Cti 10Q 2009 Q2 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 June 30, 2009


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

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


Large accelerated 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 August 11, 2009, the number of shares of Class A common stock, par value $.01 per share, outstanding was 29,178,271. As of August 11, 2009, treasury stock constituted 140,250 shares of Class A common stock.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2009
TABLE OF CONTENTS


ITEM	PAGE
NO.	NO.
Forward Looking Statements		3

PART I – Financial Information
1. Financial Statements
Consolidated Balance Sheets at June 30, 2009 (unaudited) and December 31, 2008		4
Consolidated Statements of Operations (unaudited) for the six months ended June 30, 2009 and June 30, 2008		5
Consolidated Statements of Operations (unaudited) for the three months ended June 30, 2009 and June 30, 2008		6
Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2009 and June 30, 2008		7
Notes to Consolidated Financial Statements (unaudited)		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
3. Quantitative and Qualitative Disclosures about Market Risk		26
4. 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

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-K for the fiscal year ended December 31, 2008, 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: effects of current economic crisis, 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 protect the Company’s patented technology, and 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


	June 30,			December 31,
	2009			2008
	(unaudited)
ASSETS
Cash and cash equivalents	$	566,968		$	341,936
Trade accounts receivable, less allowance for doubtful accounts of $46,983 and $122,927, respectively		3,261,873			2,655,680
Note and settlement receivable – short term		563,639			366,303
Prepaid expenses		486,047			316,554
Deferred financing costs		95,563			101,450
Other current assets		107,732			43,870

Total current assets		5,081,822			3,825,793

Long term settlement receivable – net of current portion		95,791			392,851
Property, equipment, and software, net		1,820,036			1,817,501
Deferred financing costs – long term		—			35,953
Intangible assets, net		4,230,107			4,580,987
Goodwill		4,896,990			4,896,990
Other assets		83,363			84,936

Total assets	$	16,208,109		$	15,635,011


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	1,177,906		$	498,008
Accrued expenses		1,552,527			1,328,359
Accrued wages and other compensation		1,161,253			1,017,917
Deferred revenue		1,353,533			1,230,682
Income tax payable		222,105			242,716
Deferred income tax liability		201,401			209,097
Note payable		500,000			500,000

Total current liabilities		6,168,725			5,026,779

Lease incentive – long term		178,452			190,428
Note payable – long term		561,000			—
Deferred revenue – long term		21,470			1,075
Deferred income tax liability – long term		666,550			648,339

Total liabilities		7,596,197			5,866,621

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 March 31, 2009 and at December 31, 2008		291,783			291,783
Additional paid-in capital		25,902,138			25,842,970
Accumulated deficit		(17,827,713	)		(16,637,024	)
Accumulated other comprehensive income – foreign currency translation		437,847			462,804
Treasury stock, 140,250 shares at cost		(192,143	)		(192,143	)

Total stockholders’ equity		8,611,912			9,768,390

Total liabilities and stockholders’ equity	$	16,208,109		$	15,635,011

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


	Six months ended
	June 30,
	2009			2008
Revenues:
Software sales, service fee and license fee revenue	$	8,088,610		$	10,374,707
Patent license fee and enforcement revenues		—			—

		8,088,610			10,374,707

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		2,398,908			2,441,448
Patent license fee and enforcement cost		684,153			381,314
Selling, general and administration		3,920,885			5,001,668
Research and development		1,411,312			2,098,727
Depreciation and amortization		753,951			816,081


Income / (loss) from operations		(1,080,599	)		(364,531	)


Other expense
Interest expense, net of interest income of $51,132 and $69,376, respectively		42,798			121,233
Other expense / (income)		(1,499	)		42,435

Total other expense		41,299			163,668

Loss before income taxes		(1,121,898	)		(528,199	)

Tax expense		68,791			203,954


Net loss		(1,190,689	)		(732,153	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		(24,957	)		(5,396	)

Comprehensive loss	$	(1,215,646	)	$	(737,549	)


Basic and diluted net loss per common share	$	(0.04	)	$	(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 OPERATIONS
(unaudited)


	Three months ended
	June 30,
	2009			2008
Revenues:
Software sales, service fee and license fee revenue	$	4,139,322		$	5,035,495
Patent license fee and enforcement revenues		—			—


		4,139,322			5,035,495

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		1,269,515			1,233,330
Patent license fee and enforcement cost		439,162			247,211
Selling, general and administration		1,946,592			2,578,637
Research and development		717,176			1,007,035
Depreciation and amortization		386,891			388,437


Income / (loss) from operations		(620,014	)		(419,155	)


Other expense
Interest expense, net of interest income of $15,617 and $32,707, respectively		30,931			53,382
Other expense / (income)		(1,499	)		28,145

Total other expense		29,432			81,527

Loss before income taxes		(649,446	)		(500,682	)

Tax expense		18,552			52,730


Net loss		(667,998	)		(553,412	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		(60,931	)		(4,294	)

Comprehensive loss	$	(728,929	)	$	(557,706	)


Basic and diluted net loss per common share	$	(0.02	)	$	(0.02	)


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)


	Six months ended
	June 30,
	2009			2008
Cash flows from operating activities:
Net loss	$	(1,190,689	)	$	(732,153	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		753,951			816,081
Provision for doubtful accounts		34,775			16,489
Deferred income taxes		(91,360	)		(147,779	)
Amortization of deferred financing fees		55,180			110,073
Non-cash interest charge		1,337			—
Recognition of rent incentive benefit		56,673			(7,993	)
Stock option grant expense		57,831			143,104
Loss on disposal of property and equipment		—			42,435
Changes in operating assets and liabilities:
Trade receivables		(332,179	)		(608,089	)
Note and settlement receivables		99,724			110,832
Prepaid expenses		(148,096	)		(2,066	)
Income taxes		(26,951	)		312,058
Other assets		(53,887	)		(12,072	)
Accounts payable		634,916			(27,068	)
Accrued expenses		22,698			(124,045	)
Accrued wages and other compensation		91,422			333,835
Deferred revenue		(5,695	)		225,257

Cash provided by / (used in) operating activities		(40,350	)		448,899


Cash flows used in investing activities:
Additions to property, equipment, and software		(401,805	)		(576,540	)

Cash used in investing activities		(401,805	)		(576,540	)


Cash flows provided by financing activities:
Borrowings under credit agreements		2,418,000			2,335,000
Repayments under credit agreements		(1,857,000	)		(2,335,000	)

Cash provided by financing activities		561,000			—


Effect of foreign currency exchange rates on cash and cash equivalents		106,187			32,797


Increase / (decrease) in cash and cash equivalents		225,032			(94,844	)

Cash and cash equivalents, beginning of period		341,936			555,839


Cash and cash equivalents, end of period	$	566,968		$	460,995

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 billing and data management software and services 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”), Voice over Internet Protocol (“VoIP”) and Patent Enforcement Activities (“Patent Enforcement”). 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 facilities located in Blackburn in the United Kingdom. Telemanagement, is offered through the Company’s operations in the United Kingdom and Indianapolis and the utilization of the ProteusTM products. Telemanagement software and services allows end users to manage their usage of multi-media communications services and equipment. VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, video, 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 and rights.

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, 2008 and 2007 and the notes thereto included in the Company’s Form 10-K filed with the SEC.

The Company realizes patent license fee and enforcement revenues. These revenues are realized once the Company has received a signed agreement, settlement or judgment and the collection of the receivable is deemed probable. The Company recognized $0 in revenues associated with patent license fee and enforcement activities in the six months ended June 30, 2009 and 2008.

Amortization expense of developed software amounted to $300,768 and $219,323 for the six months ended June 30, 2009 and 2008, respectively. Amortization expense of developed software amounted to $114,186 and $103,289 for the three months ended June 30, 2009 and 2008, 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 $21,108 and $85,110 in interest related to the Company’s notes payable for the six months ended June 30, 2009 and 2008, respectively.

The Company paid approximately $127,417 and $0 during the six months ended June 30, 2009 and 2008, respectively, for prior year tax payments and $62,634 and $0 during the six months ended June 30, 2009 and 2008, respectively, for current year estimated tax payments.


NOTE 3:		Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, deferred finance costs, prepaid expenses and other assets, accounts payable, and other accruals approximate their fair values because of their nature and expected duration. The fair value of the revolving credit facility and note payable is equal to its carrying value due to the variable nature of its interest rate.


NOTE 4:		Long-Term Debt Obligations

The Company has available a revolving loan facility with National City Bank (“NCB”) 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 2.82% as of June 30, 2009. 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 $3,086 and $1,389 for the six and three months ended June 30, 2009, 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 $561,000 at June 30, 2009. Amounts available for borrowing under the revolving loan on June 30, 2009 was $1,074,769. The carrying amount of receivables that served as collateral for borrowings totaled $1,635,769 at June 30, 2009.

On November 18, 2008, the Company entered into a second modification of the loan documents with NCB (the “Second Modification”). The Second Modification reduced the acquisition loan from $2,600,000 to $500,000 (the “Acquisition Loan”). The Acquisition Loan expires on December 21, 2009, unless extended. All borrowings under the Acquisition Loan are collateralized by substantially all assets of the Company. The Acquisition Loan was secured by a letter of credit from SEB Bank to NCB. Under the Second Modification, NCB removed the provision in the Loan Agreement requiring that the Company obtain a letter of credit as security for the Acquisition Loan. Pursuant to the terms of the Second Modification, NCB executed a notice of termination and release of the Letter of Credit dated November 18, 2008. Borrowings under the Acquisition Loan bear interest (2.32% at June 30, 2009) at LIBOR plus 2.00% payable monthly. The outstanding balances on the Acquisition Loan were $500,000 and $2,600,000 at June 30, 2009 and June 30, 2008, respectively.

The revolving loan facility and Acquisition Loan (the “Loan Agreements”) were secured by a guarantee from a wholly-owned subsidiary of Fairford Holdings Limited, a British Virgin Islands company. As of June 30, 2009, Fairford beneficially owned 63.7% 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 the director of Fairford.

Borrowings under the Loan Agreements are subject to certain financial covenants and restrictions on indebtedness, encumbrances, investments, business combinations, and other related items. As of June 30, 2009, the Company was in compliance with all covenants. The more significant covenants under the Loan Agreements, include that, without NCB’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 option plan on a fully-diluted basis.


NOTE 5:		New Accounting Pronouncements

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, there was no material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this FSP in the second quarter, however, the adoption did not have a material effect on the results of operations or financial position.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”. This FSP amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this FSP in the second quarter. See Note 3 of the Notes to the Consolidated Financial Statements for more information.

In May 2009, the FASB issued SFAS No. 165“Subsequent Events”(“SFAS No. 165”). SFAS No. 165 establishes accounting and reporting standards for events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 became effective for fiscal years and interim periods ending after June 15, 2009. The Company adopted SFAS No. 165 during the second quarter of 2009. See Note 11 of the Notes to the Consolidated Financial Statements for more information.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and Hierarchy of Generally Accepted Accounting Principles”(“SFAS No. 168”). SFAS No. 168 establishes the FASB Accounting Standards Codification as the authoritative source of accounting principals to be used in the preparation of the financial statements by nongovernmental entities. SFAS No. 168 is effective for fiscal years and interim periods ending after September 15, 2009. The Company plans to adopt SFAS No. 168 during the third quarter of 2009.


NOTE 6:		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 Six Months Ended
	June 30,						June 30,
	2009			2008			2008			2008
Net loss	$	(667,998	)	$	(553,412	)	$	(1,190,689	)	$	(732,153	)


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		—			—			—			—

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


Basic:
Net loss per share	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.03	)


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


Diluted:
Net loss per share	$	(0.02	)	$	(0.02	)	$	(0.04	)	$	(0.03	)


Weighted average common and common equivalent shares outstanding		29,038,021			29,038,021			29,038,021			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 and six months ended June 30, 2009.


NOTE 7:		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 an 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 June 30, 2009, there were 3,053,468 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 June 30, 2009, there were options to purchase 4,422,782 shares of Class A common stock outstanding consisting of 4,142,782 Plan and Stock Incentive Plan options and 280,000 outside plan stock options. There were exercisable options to purchase an aggregate of 3,474,129 shares of Class A common stock under the Plan and Stock Incentive Plan and options to purchase 280,000 shares of Class A common stock that were outside plan stock options as of June 30, 2009.

Information with respect to options is as follows:


			Exercise		Weighted
	Options		Price Range		Average
	Shares		Per Share		Exercise Price
Outstanding, January 1, 2009		4,422,782	$	0.21 - $0.50	$	0.32
Granted		—		—		—
Exercised		—		—		—
Cancelled		—		—		—

Outstanding, June 30, 2009		4,422,782	$	0.21 - $0.50	$	0.32

The following table summarizes options exercisable at June 30, 2009:

Exercise Price

Weighted

Aggregate

Weighted

Option

Range

Average

Intrinsic

Remaining

Shares

Per Share

Exercise Price

Value

Contractual Term

June 30, 2009

3,754,129

$0.21 - $0.50

0.33

896,905

6.44 years

The following table summarizes non-vested options:


	Option Shares
January 1, 2009		1,301,983
Granted		—
Cancelled		—
Vested		(633,330	)

June 30, 2009		668,653

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.

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 June 30, 2009, Fairford beneficially owned 63.7% 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 June 30, 2009 and 2008 of $0 and $21,318, respectively, and the six months ended June 30, 2009 and 2008 of $0 and $42,637, respectively.

Included within selling, general and administrative expense for the three months ended June 30, 2009 and June 30, 2008 was $28,914 and $28,453, respectively, of stock-based compensation. Included within selling, general and administrative expense for the six months ended June 30, 2009 and June 30, 2008 was $57,831 and $57,831, 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 8:		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 June 30, 2009, 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 9:		Income Taxes

The Company adopted the FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109”(“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 June 30, 2009 and June 30, 2008, the Company had $58,378 and $32,229 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 June 30, 2009.

For the six months ended June 30, 2009 and June 30, 2008, the Company had $68,791 and $203,954, respectively, of income tax expense and for the three months ended June 30, 2009 and June 30, 2008, the Company had $18,552 and $52,730, 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.

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.

Voice Over Internet Protocol:VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, video, 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-K for the year ended December 31, 2008.

Summarized financial information concerning the Company’s reportable segments for the six months and three months ended June 30, 2009 and 2008 is shown in the following table.


	For Six Months Ended June 30, 2009
	Electronic Invoice								Patent			Corporate
	Management		Telemanagement			VoIP			Enforcement			Allocation			Consolidated

Revenues	$	5,664,666	$	2,163,587		$	260,357		$	—		$	—		$	8,088,610
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		4,548,740		1,026,353			114,609			(684,153	)		—			5,005,549
Depreciation and Amortization		469,998		18,187			236,730			11,495			17,541			753,951
		1,709,094		(149,094	)		(1,361,580	)		(695,648	)		(583,371	)		(1,080,599	)
Long-lived assets		9,926,923		33,940			1,017,846			99,446			48,132			11,126,287


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

Revenues	$	7,278,559	$	2,992,275	$	103,873		$	—		$	—		$	10,374,707
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		6,190,732		1,807,047		(64,520	)		(381,314	)		—			7,551,945
Depreciation and Amortization		612,179		24,289		153,917			11,495			14,201			816,081

Income (loss) from operations		1,980,104		251,256		(1,436,587	)		(392,809	)		(766,495	)		(364,531	)
Long-lived assets		10,547,782		45,727		1,047,053			794,236			128,684			12,563,482


	For Three Months Ended June 30, 2009
	Electronic Invoice								Patent			Corporate
	Management		Telemanagement			VoIP			Enforcement			Allocation			Consolidated

Revenues	$	2,789,909	$	1,160,689		$	188,724			—			—		$	4,139,322
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,194,875		548,363			126,569			(439,162	)		—			2,430,645
Depreciation and Amortization		243,381		9,454			119,539			5,747			8,770			386,891

Income (loss) from operations		739,224		(41,849	)		(590,060	)		(444,909	)		(282,420	)		(620,014	)
Long-lived assets		9,926,923		33,940			1,017,846			99,446			48,132			11,126,287


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

Revenues	$	3,332,214	$	1,628,714	$	74,567		$	—		$	—		$	5,035,495
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,808,967		1,024,435		(31,237	)		(247,211	)		—			3,554,954
Depreciation and Amortization		278,587		11,878		85,064			5,747			7,161			388,437

Income (loss) from operations		733,213		211,525		(707,381	)		(252,958	)		(403,554	)		(419,155	)
Long-lived assets		10,547,782		45,727		1,047,053			794,236			128,684			12,563,482

The following table presents net revenues by geographic location.


	For Six Months Ended June 30, 2009
	United			United
	States			Kingdom		Consolidated

Revenues	$	2,259,592		$	5,829,018	$	8,088,610
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		1,104,164			3,901,385		5,005,549
Depreciation and Amortization		331,282			422,669		753,951
Income (loss) from operations		(1,336,359	)		255,760		(1,080,599	)
Long-lived assets		1,521,722			9,604,565		11,126,287


	For Six Months Ended June 30, 2008
	United			United
	States			Kingdom		Consolidated

Revenues	$	2,432,973		$	7,941,734	$	10,374,707
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		1,403,885			6,148,060		7,551,945
Depreciation and Amortization		322,001			494,080		816,081
Income (loss) from operations		(1,167,126	)		802,595		(364,531	)
Long-lived assets		2,435,424			10,128,058		12,563,482


	For Three Months Ended June 30, 2009
	United			United
	States			Kingdom		Consolidated

Revenues	$	1,176,102		$	2,963,220	$	4,139,322
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		507,333			1,923,312		2,430,645
Depreciation and Amortization		166,682			220,209		386,891
Income (loss) from operations		(685,687	)		65,673		(620,014	)
Long-lived assets		1,521,722			9,604,565		11,126,287


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

Revenues	$	1,229,130		$	3,806,365	$	5,035,495
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		652,133			2,902,821		3,554,954
Depreciation and Amortization		153,969			234,468		388,437
Income (loss) from operations		(634,647	)		215,492		(419,155	)
Long-lived assets		2,435,424			10,128,058		12,563,482


NOTE 11:		Subsequent Events

The Company evaluated subsequent events through August 14, 2009, the date our consolidated financial statements were issued. No matters were identified that would materially impact our consolidated financial statements or require disclosure in accordance with SFAS No. 165“Subsequent Events”.

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”), 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 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 $5.7 million and $7.3 million for the six months ended June 30, 2009 and 2008, respectively, and $2.8 million and $3.3 million for the three months ended June 30, 2009 and 2008, respectively. For the Telemanagement segment, the Company recorded revenues of $2.2 million and $3.0 million for the six months ended June 30, 2009 and 2008, respectively, and $1.2 million and $1.6 million for the three months ended June 30, 2009 and 2008, respectively. The Patent Enforcement segment recorded revenue of $0 for the six and three months ended June 30, 2009 and 2008. In the VoIP segment, revenue of $260 thousand and $104 thousand was recorded in the six months ended June 30, 2009 and 2008, respectively, and $189 thousand and $75 thousand was recognized in the three months ended June 30, 2009 and 2008, 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 NGNs.

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. 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.

Financial Position

In the six months ended June 30, 2009, the Company experienced a change in its financial condition as a result of a net loss of $1,190,689. The change was primarily attributable to a drop in revenue in the United Kingdom of $2,112,716 which was primarily attributable to the weakening of the UK pound against the US dollar.

At June 30, 2009, cash and cash equivalents were $566,968 compared to $341,936 at December 31, 2008, and such increase was primarily attributable to cash borrowed under the Company’s credit agreements of $561,000. The increase in cash due to borrowing was partially offset by cash used in operating and investing activities. Cash used in the six months ended June 30, 2009 by operating activities amounted to $40,350 which was primarily related to the net operating loss of $1,190,689 partially off-set by $753,951 of non-cash depreciation and amortization. Cash utilized in investing activities of $401,805 related to additions to property, equipment and software. The Company realized an increase in net current assets (current assets less current liabilities) of $114,083 which was primarily attributable to the increase in receivables. The Company realized a decline in stockholders’ equity of $1,156,478 primarily as a result of the net loss reported for the six months ended June 30, 2009. The Company generates approximately 72% of its revenues from operations in the United Kingdom where the functional currency, the UK pound, has increased since December 31, 2008 by 13.5% in relation to the US dollar as of June 30, 2009.

Results of Operations(Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008)

Revenues

Revenues from operations for the six months ended June 30, 2009 decreased $2,286,097, or 22.0%, to $8,088,610 as compared to $10,374,707 for the six months ended June 30, 2008. The decrease in revenue was primarily due to the $2,112,716, or 26.6% decrease of revenue derived from the UK operations associated with a 24.2% drop in the UK pound to US dollar average exchange rate for the six months ended June 30, 2009 compared to the average exchange rate for the six months ended June 30, 2008. Revenues derived from the UK operations represent 72.1% and 76.5% of total revenues for the six months ended June 30, 2009 and 2008, respectively. The US revenues decreased by $173,381, or 7.1%, to $2,259,592 for the six months ended June 30, 2009 compared to $2,432,973 for the six months ended June 30, 2008. The decrease in US 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. The Company earns a substantial portion of its revenue from a single EIM customer. This customer represented 18.4% of the total revenues for the six months ended June 30, 2009 and 17.2% for the six months ended June 30, 2008. The increase in the percentage in the largest customer was primarily the result of a decrease in total revenue due to the weakening of the UK pound against the US dollar. The Company believes that the portion of revenue from the single largest EIM customer will decline due to the erosion of the customer’s revenue.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the six months ended June 30, 2009, decreased $42,540, or 1.7%, to $2,398,908 as compared to $2,441,448 for the six months ended June 30, 2008. The decrease was primarily due to the lower exchange rate of the UK pound to the US dollar partially off-set by an increase in the amount of development expense allocated to cost of products and services, excluding depreciation and amortization due to an increase in customer development projects. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 29.7% of revenue for the six months ended June 30, 2009 as compared to 23.5% of revenue for the six months ended June 30, 2008.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the six months ended June 30, 2009 increased by $302,839, or 79.4%, to $684,153 as compared to $381,314 for the six months ended June 30, 2008. The increase was primarily due to increased professional fees associated with increased patent enforcement activities in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. There were no patent license fee and enforcement revenues recognized in the six months ended June 30, 2009 and 2008.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the six months ended June 30, 2009 decreased $1,080,783, or 21.6%, to $3,920,885 compared to $5,001,668 for the six months ended June 30, 2008. The decrease in Selling, general and administrative expenses was primarily due to the lower exchange rate of the UK pound to the US dollar along with a reduction in anticipated incentive compensation for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Research and Development Expense

Research and development expense for the six months ended June 30, 2009 decreased $687,415, or 32.8%, to $1,411,312 as compared to $2,098,727 for the six months ended June 30, 2008. The decrease was primarily due to the lower exchange rate of the UK pound to the US dollar along with an increase in billable research and development being charged to cost of sales in the six months ended June 30, 2009. Research and development costs that were capitalized during the six months ended June 30, 2009 and June 30, 2008 amounted to $318,973 and $406,508, respectively.

Depreciation and Amortization

Depreciation and amortization for the six months ended June 30, 2009 decreased $62,130, or 7.6%, to $753,951 from $816,081 in the six months ended June 30, 2008. The decrease was primarily associated with a large amount of fixed assets being fully depreciated in the year ended December 31, 2008.

Other Income and Expense

Interest expense decreased $78,435, or 64.7%, to $42,798 for the six months ended June 30, 2009 compared to $121,233 for the six months ended June 30, 2008. The decrease in interest expense was primarily associated with the lower interest rates and lower outstanding borrowings under the Company’s acquisition loan.

The Company realized a gain on disposal of equipment of $1,499 for the six months ended June 30, 2009 compared to a loss on disposal of equipment of $42,435 for the six months ended June 30, 2008.

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 June 30, 2009, the Company’s valuation allowance related to the net deferred tax assets in the United States.

The tax expense for the six months ended June 30, 2009 and June 30, 2008 of $68,791 and $203,954, respectively, was due to the pre-tax income in the United Kingdom of $251,476 and $724,178, respectively.

Net Loss

Net loss increased $458,536 to $1,190,689 for the six months ended June 30, 2009 compared to a net loss of $732,153 for the six months ended June 30, 2008. The increase in net loss was primarily associated with the decrease in revenue along with increased patent enforcement costs.

Results of Operations(Three Months Ended June 30, 2009 Compared to Three Months Ended June 30, 2008)

Revenues

Revenues from operations for the three months ended June 30, 2009 decreased $896,173, or 17.8%, to $4,139,322 as compared to $5,035,495 for the three months ended June 30, 2008. The decrease in revenue was primarily due to the $843,145, or 22.2% decrease of revenue derived from the UK operations associated with a 20.1% drop in the UK pound to US dollar average exchange rate for the three months ended June 30, 2009 compared to the average exchange rate for the three months ended June 30, 2008. Revenues derived from the UK operations represented 71.6% and 75.6% of total revenues for the three months ended June 30, 2009 and 2008, respectively. The US revenues decreased by $53,028, or 4.3%, to $1,176,102 for the three months ended June 30, 2009 compared to $1,229,130 for the three months ended June 30, 2008. The decrease in US 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. The Company earns a substantial portion of its revenue from a single EIM customer. This customer represented 17.4% of the total revenues for the three months ended June 30, 2009 and 17.6% for the three months ended June 30, 2008. The Company believes that the portion of revenue from the single largest EIM customer will decline due to the erosion of the customer’s revenue.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended June 30, 2009, increased $36,185, or 2.9%, to $1,269,515 as compared to $1,233,330 for the three months ended June 30, 2008. The increase was primarily due to an increase in the amount of research and development expense allocated to cost of products and services, excluding depreciation and amortization due to an increase in customer development projects partially offset by a the decrease was related to the lower exchange rate of the UK pound to the US dollar. For software sales, service fee and license fee revenues, the cost of products and services, excluding depreciation and amortization, was 30.7% of revenue for the three months ended June 30, 2009 as compared to 24.6% of revenue for the three months ended June 30, 2008.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the three months ended June 30, 2009 increased by $191,951, or 77.6%, to $439,162 as compared to $247,211 for the three months ended June 30, 2008. The increase was primarily due to increased professional fees associated with increased patent enforcement activities in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. There were no patent license fee and enforcement revenues recognized in the three months ended June 30, 2009 and 2008.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended June 30, 2009 decreased $632,045, or 24.5%, to $1,946,592 compared to $2,578,637 for the three months ended June 30, 2008. The decrease in Selling, general and administrative expenses was primarily due to the lower exchange rate of the UK pound to the US dollar along with a reduction in anticipated incentive compensation accrual for the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Research and Development Expense

Research and development expense for the three months ended June 30, 2009 decreased $289,859, or 28.8%, to $717,176 as compared to $1,007,035 for the three months ended June 30, 2008. The decrease was primarily due to the lower exchange rate of the UK pound to the US dollar along with an increase in billable research and development being charged to cost of sales in the three months ended June 30, 2009. Research and development costs that were capitalized during the three months ended June 30, 2009 and June 30, 2008 amounted to $196,932 and $207,922, respectively.

Depreciation and Amortization

Depreciation and amortization for the three months ended June 30, 2009 decreased $1,546, or 0.4%, to $386,891 from $388,437 in the three months ended June 30, 2008. The decrease was primarily associated with a large amount of fixed assets being fully depreciated in the year ended December 31, 2008 partially offset by an increase in amortization of developed software.

Amortization expense of developed software amounted to $114,186 and $103,289 for the three months ended June 30, 2009 and 2008, 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 $22,451, or 42.1%, to $30,931 for the three months ended June 30, 2009 compared to $53,382 for the three months ended June 30, 2008. The decrease in interest expense was primarily associated with the lower interest rates and lower outstanding borrowings under the Company’s acquisition loan.

The Company realized a gain on disposal of equipment of $1,499 for the three months ended June 30, 2009 compared to a loss on disposal of equipment of $28,145 for the three months ended June 30, 2008.

Taxes

The tax expense for the three months ended June 30, 2009 and June 30, 2008 of $18,552 and $52,730, respectively, was due to the pre-tax income in the United Kingdom of $62,881 and $169,814, respectively.

Net Loss

Net loss increased $114,586 to $667,998 for the three months ended June 30, 2009 compared to a net loss of $553,412 for the three months ended June 30, 2008. The increase in net loss was primarily associated with the decrease in revenue along with increased patent enforcement costs.

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 $225,032 to $566,968 as of June 30, 2009 compared to $341,936 as of December 31, 2008.The increase in cash, cash equivalents, and short-term investments during the six months ended June 30, 2009 was predominately related to cash borrowed under the Company’s credit agreements of $561,000. The increase was offset by to cash flows used in operations of $40,350 along with cash spent on property, equipment, and software of $401,805. The effect of foreign currency exchange rates on cash and cash equivalents was an increase of $106,187.

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 six months ended June 30, 2009 of $1,709,094, $(149,094), $(1,361,580) and $(695,648), respectively. The Corporate Allocation expense generated an operating loss of $(583,371) for the six months ended June 30, 2009. The United States location generated a loss from operations for the six months ended June 30, 2009 of $(1,336,359) which was primarily associated with losses generated in the VoIP segment, Patent Enforcement segment, and the Corporate Allocations expense. The United Kingdom location generated income from operations for the same period of $255,760. For the six months ended June 30, 2008 the EIM, Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations of $1,980,104, $251,256, $(1,436,587) and $(392,809), respectively. The Corporate Allocation expense generated an operating loss of $(766,495) for the six months ended June 30, 2008. The United States location generated a loss from operations for the six months ended June 30, 2008 of $(1,167,126) 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 $802,595.

The Company has available a revolving loan facility with National City Bank (“NCB”) 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 2.82% as of June 30, 2009. 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 $3,086 and $1,389 for the six and three months ended June 30, 2009, 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 $561,000 at June 30, 2009. Additional available for borrowing under the revolving loan on June 30, 2009 was $1,074,769. The carrying amount of receivables that served as collateral for borrowings totaled $1,635,769 at June 30, 2009.

The Company derives a substantial portion of its revenues from a single EIM customer. This single customer generated approximately $1.5 million and $1.8 million in the six months ended June 30, 2009 and June 30, 2008, respectively (18.4% of revenue for the six months ended June 30, 2009 and 17.2% or revenue for the six months ended June 30, 2008). This 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 2008 and 2007, the Company experienced significant decreases in the processing for this customer and anticipates additional decreased processing revenue. The loss of this customer 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 8. “Financial Statements and Supplementary Date – Notes to Consolidated Financial Statements – Note 1” in the Company’s Annual Report on Form10-K for the year ended December 31, 2008.

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.

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 June 30, 2009, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense relates to the UK 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 June 30, 2009.

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.

Goodwill and Intangible Assets.The Company considers the goodwill and related intangible assets related to CTI Billing Solutions Limited to be the premium the Company paid for CTI Billing Solutions Limited. For accounting purposes, these assets are maintained at the corporate level and the Company considers the functional currency with respect to these assets the U.S. dollar.

Goodwill is tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. There were no impairments in 2009 and 2008. Purchased intangible assets other than goodwill

are amortized over their useful lives unless these lives are determined to be indefinite. Purchased intangible assets are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally 3-15 years. Intangible assets consist of patents, purchased technology, trademarks and trade names, and customer lists.

For purposes of applying SFAS 142, the Company has allocated goodwill and a significant component of its intangible assets to CTI Billing Solutions Limited. As that entity is considered a separate reporting unit under guidance of SFAS 142 and the Company performed its annual impairment analysis on goodwill as of the October 1, 2008, to coincide with the calendar date set in past years for this analysis. The Company’s analysis considered the projected cash flows of the reporting unit and gave consideration to appropriate factors in determining a discount rate to be applied to these cash flows. The Company engaged the same outside firm as was used in past years to assist in this analysis. The Company is satisfied as to the qualifications and independence of this firm with respect to their ability to assist in this analysis. The results of this analysis indicated that there was no SFAS 142, Step One impairment as of the date of our annual impairment determination.

Coincident with the decline in the overall stock market, the Company’s Class A common stock dropped significantly in the fourth quarter of 2008 and has remained at low levels after year end. As of August 11, 2009, the Company’s common stock closed at $0.12 per share and the “market cap” for the Company’s stock was approximately $3.5 million which is well below the Company’s reported book value at June 30, 2009 of approximately $8.6 million.

Because of the significant decline in the Company’s stock price, the Company reviewed the assumptions utilized in the impairment determination and again found that there existed no impairment. The Company’s operations of the business unit are primarily based on recurring revenues and have not experienced an adverse change in anticipated performance considered in the impairment analysis. The business units operating performance subsequent to the goodwill impairment analysis has exceeded anticipated performance through the most recent period that information is available.

The Company recognizes that the market for our stock is significantly below our book value which the Company attributes to a number of factors including very limited trading in the Company’s Class A common stock; a significant portion of the Company’s Class A common stock (approximately 75%) is beneficially owned by its majority stockholder, an overall “flight to quality” by investors in which many “penny stocks” such as CTI’s have been significantly downgraded in terms of pricing and an overall lack of public awareness of its operations. While the Company cannot quantify the impacts of these factors in terms of how they impact the difference between book value and our stock’s “market cap” The Company does not believe that the market in its Class A common stock is sufficiently sophisticated to make a proper determination of the value of the Company’s Class A common stock such that it should drive the Company to reach a conclusion that impairment of its goodwill has occurred when the Company believes that generally accepted valuation techniques using its most recent assessments as to the future performance of our business indicate that is not impaired. The Company will continue in the future to be aware of the market cap in our assessment of its goodwill and may more frequently update its analysis of goodwill impairment in light of this situation. The Company believes the year-end analysis is sufficiently current and no formal analysis has been performed at June 30, 2009. If the Company assesses market condition changes in our business, it may be required to reflect goodwill impairment in the future.

Long-Lived Assets.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.

The Company estimates it will recognize approximately $112,000, $9,000, $0 and $0 for the fiscal years ending December 31, 2009, 2010, 2011 and 2012, respectively, of compensation costs for nonvested stock options previously granted to employees.

New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157,Fair Value Measurements(“SFAS 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 SFAS 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 SFAS 157 had no material effect 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 SFAS 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, there was no material impact on the Company’s condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not Applicable.

Item 4. 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.

Qwest Corporation

The Company previously disclosed that on May 11, 2004, an action was brought against the Company in the United States District Court for the Western District of Washington by Qwest Corporation seeking a declaratory judgment of non-infringement and invalidity of the Company’s Patent No. 5,287,270. An amended complaint was filed on July 13, 2004 adding Qwest Communications Corporation to that action. The Company filed a motion with the United States District Court for the Western District of Washington seeking to dismiss that action or, in the alternative, to transfer it to the United States District Court for the Southern District of Indiana. On November 12, 2004, the United States District Court for the Western District of Washington granted the Company’s motion to the extent of transferring the action to the United States District Court for the Southern District of Indiana. The Company asserted counterclaims alleging patent infringement and the United States District Court for the Southern District of Indiana then consolidated the transferred action with the pending patent infringement lawsuit disclosed above under “BellSouth Corporation et al.”

On January 9, 2008, the United States District Court for the Southern District of Indiana issued its claim construction for U.S. Patent No. 5,287,270. On January 18, 2008, Qwest entities filed a motion for stay and a summary judgment motion of invalidity based on the construction of one of the claim terms. The motions were fully briefed on an expedited basis and on February 26, 2008, the court denied the motions. During April and May 2008, the parties filed amended pleadings to permit the Qwest entities to assert certain affirmative defenses related to government contracts.

Fact discovery closed on December 23, 2008. Expert discovery was completed on April 1, 2009. On April 15, 2009, the parties filed various summary judgment motions related to patent infringement and invalidity and immunity from suit concerning the Networx government contracts. The summary judgment motions are pending. The court has set a trial date of November 30, 2009.

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 10.1 Office Lease dated April 24, 2009, between CTI Billing Solutions Limited and British Waterways Board, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 30, 2009.

Exhibit 11.1 Statement re computation of per share earnings, incorporated by reference to Note 6 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: August 14, 2009
Chief Executive Officer
(principal executive officer)

/s/ Manfred Hanuschek
Manfred Hanuschek		Date: August 14, 2009
Chief Financial Officer
(principal financial officer)

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

Cti (CTIG) Inactive 10-Q2009 Q2 Quarterly report

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