10,010,843		12,040,678


	For Three Months Ended September 30, 2007
	United			United
	States			Kingdom		Consolidated

Revenues	$	1,272,337		$	4,076,172	$	5,348,509
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		64,930			3,113,073		3,178,003
Depreciation and amortization		264,692			293,012		557,704
Loss from operations		(1,441,843	)		927,769		(514,074	)
Long-lived assets		2,848,475			10,716,143		13,564,618

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

Overview

The Company is comprised of four business segments: Electronic Invoice Management (“EIM”), Telemanagement (“Telemanagement”), Hosted Voice over Internet Protocol (“VoIP”) and Patent Enforcement Activities (“Patent Enforcement”). EIM designs, develops and provides services and software tools that enable telecommunication service providers to better meet the needs of their enterprise customers. EIM software and services are provided and sold directly to telecommunication service providers who then market and distribute the software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while reducing the resource investment required to process, validate, approve, and pay their telecommunication invoices. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications are commonly available in the market as enterprise-grade products. Customers typically purchase these products when upgrading or acquiring a new enterprise communications platform. Patent Enforcement involves the licensing, protection, enforcement and defense of the Company’s intellectual property, including patents.

The Company generates its revenues and cash from several sources: software sales, license fees, processing fees, implementation fees, training and consulting services, and enforcement revenues.

The Company’s software products and services are subject to changing technology and evolving customer needs which require the Company to continually invest in research and development in order to respond to such demands. The limited financial resources available to the Company require the Company to concentrate on those business segments and product lines which provide the greatest returns on investment. The EIM segment, as compared to the other business segments, provides the predominant share of income from operations and cash flow from operations. The majority of Telemanagement segment revenues are derived from its United Kingdom operations. The VoIP segment is a relatively new segment which the Company believes offers the most growth opportunity; however, there can be no assurances that the Company will be successful in the VoIP market. The Company believes it is able to develop and market its VoIP products with its current resources and will not need to incur incremental costs to support this segment. The Company reported revenue in the EIM segment of $3.3 million and $3.7 million for the three months ended September 30, 2008 and 2007, respectively and $10.6 million and $11.0 million for the nine months ended September 30, 2008 and 2007, respectively. For the Telemanagement segment, the Company recorded revenues of $1.7 million and $1.7 million for the three months ended September 30, 2008 and 2007, respectively, and revenues for the nine months ended September 30, 2008 and 2007 of $4.7 million and $4.5 million, respectively. The Patent Enforcement segment recorded revenue of $2.9 million and $0 for the three months ended September 30, 2008 and 2007, respectively, and $2.9 million and $900 thousand for the nine months ended September 30, 2008 and 2007, respectively. Revenue of $38 thousand and $17 thousand was recognized for the VoIP segment in the three months ended September 30, 2008 and 2007, respectively, and revenue of $142 thousand and $114 thousand was recorded for the nine months ended September 30, 2008 and 2007, respectively .

The Company believes that as voice and data services continue to commoditize, service providers are seeking alternative business models to replace revenue lost directly as a result of pricing pressures. One such business model is the delivery of managed or hosted voice services.

Traditionally, organizations that required advanced voice services would purchase enabling communications hardware and software, operate and maintain this equipment, and depreciate the associated capital expense over time. The Company believes that this approach had two major disadvantages for such organizations. The first being that organizations would experience significant capital and operational expenditures related to acquiring these advanced services. The second being that the capabilities of the acquired equipment would not materially improve as voice service technology evolved.

Service providers recognized these challenges and began, as part of their next generation network (“NGN”) strategies, to deliver managed and hosted service offerings that do not require the customer to purchase expensive equipment up-front and virtually eliminate the operational expenditures associated with managing and maintaining an enterprise-grade communications network. Service providers incrementally improve revenue by enabling competitive voice features while reducing costs by delivering these services on high-capacity, low-cost next generation networks.

Due to the profitability and revenue per user advantage possible by delivering such managed and hosted service offerings that do not require expensive equipment, providers not only look at acquiring new customers but converting legacy customers onto the NGN platform. The Company believes that this conversion process is significant. Many legacy features and functions are not available on NGN platforms, primarily due to the immaturity of the service delivery model.

The Company’s VoIP applications help eliminate customer resistance to conversion to the next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. The Company is marketing its two VoIP applications, emPulse, a web-based communications traffic analysis solution, and SmartRecord® IP, which enables service providers to selectively intercept communications on behalf of their hosted and managed service customers. These applications also enable managed and hosted service customers of service providers to analyze voice and data usage, record and monitor communications, and perform administration and back office functions such as cost allocation or client bill back. These applications were released as enterprise-grade products in the first quarter of 2007. Although no assurances can be made, the Company anticipates that customers will purchase these products when upgrading or acquiring a new enterprise communications platform. The Company has taken the business benefits of these enterprise-grade applications and has delivered provider-grade managed and hosted service applications, enabling service providers to create a new recurring revenue stream, while ensuring that enterprise customers have the tools necessary and relevant to their particular line of business. The Company’s future success is directly related to the successful market penetration of emPulse and SmartRecord® IP.

Financial Position

In the nine months ended September 30, 2008, the Company experienced a change in its financial condition as a result of a net income of $798,326. The change was primarily attributable to revenue recognized from the Company’s Patent Enforcement segment in the United States of approximately $2.9 million.

At September 30, 2008, cash and cash equivalents were $643,976 compared to $555,839 at December 31, 2007, and such increase was primarily attributable to cash provided by operating and financing activities offset by cash utilized in investing activities. Cash provided in the nine months ended September 30, 2008 by operating activities amounted to $587,155 which was primarily related to the net operating income of $798,326 along with $1,208,234 of non-cash depreciation and amortization and an increase in accrued expenses of $722,895 partially offset by an increase in trade receivables of $3,193,259. Cash provided by financing activities related to net borrowings of $330,000 under the Company’s Revolving Loan during the nine months ended September 30, 2008. Cash utilized in investing activities of $771,043 related to additions to property, equipment and software. The Company realized an increase in net current assets (current assets less current liabilities) of $2,207,658 which was primarily attributable to the increase in receivables associated with the aforementioned increase in Patent Enforcement revenue. The Patent Enforcement revenue increased trade receivables by $2,850,000 which was partially offset by the increase in accrued legal fees related to the Patent Enforcement revenue of approximately $900,000. The Company realized an improvement in stockholders’ equity of $1,119,872 primarily as a result of the net income reported for the nine months ended September 30, 2008. The Company generates approximately 63% of its revenues from operations in the United Kingdom where the functional currency, the UK pound, has deteriorated by 10.3% in relation to the US dollar in the nine months ended September 30, 2008.

Results of Operations(Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007)

Revenues

Revenues from operations for the nine months ended September 30, 2008 increased $1,787,502, or 10.8%, to $18,291,693 as compared to $16,504,191 for the nine months ended September 30, 2007. The increase in revenue was primarily due to the $2,850,000 of revenue recognized in connection with the settlement associated with Patent Enforcement segment activities for the nine months ended September 30, 2008 compared to $899,519 recognized for the nine months ended September 30, 2007. The EIM segment revenues decreased by $391,452, or 3.6%, to $10,594,053 for the nine months ended September 30, 2008 compared to $10,985,505 for the nine months ended September 30, 2007. The decrease in EIM segment revenues was primarily related to a decrease in the revenue recognized from the largest EIM customer in the United States due to decreased processing for that customer. Telemanagement segment revenues increased $200,415, or 4.4%, to $4,705,569 for the nine months ended September 30, 2008 compared to $4,505,154 for the nine months ended September 30, 2007. VoIP segment revenues increased $28,058, or 24.6%, to $142,071 for the nine months ended September 30, 2008 compared to $114,013 for the nine months ended September 30, 2007 due to an increased customer base. The Company earns a substantial portion of its revenue from two EIM customers. These customers represented 14.5% and 8.7% of the total revenues for the nine months ended September 30, 2008 and 19.2% and 11.0% for the nine months ended September 30, 2007. The decrease in the percentage in the two largest customers was primarily the result of an increase in total revenue along with a

decrease in revenue recognized from those customers. The Company believes that the portion of revenue from the single largest EIM customer will continue to decline due to the erosion of the customer’s customer base while the revenue from its second largest customer will remain consistent with prior periods.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the nine months ended September 30, 2008 decreased $119,168, or 3.1%, to $3,724,238 as compared to $3,843,406 for the nine months ended September 30, 2007. The Company considers this small decrease to be consistent with the prior period. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 24.1% of revenue for the nine months ended September 30, 2008 as compared to 24.6% of revenue for the nine months ended September 30, 2007.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the nine months ended September 30, 2008 increased by $65,650, or 4.3%, to $1,580,989 as compared to $1,515,339 for the nine months ended September 30, 2007. The increase was primarily due to increased legal expense due to $2,850,000 settlement revenue being recognized under a contingent fee arrangement during the nine months ended September 30, 2008 compared to $899,519 of settlement revenue being recognized for the nine months ended September 30, 2007. The increase in contingent legal fee expense was partially offset by fewer billable hourly legal fees recorded in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the nine months ended September 30, 2008 increased $322,496, or 4.5%, to $7,538,857 compared to $7,216,361 for the nine months ended September 30, 2007. The increase in Selling, general and administrative expenses was primarily related to an increase in compensation expense for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007.

Research and Development Expense

Research and development expense for the nine months ended September 30, 2008 decreased $85,335, or 2.8%, to $2,920,129 as compared to $3,005,464 for the nine months ended September 30, 2007. The increase was caused by an increase in research and development staff but partially offset by an increase in capitalization of research and development costs. Research and development costs that were capitalized during the nine months ended September 30, 2008 and September 30, 2007 amounted to $630,200 and $328,750, respectively. The increase in capitalized research and development costs is related to the Company’s focus on new product development.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2008 decreased $437,042, or 26.6%, to $1,208,234 from $1,645,276 in the nine months ended September 30, 2007. The decrease was primarily associated with the amortization of the first version of SmartBill^® Connect being completed in December 2007.

Other Income and Expense

Interest expense decreased $117,207, or 39.6%, to $178,636 for the nine months ended September 30, 2008 compared to $295,843 for the nine months ended September 30, 2007. The decrease in interest expense was primarily associated with the lower interest rates and outstanding borrowings under the Company’s revolving loan facility.

The Company realized a loss on disposal of equipment of $35,747 for the nine months ended September 30, 2008 compared to $35,769 for the nine months ended September 30, 2007. The loss for the nine months ended September 30, 2008 was primarily related to the write-off of customer relationship management software that the Company had purchased and then disposed of. The loss for the nine months ended September 30, 2007 was related to a disposal of equipment no longer in service.

Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of September 30, 2008, the Company’s valuation allowance related to the net deferred tax assets in the United States.

The tax expense for the nine months ended September 30, 2008 and September 30, 2007 of $306,537 and $289,145, respectively, was due to the pre-tax income in the United Kingdom of $945,094 and $1,403,724, respectively.

Net Income

Net income increased $2,140,738 to $798,326 for the nine months ended September 30, 2008 compared to a net loss of $1,342,412 for the nine months ended September 30, 2007. The increase in net income was primarily associated with the increase in patent license fee and enforcement revenues of $1,950,481.

Results of Operations(Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007)

Revenues

Revenues from operations for the three months ended September 30, 2008 increased $2,568,477, or 48.0%, to $7,916,986 as compared to $5,348,509 for the three months ended September 30, 2007. The increase in revenue was primarily due to revenue of $2,850,000 recognized in the Patent Enforcement segment for the three months ended September 30, 2008 compared to $0 recognized for the three months ended September 30, 2007. The Company realizes revenues from the Patent Enforcement segment on an inconsistent basis due to the nature and volatility of the patent enforcement process. The EIM segment revenues decrease of $363,739 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 was primarily related to a decrease in processing for the US EIM segment’s largest customer. Telemanagement segment revenues increased $61,376 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007. VoIP segment revenues increased $20,840 for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 due to an increase in the customer base. The Company earns a substantial portion of its revenue from two EIM customers. These customers represented 10.9% and 6.5% of the total revenues for the three months ended September 30, 2008 and 17.6% and 10.7% for the three months ended September 30, 2007. The decrease in the percentage of the largest customer was primarily the result of an increase in other revenue recognized by the Company along with a decrease in revenue recognized from this customer. The Company believes that the portion of revenue from this EIM customer will continue to decline due to the erosion of the customer’s customer base. The decrease in the percentage of the second largest customer was primarily due to an increase in total revenue along with a slight decline in revenue from this EIM customer.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended September 30, 2008 decreased $63,097, or 4.7%, to $1,282,790 as compared to $1,345,887 for the three months ended September 30, 2007. The decrease was related to the decrease in software sales, service fee and license fee revenues. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 25.3% of revenue for the three months ended September 30, 2008 as compared to 25.2% of revenue for the three months ended September 30, 2007.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the three months ended September 30, 2008 increased by $375,056, or 45.5%, to $1,199,675 as compared to $824,619 for the three months ended September 30, 2007. The increase was primarily due to legal fees realized on the patent license fee and enforcement revenue under a contingency fee arrangement for the three months ended September 30, 2008 and no revenue or corresponding contingency fees for the three months ended September 30, 2007.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended September 30, 2008 increased $296,734, or 13.2%, to $2,537,189 compared to $2,240,455 for the three months ended September 30, 2007. The increase was primarily attributable to an increase in compensation expense.

Research and Development Expense

Research and development expense for the three months ended September 30, 2008 decreased $72,516, or 8.1%, to $821,402 as compared to $893,918 for the three months ended September 30, 2007. The decrease was primarily related to the capitalization of research and development costs in the UK EIM segment for the three months ended September 30, 2008 and no capitalization for the three months ended September 30, 2007. Research and development costs that were capitalized during the three months ended September 30, 2008 and September 30, 2007 amounted to $227,726 and $160,369, respectively. The increase in capitalized research and development costs is related to the Company’s focus on new product development.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2008 decreased $165,551, or 29.7%, to $392,153 from $557,704 in the three months ended September 30, 2007. The decrease was primarily associated with the amortization of the first version of SmartBill® Connect being completed in December 2007.

Amortization expense of developed software amounted to $98,874 and $210,960 for the three months ended September 30, 2008 and 2007, respectively. Amortization expense of developed software, which relates to cost of sales, was presented as depreciation and amortization expense.

Other Income and Expense

Interest expense decreased $13,694, or 19.3%, to $57,403 for the three months ended September 30, 2008 compared to $71,097 for the three months ended September 30, 2007. The decrease in interest expense was primarily associated with the lower interest rates and outstanding borrowings under the Company’s revolving loan facility.

The Company realized a gain on disposal of equipment of $6,688 for the three months ended September 30, 2008 compared to a loss of $29,002 for the three months ended September 30, 2007. The loss for the three months ended September 30, 2007 was related to a disposal of equipment no longer in service.

Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes it is more likely than not that the asset will not be realized. As of September 30, 2008, the Company’s valuation allowance related to the net deferred tax assets in the United States.

The tax expense for the three months ended September 30, 2008 and September 30, 2007 of $102,583 and $194,300, respectively, was due to the pre-tax income in the United Kingdom of $220,916 and $815,823, respectively.

Net Income

Net income increased $2,338,952 to $1,530,479 for the three months ended September 30, 2008 compared to a net loss of $808,473 for the three months ended September 30, 2007. The increase in net income was primarily associated with the increase in patent license fee and enforcement revenues of $2,850,000 partially offset by an increase of patent license fee and enforcement costs of $375,056 to $1,199,675 for the three months ended September 30, 2008 compared to costs of $824,619 for the three months ended September 30, 2007.

Liquidity and Capital Resources

Historically, the Company’s principal needs for funds have been for operating activities (including costs of products and services, patent enforcement activities, selling, general and administrative expenses, research and development, and working capital needs) and capital expenditures, including software development. Cash flows from operations and existing cash and cash equivalents have been adequate to meet the Company’s business objectives. Cash and cash equivalents, increased $88,137, or 15.9%, to $643,976 as of September 30, 2008 compared to $555,839 as of December 31, 2007.The increase in cash, cash equivalents, and short-term investments during the nine months ended September 30, 2008 was predominately related to cash flows from operations of $587,155 along with cash provided by financing activities of $330,000 and partially offset by cash spent on property, equipment, and software of $771,043.

Cash is generated from (or utilized in) the income/(loss) from operations for each segment (see Note 10 to the Consolidated Financial Statements (unaudited) of Part I, Item 1 of this Form 10-Q). The EIM, Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations for the nine months ended September 30, 2008 of $2,893,188, $536,398, $(2,042,045) and $1,251,768, respectively. The Corporate Allocation expense

generated an operating loss of $(1,320,063) for the nine months ended September 30, 2008. The United States location generated an income from operations for the nine months ended September 30, 2008 of $282,782 which was primarily associated with increased revenues in the Patent Enforcement segment. The United Kingdom location generated income from operations for the same period of $1,036,464. For the nine months ended September 30, 2007 the EIM, Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations of $3,050,781, $556,398, $(1,779,147) and $(633,063), respectively. The Corporate Allocation expense generated an operating loss of $(1,917,001) for the nine months ended September 30, 2007. The United States location generated a loss from operations for the nine months ended September 30, 2007 of $(2,483,421) which was primarily associated with corporate expenses and a loss from the VoIP segment. The United Kingdom location generated income from operations for the same period of $1,761,766.

Provisions under the revolving loan and Acquisition Loan require the Company to comply with certain covenants. These covenants include limitations on, among other things, indebtedness, investments, the issuance of guarantees and the payment of dividends. For example, subject to certain exceptions, the Company agreed under the loan agreement, among other matters, that, without the bank’s prior written consent, the Company shall not, and shall not permit any of its subsidiaries to: (i) incur or have outstanding any indebtedness in excess of $20,000 individually or $100,000 in the aggregate; (ii) dispose of all, or any part, of business or assets; (iii) make any acquisitions, or (iv) issue any additional shares of stock or other securities and the Company shall not issue more than 10% of the Company’s capital stock pursuant to its stock incentive plan on a fully-diluted basis. The revolving loan and Acquisition Loan also contain financial covenants which require achievement of certain levels of financial performance including achievement of, among other things, a minimum consolidated funded debt ratio, consolidated net worth and consolidated debt service ratio. As of September 30, 2008, the Company was in compliance with the applicable covenants contained in the revolving loan and Acquisition Loan agreements.

Pursuant to the loan agreement, the following events, among other circumstances, constitute an event of default and may cause all obligations of the Company under each of the promissory notes to become immediately due and payable: (i) any amount due under the Acquisition Loan note and/or the revolving note is not paid within ten days of when due; (ii) a default under any of the loan documents; (iii) any default in the payment of the principal or any other sum for any other indebtedness having a principal amount in excess of $10,000 or in the performance of any other term, condition or covenant contained in any agreement under which any such indebtedness is created, the effect of which default is to permit the holder of such indebtedness to cause such indebtedness to become due prior to its stated maturity; and (iv) any sale or other transfer of any ownership interest of the Company or its subsidiaries, which results in any change in control of the Company or a change in the Chairman or Chief Executive Officer of the Company.

The Company derives a substantial portion of its revenues from two EIM customers. The first largest customer generated approximately $2.6 million and $3.2 million for the nine months ended September 30, 2008 and September 30, 2007, respectively (14.5% of revenue for the nine months ended September 30, 2008 and 19.2% of revenue for the nine months ended September 30, 2007). The second largest customer generated approximately $1.6 million and $1.8 million for the nine months ended September 30, 2008 and September 30, 2007, respectively (8.7% of revenue for the nine months ended September 30, 2008 and 11.0% of revenue for the nine months ended September 30, 2007). The first largest customer’s contract includes an automatic annual renewal provision; however, the contract can be terminated at any time by either party with four months advanced notice. In 2007, the Company experienced a significant decrease in the processing for the first largest customer which carried over into the nine months ended September 30, 2008 and the Company anticipates additional decreased processing revenue. The loss of these customers would have a substantial negative impact on the Company’s financial condition and results of operations.

The Company’s primary sources of liquidity over the next twelve months will be cash on hand, anticipated cash generated from future operating activities and the cash available to the Company under the revolving loan facility.

The Company expects to continue to require funds to meet debt service obligations, capital expenditures and other non-operating expenses. The Company’s future capital requirements will depend on many factors, including revenue growth, expansion of service offerings and business strategy. The Company believes that expected future earnings from operations, available funds, together with existing revolving credit facility, will be adequate to satisfy its planned operations for the next 12 months.

Off-Balance Sheet Arrangements

The Company has no material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, depreciation and amortization, investments, income taxes, capitalized software, goodwill, restructuring costs, accrued compensation, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. For the description of other critical accounting policies used by the Company, see Item 7. “Financial Statements — Notes to Consolidated Financial Statements — Note 1” in the Company’s Annual Report on Form10-KSB for the year ended December 31, 2007.

Income Taxes.The Company is required to estimate its income taxes. This process involves estimating the Company’s actual current tax obligations together with assessing differences resulting from different treatment of items for tax and accounting purposes which result in deferred income tax assets and liabilities.

The Company accounts for income taxes using the liability method in accordance with SFAS No. 109,“Accounting for Income Taxes.”Under the liability method, a deferred tax asset or liability is determined based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences are expected to reverse.

The Company’s deferred tax assets are assessed for each reporting period as to whether it is more likely than not that they will be recovered from future taxable income, including assumptions regarding on-going tax planning strategies. To the extent the Company believes that recovery is uncertain, the Company has established a valuation allowance for assets not expected to be recovered. Changes to the valuation allowance are included as an expense or benefit within the tax provision in the statement of operations.

operations and the Company does not anticipate recording significant tax charges or benefits related to operating gains or losses for the Company’s US operations.

The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) an interpretation of SFAS No. 109 as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on the Company’s financial statements.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Indiana and foreign income tax in the United Kingdom. The Company is no longer subject to examination by taxing authorities for years before 2002. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at January 1, 2007.

The Company’s tax filings are subject periodically to regulatory review and audit.

Research and Development and Software Development Costs.Research and development costs are charged to operations as incurred. Software Development Costs are considered for capitalization when technological feasibility is established in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”. The Company bases its determination of when technological feasibility is established based on the development team’s determination that the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet its design specifications including, functions, features, and technical performance requirements.

Impairment.In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company reviews the recoverability of the carrying value of its long-lived assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. When such events occur, the Company compares the carrying amount of the assets to the undiscounted expected future cash flows. If this comparison indicates there is impairment, the amount of the impairment is typically calculated using discounted expected future cash flows.

Revenue Recognition and Accounts Receivable Reserves.The Company’s revenue recognition policy is consistent with the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”) which supersedes SAB No. 101, “Revenue Recognition in Financial Statements.” SAB No. 104 primarily rescinds the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements, which was superseded as a result of the issuance of EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104 rescinds the SEC’s “Revenue Recognition in Financial Statements, Statement of Position No. 97-2, Software Revenue Recognition (“SOP 97-2”), and other applicable revenue recognition guidance and interpretations. In general, the Company records revenue when it is realized, or realizable, and earned. Revenues from software licenses are recognized upon shipment, delivery or customer acceptance, based on the substance of the arrangement or as defined in the sales agreement provided there are no significant remaining vendor obligations to be fulfilled and collectability is reasonably assured. Software sales revenue is generated from licensing software to new customers and from licensing additional users and new applications to existing customers.

The Company’s sales arrangements typically include services in addition to software. Service revenues are generated from support and maintenance, processing, training, consulting, and customization services. For sales arrangements that include bundled software and services, the Company accounts for any undelivered service offering as a separate element of a multiple-element arrangement. Amounts deferred for services are determined based upon vendor-specific objective evidence of the fair value of the elements as prescribed in SOP 97-2. Support and maintenance revenues are recognized on a straight-line basis over the term of the agreement. Revenues from processing, training, consulting, and customization are recognized as provided to customers. If the services are essential to the functionality of the software, revenue from the software component is deferred until the essential service is complete.

If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in paragraph 65 of SOP 97-2. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with Accounting Research Bulletin (“ARB”) No. 45, using the relevant guidance in SOP 81-1. The Company carefully evaluates the circumstances surrounding the

implementations to determine whether the percentage-of-completion method or the completed-contract method should be used. Most implementations relate to the Company’s Telemanagement products and are completed in less than 30 days once the work begins. The Company uses the completed-contract method on contracts that will be completed within 30 days since it produces a result similar to the percentage-of-completion method. On contracts that will take over 30 days to complete, the Company uses the percentage-of-completion method of contract accounting.

The Company also realizes patent license fee and enforcement revenues. These revenues are realized once the Company has received a signed settlement or judgment and the collection of the receivable is deemed probable.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company continuously monitors collections and payments from its customers and the allowance for doubtful accounts is based on historical experience and any specific customer collection issues that the Company has identified. If the financial condition of its customers were to deteriorate resulting in an impairment of their ability to make payments, additional allowances may be required. Where an allowance for doubtful accounts has been established with respect to customer receivables, as payments are made on such receivables or if the customer goes out of business with no chance of collection, the allowances will decrease with a corresponding adjustment to accounts receivable as deemed appropriate.

Legal Costs Related to Patent Enforcement Activities.Hourly legal costs incurred while pursuing patent license fee and enforcement revenues are expensed as incurred. Legal fees that are contingent on the successful outcome of an enforcement claim are recorded when the patent license fee and enforcement revenues are realized.

Stock Based Compensation.The Company follows the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company uses the Black-Scholes-Merton formula and the modified prospective method and, as such, results for prior periods have not been restated.

The Company recognizes compensation cost net of a forfeiture rate and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term. The Company estimated the forfeiture rate based on its historical experience and its expectations about future forfeitures.

Included within selling, general and administrative expense for the three months ended September 30, 2008 and September 30, 2007 was $28,903 and $49,177, respectively, of stock-based compensation. Included within selling, general and administrative expense for the nine months ended September 30, 2008 and September 30, 2007 was $86,734 and $133,858, respectively, of stock-based compensation. Stock-based compensation expenses are recorded in the Corporate Allocation expense as these amounts are not included in internal measures of segment operating performance.

The Company estimates it will recognize approximately $116,000, $112,000, $9,000 and $0 for the fiscal years ending December 31, 2008, 2009, 2010 and 2011, respectively, of compensation costs for nonvested stock options previously granted to employees. See Part I, Item 1. “Financial Statements — Notes to Consolidated Financial Statements — Note 6” in this Quarterly Report on Form 10-Q for further information regarding the Company’s adoption of SFAS No. 123R.

New Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) released Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This Interpretation revises the recognition tests for tax positions taken in tax returns such that a tax benefit is recorded only when it is more likely than not that the tax position will be allowed upon examination by taxing authorities. The amount of such a tax benefit to record is the largest amount that is more likely than not to be allowed. Any reduction in deferred tax assets or increase in tax liabilities upon adoption will correspondingly reduce retained earnings. The adoption did not have a material effect on the Company’s financial statements. See further discussion in Note 9.

for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2,Effective Date of FASB Statement No. 157(“FSP 157-2”). This FSP 157-2 delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of FAS 157 as it relates to financial assets and financial liabilities had no effect on the Company’s financial statements. The Company anticipates there will be no material impact of the adoption of FSP 157-2 on the Company’s financial statements. In October 2008, the FASB issued FSP No. 157-3,Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active(“FSP 157-3”), which clarifies the application of FAS 157 in an inactive market. FSP 157-3 explains that when relevant and observable market information is not available to determine the measurement of an asset’s fair value, management must use their judgment about the assumptions a market participant would use in pricing the asset in a current sale transaction. Appropriate risk adjustments that a market participant would use must also be taken into account when determining the fair value. Application of this guidance should be accounted for as a change in estimate and FSP 157-3 was effective upon issuance. Upon adoption of FSP 157-3, the Company anticipates there will be no material impact on the Company’s condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4(T). Controls and Procedures.

The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

The Company’s principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter covered by this report that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this report.

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.

PART II — OTHER INFORMATION

Item 1 — Legal Proceedings.

The Company is from time to time subject to claims and administrative proceedings that are filed in the ordinary course of business and are unrelated to Patent Enforcement.

Convergys Corporation

The Company previously disclosed that the Company had filed a lawsuit for patent infringement under 35 U.S.C. §271 et seq. against Convergys Corporation and certain other parties in the United States District Court for the Southern District of Indiana on January 12, 2004. The lawsuit sought treble damages, attorneys’ fees and an injunction for infringement of U.S. Patent No. 5,287,270. On September 26, 2008, the Company entered into a formal settlement agreement with Convergys Corporation.

Item 1A — Risk Factors.

Not Applicable.

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

None.

Item 3—Defaults Upon Senior Securities.

None.

Item 4 — Submission of Matters to a Vote of Security Holders.

None.

Item 5 — Other Information.

None.

Item 6 — Exhibits.


	Exhibit 11.1		Statement re computation of per share earnings, incorporated by reference to Note 5 to Consolidated Financial Statements included in this Quarterly Report on Form 10-Q

	Exhibit 31.1-		Chief Executive Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2-		Chief Financial Officer Certification pursuant to Securities Exchange Act Rule 13a-14(a) / 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1-		Section 1350 Certification of the Chief Executive Officer

	Exhibit 32.2-		Section 1350 Certification of the Chief Financial Officer

SIGNATURES

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


/s/ John Birbeck John Birbeck		Date: November 13, 2008
Chief Executive Officer (principal executive officer)


/s/ Manfred Hanuschek Manfred Hanuschek		Date: November 13, 2008
Chief Financial Officer (principal financial officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Cti (CTIG) Inactive 10-Q2008 Q3 Quarterly report

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