Cti 10Q 2011 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2011


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 000-10560

CTI GROUP (HOLDINGS) INC.

(Exact name of registrant as specified in its charter)


DELAWARE		51-0308583

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).þ 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 November 2, 2011, the number of shares of Class A common stock, par value $.01 per share, issued was 29,178,271. As of November 2, 2011, treasury stock constituted 140,250 shares of Class A common stock.

CTI GROUP (HOLDINGS) INC.

FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS


ITEM	PAGE
NO.	NO.

Forward Looking Statements		3

PART I — Financial Information

1. Financial Statements

Consolidated Balance Sheets at September 30, 2011 (unaudited) and December 31, 2010		4

Consolidated Statements of Operations (unaudited) for the nine months ended September 30, 2011 and September 30, 2010		5

Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2011 and September 30, 2010		6

Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2011 and September 30, 2010		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		25

4. Controls and Procedures		26

PART II — Other Information

1. Legal Proceedings		27

1A. Risk Factors		27

2. Unregistered Sales of Equity Securities and Use of Proceeds		27

3. Defaults Upon Senior Securities		27

4. (Removed and Reserved)		27

5. Other Information		27

6. Exhibits		28

Signatures		29

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) contains “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, 2010, 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: economic conditions, risks associated with conducting business outside the U.S., ability to obtain a loan facility or receive additional advances from Fairford Holdings, Ltd., if needed, incurring additional losses, impact of accounting pronouncements, recording additional impairments, ability to maintain an effective system of internal controls over financial reporting and disclosure controls and procedures, 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.

References herein to the Company mean CTI Group (Holdings) Inc. and its subsidiaries unless the context otherwise requires.

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2011			2010
	(unaudited)
ASSETS
Cash and cash equivalents	$	3,818,021		$	680,046
Trade accounts receivable, less allowance for doubtful accounts of $68,085 and $71,689, respectively		3,229,493			3,138,280
Note and settlement receivable — short term		—			24,623
Prepaid expenses		587,822			315,411
Deferred tax asset		—			112,172
Other current assets		397,487			209,863

Total current assets		8,032,823			4,480,395

Property, equipment, and software, net		2,264,070			1,902,343
Intangible assets, net		2,684,008			3,199,477
Goodwill		2,769,589			2,769,589
Other assets		78,991			78,703

Total assets	$	15,829,481		$	12,430,507


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	$	327,015		$	428,544
Accrued expenses		1,091,604			1,037,650
Accrued wages and other compensation		651,065			303,829
Income tax payable		306,070			526,082
Note payable		—			825,000
Advance from shareholder		—			505,016
Deferred tax liability — short term		51,468			—
Deferred revenue		4,537,992			2,274,870

Total current liabilities		6,965,214			5,900,991

Lease incentive — long term		121,698			187,365
Deferred revenue — long term		3,430,263			355,001
Deferred income tax liability — long term		772,483			756,356

Total liabilities		11,289,658			7,199,713

Commitments and contingencies

Stockholders’ equity
Class A common stock, par value $.01 per share; 47,166,666 shares authorized; 29,178,271 issued at September 30, 2011 and at December 31, 2010		291,783			291,783
Additional paid-in capital		26,049,874			26,020,967
Accumulated deficit		(22,101,567	)		(21,298,515	)
Other comprehensive income — foreign currency translation		491,876			408,702
Treasury stock, 140,250 shares at cost		(192,143	)		(192,143	)

Total stockholders’ equity		4,539,823			5,230,794

Total liabilities and stockholders’ equity	$	15,829,481		$	12,430,507

See accompanying notes to consolidated financial statements.

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Nine months ended
	September 30,
	2011			2010
Revenues:
Software sales, service fee and license fee revenue	$	12,495,621		$	10,824,098
Patent license fee and enforcement revenues		—			40,500

		12,495,621			10,864,598

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		3,463,663			3,558,107
Patent license fee and enforcement cost		(54,531	)		7,450
Selling, general and administration		6,322,624			5,542,584
Research and development		1,930,393			1,798,569
Depreciation and amortization Legal settlements		1,452,128			1,231,223


Loss from operations		(618,656	)		(1,273,335	)


Other expense / (income)
Interest expense, net of interest income of $2,974 and $23,012, respectively		23,886			72,998
Other expense / (income)		(994	)		51

Total other expense / (income)		22,892			73,049

Loss before income taxes		(641,548	)		(1,346,384	)

Tax expense		161,504			52,654


Net loss		(803,052	)		(1,399,038	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		83,174			(66,855	)

Comprehensive loss		(719,878	)	$	(1,465,893	)


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


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
	September 30,
	2011			2010
Revenues:
Software sales, service fee and license fee revenue	$	4,378,665		$	3,346,509

Cost and Expenses:
Cost of products and services, excluding depreciation and amortization		1,089,661			1,212,783
Patent license fee and enforcement cost		3,775			(3,153	)
Selling, general and administration		2,320,750			1,800,264
Research and development		617,906			571,982
Depreciation and amortization Legal settlements		504,787			435,113


Loss from operations		(158,214	)		(670,480	)


Other expense / (income)
Interest expense, net of interest income of $1,627 and $3,068, respectively		4,100			31,349
Other expense / (income)		(994	)		—

Total other expense / (income)		3,106			31,349

Loss before income taxes		(161,320	)		(701,829	)

Tax expense / (benefit)		17,518			26,559


Net loss		(178,838	)		(728,388	)


Other comprehensive income / (loss)
Foreign currency translation adjustment		107,356			(210,582	)

Comprehensive income / (loss)		(71,482	)	$	(938,970	)


Basic and diluted net loss per common share	$	(0.01	)	$	(0.03	)


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

See accompanying notes to consolidated financial statements

CTI GROUP (HOLDINGS) INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine months ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net loss	$	(803,052	)	$	(1,399,038	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,452,128			1,231,223
Provision for doubtful accounts		3,393			29,500
Deferred income taxes		183,960			(88,904	)
Amortization of deferred financing fees		—			56,705
Non-cash interest charge		—			2,006
Recognition of rent incentive benefit		(80,663	)		46,117
Stock option grant expense		28,909			40,387
Loss on disposal of property and equipment		421			53
Changes in operating assets and liabilities:
Trade receivables		(86,458	)		(516,985	)
Note and settlement receivables		24,623			306,362
Prepaid expenses		(279,364	)		(53,971	)
Income taxes		(230,147	)		235,567
Other assets		(191,198	)		31,574
Accounts payable		(103,212	)		(231,822	)
Accrued expenses		68,546			(36,795	)
Accrued wages and other compensation		350,783			218,330
Deferred revenue		5,514,935			391,963

Cash provided by operating activities		5,853,604			262,272


Cash flows used in investing activities:
Additions to property, equipment, and software		(1,264,433	)		(786,932	)

Cash used in investing activities		(1,264,433	)		(786,932	)


Cash flows (used in) / provided by financing activities:
Borrowings under credit agreements		—			3,031,000
Repayments under credit agreements		(825,000	)		(2,689,027	)
Advance from shareholder		838,509			—
Repayment of advance from shareholder		(1,343,525	)		—

Cash (used in) / provided by financing activities		(1,330,016	)		341,973


Effect of foreign currency exchange rates on cash and cash equivalents		(121,180	)		(2,816	)


Increase / (decrease) in cash and cash equivalents		3,137,975			(185,503	)

Cash and cash equivalents, beginning of period		680,046			508,836


Cash and cash equivalents, end of period	$	3,818,021		$	323,333

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. The Company operates in four business segments: Electronic Invoice Management, Telemanagement, Voice Over Internet Protocol and Patent Enforcement Activities. The majority of the Company’s business is in Europe and North America.

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 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 such 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 their telecommunications expenses while driving internal efficiencies into their invoice receipt, validation, approval and payment workflow processes. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, 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 the VoIP 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 year ended December 31, 2010 and the notes thereto included in the Company’s Form 10-K filed with the SEC.

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow.

Amortization expense of developed software amounted to $658,466 and $559,127 for the nine months ended September 30, 2011 and 2010, respectively. Amortization expense of developed software amounted to $242,544 and $251,553 for the three months ended September 30, 2011 and 2010, respectively. Amortization expense of developed software, which relates to cost of sales, was included in depreciation and amortization expense.

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

The Company paid $23,919 and $27,468 in interest related to the Company’s notes payable for the nine months ended September 30, 2011 and 2010, respectively.

The Company paid approximately $98,000 and $17,000 for current year tax estimates for the nine months ended September 30, 2011 and 2010, respectively. The Company received income tax refunds of approximately $0 and $124,914 during the nine months ended September 30, 2011 and 2010, respectively, for prior year tax payments and paid income taxes of approximately $101,737 and $4,200 during the nine months ended September 30, 2011 and 2010, respectively, for prior year taxes.

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.

NOTE 4: Debt Obligations and Liquidity

The Company had the following debt obligations.

The Company had a revolving loan with PNC Bank (“PNC”) which matured on December 31, 2010 (the “Loan Agreement”).

The Loan Agreement allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. Outstanding principal under the Loan Agreement amounted to $825,000 on December 31, 2010. On January 3, 2011, the revolving loan was repaid with an advance of $825,000 from Fairford Holdings, Limited, a British Virgin Islands Company (”Fairford”). On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%.

In October 2010, in order to supplement the Company’s liquidity, Fairford advanced $500,000 to the Company. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest under the promissory notes amounted to $23,919. As of September 30, 2011, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock.

In March 2011, the Company received a purchase order for EIM licenses in the UK totaling approximately $6 million and received payment of approximately $7 million in May 2011, which includes VAT tax remittance. The EIM license agreement expands services provided to an existing customer and the revenue will be recognized over the term of the three-year license and service agreement. The license agreement does contain a termination clause which enables the customer to cancel the agreement after two years of service and return 80% of the unearned prepaid license fee. The maximum prepaid fee which could be claimed would be approximately $1.5 million. The Company believes that this source of liquidity along with the cash on hand, and anticipated increased cash generated from future operating activities will be sufficient to support its operations over the next twelve months.

NOTE 5: New Accounting Pronouncements

FASB Accounting Standards Update (“ASU”) No. 2009-13 — Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This ASU also provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated, requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method. The consensus significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. This ASU should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this ASU on a retrospective basis. The adoption of this ASU had no effect on the Company’s results of operations or financial position.

FASB ASU No. 2009-14 — Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This ASU removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue model or the guidance in revenue arrangements with multiple deliverables model, ASU No. 2009-13. Generally, if the software contained in or part of the arrangement with the tangible product is essential to the tangible product’s functionality, then the software is excluded from the software revenue guidance. The ASU also provides factors to consider in evaluating whether the software was essential to the tangible product or not. The disclosure requirements, effective date, and transition methods for this ASU are the same as those for ASU No. 2009- 13. An entity must adopt both ASUs in the same period using the same transition method. The adoption of this ASU had no effect on the Company’s results of operations or financial position.

NOTE 6: Basic and Diluted Net Income Per Common Share

Basic earnings per share amounts are computed by dividing reported earnings available to common stockholders by the weighted average shares outstanding for the period. Diluted earnings per share amounts are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding for the period giving effect to securities considered to be potentially dilutive common shares such as stock options.


	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Net loss	$	(178,838	)	$	(728,388	)	$	(803,052	)	$	(1,399,038	)


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	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.05	)


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


Diluted:
Net loss per share	$	(0.01	)	$	(0.03	)	$	(0.03	)	$	(0.05	)


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

For the three and nine months ended September 30, 2011, outstanding stock options were excluded from weighted average shares of common and common equivalent shares outstanding due to their anti-dilutive effect as a result of the Company’s net loss. Additional common shares to be issued, assuming exercise of stock options for the three and nine months ended September 30, 2011, would have been 73,977 and 79,486, respectively. 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 nine months ended September 30, 2010.

NOTE 7: Stock Based Compensation

The Company’s Amended and Restated Stock Option and Restricted Stock Plan (the “Plan”) provided 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 included 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 were 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.

In 2002, the Company’s stockholders authorized an additional 2,000,000 shares available for grant under the Plan. In addition, the Company filed a registration statement on Form S-8 with the Securities Exchange Commission. Such registration statement also covered certain options granted prior to the merger in 2001, which were not granted under the Plan (“Outside Plan Stock Options”).

On December 8, 2005, the Company’s stockholders ratified the CTI Group (Holdings) Inc. Stock Incentive Plan (the “Stock Incentive Plan”) at the Company’s 2005 Annual Meeting of Stockholders. In addition, the Company filed a registration statement on Form S-8 with the Securities and Exchange Commission. 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 the stockholders’ approval of the Stock Incentive Plan will continue to be administered under the Plan.

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 awards 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 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 described in the Stock Incentive Plan.

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. As of September 30, 2011, there were 1,395,400 shares available for grant under the Stock Incentive Plan. If any outstanding award is cancelled, forfeited, or surrendered to the Company, shares of Class A common stock allocable to such award may again be available for awards under the Stock Incentive Plan. Incentive stock options may be granted only to participants who are executive officers and other employees of the Company or any of its subsidiaries on the day of the grant, and non-qualified stock options may be granted to any participant in the Stock Incentive Plan. No stock option granted under the Stock Incentive Plan will be exercisable later than ten years after the date it is granted.

At September 30, 2011, there were options to purchase 6,110,850 shares of Class A common stock outstanding consisting of 5,860,850 Plan and Stock Incentive Plan options and 250,000 outside plan stock options. There were exercisable options to purchase an aggregate of 4,995,115 shares of Class A common stock under the Plan and Stock Incentive Plan and options to purchase 250,000 shares of Class A common stock that were outside plan stock options as of September 30, 2011.

Information with respect to options was as follows:


			Exercise		Weighted
	Options		Price Range		Average
	Shares		Per Share		Exercise Price
Outstanding, January 1, 2011		5,861,782	$	0.08 - $0.49	$	0.27
Granted		249,068		0.10		0.10
Exercised		—		—		—
Cancelled		—		—		—

Outstanding, September 30, 2011		6,110,850	$	0.08 - $0.49	$	0.26

The following table summarizes options exercisable at September 30, 2011:

Exercise Price

Weighted

Aggregate

Weighted

Option

Range

Average

Intrinsic

Remaining

Per Share

Exercise Price

Value

Contractual Term

September 30, 2011

5,245,115

$0.08- $0.49

0.28

—

4.97 years

The following table summarizes non-vested options:


	Option
	Shares
January 1, 2011		1,000,000
Granted		249,068
Cancelled		—
Vested		(383,333	)

September 30, 2011		865,735

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 following table:


	2011
Risk-free interest rate		0.38	%
Dividend yield		0.00	%
Volatility factor		149.3	%
Expected lives	5 years

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). Closed-form valuation models incorporate ranges of assumptions for inputs. 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. On December 31, 2009, Fairford Scandinavia sold all of its owned Class A shares, or 355,099 shares to Fairford for SEK 2.80362 ($0.39) per share. As of September 30, 2011, 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 and expire ten years after the date of the grant.

Included within selling, general and administrative expense for the three months ended September 30, 2011 and September 30, 2010 was $10,152 and $9,388, respectively, of stock-based compensation. Included within selling, general and administrative expense for the nine months ended September 30, 2011 and September 30, 2010 was $28,909 and $40,387, 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 September 30, 2011, 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: Contingencies

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

NOTE 10: Income Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes, it is more likely than not, that the asset will not be realized. As of September 30, 2011, the Company’s valuation allowance related only to net deferred tax assets in the United States.

The Company recognizes a tax position 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. As of September 30, 2011 and September 30, 2010, the Company had $92,354 and $79,530 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 and state income taxes as well as foreign income tax in the United Kingdom. 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 had amounts accrued for interest and penalties as of September 30, 2011.

For the nine months ended September 30, 2011 and September 30, 2010, the Company had $161,504 and $52,654, respectively, of income tax expense and for the three months ended September 30, 2011 and September 30, 2010, the Company had $17,518 and $26,559 of income tax expense, respectively. The income tax expense was primarily related to the United Kingdom operations.

NOTE 11: Segment 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 and analysis 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 Proteus^® 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, 2010.

Summarized financial information concerning the Company’s reportable segments for the nine months and three months ended September 30, 2011 and 2010 is shown in the following tables.


	For Nine Months Ended September 30, 2011
	Electronic Invoice							Patent		Corporate
	Management		Telemanagement		VoIP			Enforcement		Allocation			Consolidated
Revenues	$	7,576,585	$	3,736,691	$	1,182,345		$	—	$	—		$	12,495,621
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		6,179,671		2,279,546		572,741			54,531		—			9,086,489
Depreciation and Amortization		1,084,686		32,424		327,717			—		7,301			1,452,128
Income / (loss) from operations		1,049,499		545,481		(1,462,215	)		54,531		(805,952	)		(618,656	)
Long-lived assets		7,058,234		91,001		642,343			—		5,080			7,796,658


	For Nine Months Ended September 30, 2010
	Electronic Invoice							Patent		Corporate
	Management		Telemanagement		VoIP			Enforcement		Allocation			Consolidated
Revenues	$	6,860,275	$	3,475,198	$	488,625		$	40,500	$	—		$	10,864,598
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		5,342,442		1,901,443		22,106			33,050		—			7,299,041
Depreciation and Amortization		795,780		12,768		404,528			353		17,794			1,231,223
Income / (loss) from operations		1,021,170		399,025		(1,885,984	)		32,697		(840,243	)		(1,273,355	)
Long-lived assets		9,595,997		62,192		829,411			—		10,365			10,497,965


	For Three Months Ended September 30, 2011
	Electronic Invoice							Patent			Corporate
	Management		Telemanagement		VoIP			Enforcement			Allocation			Consolidated
Revenues	$	2,717,582	$	1,185,876	$	475,207		$	—		$	—		$	4,378,665
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,233,300		773,879		281,825			(3,775	)		—			3,285,229
Depreciation and Amortization		381,784		11,406		109,233			—			2,364			504,787
Income / (loss) from operations		429,310		156,533		(481,378	)		(3,775	)		(258,904	)		(158,214	)
Long-lived assets		7,058,234		91,001		642,343			—			5,080			7,796,658


	For Three Months Ended September 30, 2010
	Electronic Invoice							Patent		Corporate
	Management		Telemanagement		VoIP			Enforcement		Allocation			Consolidated
Revenues	$	2,091,285	$	1,084,493	$	170,731			—		—		$	3,346,509
Gross profit/(loss) (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		1,538,844		603,079		(8,197	)		3,153		—			2,136,879
Depreciation and Amortization		299,216		4,380		128,105			—		3,412			435,113
Income / (loss) from operations		179,145		137,189		(667,219	)		3,153		(322,748	)		(670,480	)
Long-lived assets		9,595,997		62,192		829,411			—		10,365			10,497,965

The following table presents net revenues by geographic location.


	For Nine Months Ended September 30, 2011
				United
	United States			Kingdom		Consolidated
Revenues	$	3,003,646		$	9,491,975	$	12,495,621
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,237,530			6,848,959		9,086,489
Depreciation and Amortization		383,867			1,068,261		1,452,128
Income / (loss) from operations		(1,260,181	)		641,525		(618,656	)
Long-lived assets		6,274,031			1,522,627		7,796,658


	For Nine Months Ended September 30, 2010
				United
	United States			Kingdom			Consolidated
Revenues	$	3,275,401		$	7,589,197		$	10,864,598
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		2,309,225			4,989,816			7,299,041
Depreciation and Amortization		483,057			748,166			1,231,223
Income / (loss) from operations		(950,634	)		(322,721	)		(1,273,355	)
Long-lived assets		9,336,499			1,161,466			10,497,965


	For Three Months Ended September 30, 2011
				United
	United States			Kingdom		Consolidated
Revenues	$	1,076,382		$	3,302,283	$	4,378,665
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		794,440			2,490,789		3,285,229
Depreciation and Amortization		127,375			377,412		504,787
Income / (loss) from operations		(487,473	)		329,259		(158,214	)
Long-lived assets		6,274,031			1,522,627		7,796,658


	For Three Months Ended September 30, 2010
				United
	United States			Kingdom			Consolidated
Revenues	$	1,004,419		$	2,342,090		$	3,346,509
Gross profit (Revenues less cost of products and patent license cost, excluding depreciation and amortization)		645,494			1,491,385			2,136,879
Depreciation and Amortization		148,738			286,375			435,113
Income / (loss) from operations		(522,432	)		(148,048	)		(670,480	)
Long-lived assets		9,336,499			1,161,466			10,497,965

NOTE 12 —RELATED PARTY TRANSACTIONS

Principal and interest outstanding under the Loan Agreement (see Note 4: Debt Obligations and Liquidity) matured on December 30, 2010. The Loan Agreement, however, allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. Outstanding principal under the Loan Agreement amounted to $825,000 on December 30, 2010. On January 3, 2011, the revolving loan was repaid with an advance of $825,000 from Fairford. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. Advances from the shareholder, Fairford, totaling $1,325,000, documented in the form of two demand promissory notes, were repaid and cancelled in May 2011. Accumulated interest paid under the promissory notes amounted to $23,919.


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”), Telemanagment (“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 such software to their enterprise customers. Using the Company’s software and services, telecommunication service providers are able to electronically invoice their enterprise customers in a form and format that enables the enterprise customers to improve their ability to analyze, allocate and manage telecommunications expenses while driving internal efficiencies into their invoice receipt, validation, approval and payment workflow processes. Telemanagement designs, develops and provides software and services used by enterprise, governmental and institutional end users to manage their telecommunications service and equipment usage. VoIP designs, develops and provides software and services that enable managed and hosted customers of service providers to analyze voice, 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 the VoIP 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 Company realizes patent license fee and enforcement revenues. These revenues are realized once the Company has received a signed settlement or judgment and the collection of the receivable is deemed probable.

The Company 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 the Company believes will 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 Company reported revenue in the EIM segment of $7.6 million and $6.9 million for the nine months ended September 30, 2011 and 2010, respectively, and $2.7 million and $2.1 million for the three months ended September 30, 2011 and 2010, respectively. For the Telemanagement segment, the Company recorded revenues of $3.7 million and $3.5 million for the nine months ended September 30, 2011 and 2010, respectively, and $1.2 million and $1.1 million for the three months ended September 30, 2011 and 2010, respectively. The VoIP segment recorded revenue of approximately $1.2 million and $489,000 for the nine months ended September 30, 2011 and 2010, respectively, and $475,000 and $171,000 for the three months ended September 30, 2011 and 2010, respectively. The Patent Enforcement segment recorded revenue of $0 and $40,500 for the nine months ended September 30, 2011 and 2010 and no revenue for the three months ended September 30, 2011 and 2010.

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

Traditionally, organizations that required advanced voice and video services would purchase enabling communications hardware and software, operate and maintain this equipment, and depreciate the associated capital expense over time. 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 and video 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 and video features while reducing costs by delivering these services on high-capacity, low-cost NGNs.

Due to the profitability and average revenue per user advantage possible by delivering such managed and hosted service offerings, 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 will help eliminate customer resistance to conversion to next generation platforms, while creating new revenue opportunities for service providers through the delivery of compelling value added services. In 2007, the Company marketed two applications, emPulse, a web-based communications traffic analysis solution, and SmartRecord^® IP, which enable 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, 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 were released as enterprise-grade products. 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 or vertical.

Financial Condition

In the nine months ended September 30, 2011, the stockholders’ equity decreased $690,971 from $5,230,794 as of December 31, 2010 to $4,539,823 as of September 30, 2011 primarily as a result of the nine months ended September 30, 2011 net loss of $803,052. The Company realized an increase in net current assets (current assets less current liabilities) of approximately $2,488,205 which was primarily attributable to a large sale in the nine months ended September 30, 2011.

At September 30, 2011, cash and cash equivalents were $3,818,021 compared to $680,046 at December 31, 2010, and such increase was primarily attributable to cash provided by operating activities offset by cash used in investing and financing activities. Cash provided by operating activities in the nine months ended September 30, 2011 amounted to $5,853,604 which was primarily related a large sale that was recorded as deferred revenue and depreciation and amortization of $1,452,128 partially off-set by the net operating loss of $(803,052). Cash used in financing activities related to a repayment of all debt of $1,330,016. Cash utilized in investing activities of $1,264,433 related to additions to property, equipment which was primarily related to the aforementioned large sale that was recorded in deferred revenue. The Company generates approximately 76% of its revenues from operations in the United Kingdom where the functional currency, the UK pound, has improved by 0.4% in relation to the US dollar during the nine month period ended September 30, 2011 when compared to December 31, 2010.

In October 2010, in order to supplement the Company’s liquidity, Fairford advanced to the Company $500,000. Subsequent to the advancement, the Company issued to Fairford a demand note, in the aggregate principal amount of $500,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. Principal and interest outstanding under the Company’s revolving loan facility matured on December 30, 2010. The revolving loan facility, however, allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. Outstanding principal under the revolving loan facility amounted to $825,000 on December 30, 2010. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the revolving loan facility with PNC, Fairford advanced to the Company $825,000. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand. The advances from Fairford of $1,325,000 documented in the form of two demand promissory notes were repaid and cancelled on May 10, 2011. Accumulated interest paid under the promissory notes amounted to $23,919.

Results of Operations(Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010)

Revenues

Revenues from operations for the nine months ended September 30, 2011 increased $1,631,023, or 15.0%, to $12,495,621 as compared to $10,864,598 for the nine months ended September 30, 2010. Revenues derived from the U.K. operations represent 76.0% and 69.9% of total revenues for the nine months ended September 30, 2011 and 2010, respectively. The U.K. revenues increased by $1,902,778, or 25.1%, to $9,491,975 for the nine months ended September 30, 2011 compared to $7,589,197 for the nine months ended September 30, 2010. The increase in U.K. revenue was due to the increase in demand in the EIM, VoIP, and Telemanagement segments. The Company won a large EIM contract in the UK in the nine months ended September 30, 2011. The U.S. revenues decreased by $271,755, or 8.3%, to $3,003,646 for the nine months ended September 30, 2011 compared to $3,275,401 for the nine months ended September 30, 2010. The decrease in U.S. revenues was primarily related to a decrease in the revenue recognized in the US EIM segment. The Company earns a substantial portion of its revenue from a single EIM customer. This customer represented 11.8% of the total revenues for the nine months ended September 30, 2011 and 16.9% for the nine months ended September 30, 2010. The Company believes that the portion of revenue from the single largest EIM customer will continue to decline due to the erosion of the customer’s customer base and the revenue growth in other segments of the Company.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the nine months ended September 30, 2011, decreased $94,444, or 2.7%, to $3,463,663 as compared to $3,558,107 for the nine months ended September 30, 2010. The cost of products and services, excluding depreciation and amortization, was 27.7% of revenue for the nine months ended September 30, 2011 as compared to 32.8% of revenue for the nine months ended September 30, 2010. The decrease in percentage of cost of products and services was due to the decrease in costs and a 15.0% increase in revenues.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the nine months ended September 30, 2011 decreased by $61,981, or 832.0%, to a credit of $54,531 as compared to $7,450 for the nine months ended September 30, 2010. The decrease was primarily due to an adjustment to the estimated legal accrual being recognized in the nine months ended September 30, 2011 and decreased professional fees associated with cost absorption of certain out-of-pocket expenses by the Company’s attorneys in connection with certain patent enforcement activities.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the nine months ended September 30, 2011 increased $780,040, or 14.1%, to $6,322,624 compared to $5,542,584 for the nine months ended September 30, 2010. The increase in Selling, general and administrative expenses was primarily due to increased selling costs related to increased selling initiatives and an increase in revenue.

Research and Development Expense

Research and development expense for the nine months ended September 30, 2011 increased $131,824, or 7.3%, to $1,930,393 as compared to $1,798,569 for the nine months ended September 30, 2010. The increase was primarily due to a decrease in research and development being capitalized in the nine months ended September 30, 2011. Research and development costs that were capitalized during the nine months ended September 30, 2011 and September 30, 2010 amounted to $399,578 and $521,002, respectively.

Depreciation and Amortization

Depreciation and amortization for the nine months ended September 30, 2011 increased $220,905, or 17.9%, to $1,452,128 from $1,231,223 in the nine months ended September 30, 2010. The increase was primarily associated with depreciation and amortization of fixed assets acquired and software capitalized in 2010.

Other Income and Expense

Net interest expense decreased $49,112, or 67.3%, to $23,886 for the nine months ended September 30, 2011 compared to $72,998 for the nine months ended September 30, 2010. The Company repaid all notes payable in the nine months ended September 30, 2011.

The Company realized other (income) / loss on disposal of equipment of ($994) and $51 for the nine months ended September 30, 2011 and 2010, respectively.

Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of September 30, 2011, the Company’s valuation allowance related only to the net deferred tax assets in the United States.

For the nine months ended September 30, 2011 and September 30, 2010, the Company had $161,504 and $52,654, respectively, of income tax expense. The income tax benefit and expense were primarily related to the United Kingdom operations.

Net Loss

Net loss decreased $595,986 to $803,052 for the nine months ended September 30, 2011 compared to a net loss of $1,399,038 for the nine months ended September 30, 2010. The decrease in net loss was primarily associated with the increase in revenue. Included in the net loss for the nine months ended September 30, 2011 is approximately $289,000 of severance costs for a reduction in workforce that occurred in the nine months ended September 30, 2011.

Results of Operations(Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010)

Revenues

Revenues from operations for the three months ended September 30, 2011 increased $1,032,156, or 30.8%, to $4,378,665 as compared to $3,346,509 for the three months ended September 30, 2010. Revenues derived from the U.K. operations represent 75.4% and 70.0% of total revenues for the three months ended September 30, 2011 and 2010, respectively. The U.K. revenues increased by $960,193, or 41.0%, to $3,302,283 for the three months ended September 30, 2011 compared to $2,342,090 for the three months ended September 30, 2010. The increase in U.K. revenue was due to the increase in demand in the EIM, VoIP, and Telemanagement segments. The U.S. revenues increased by $71,963, or 7.2%, to $1,076,382 for the three months ended September 30, 2011 compared to $1,004,419 for the three months ended September 30, 2010. The increase in U.S. revenues was primarily related to an increase in the demand in the VoIP segment partially offset by a decrease in the revenue recognized in the U.S. EIM segment. The Company earns a substantial portion of its revenue from a single EIM customer. This customer represented 11.0% of the total revenues for the three months ended September 30, 2011 and 17.6% for the three months ended September 30, 2010. The Company believes that the portion of revenue from the single largest EIM customer will continue to decline due to the erosion of the customer’s customer base.

Cost of Products and Services Excluding Depreciation and Amortization

Cost of products and services, excluding depreciation and amortization, for the three months ended September 30, 2011, decreased $123,122, or 10.2%, to $1,089,661 as compared to $1,212,783 for the three months ended September 30, 2010. The decrease in cost was primarily due to a decrease in outsourced development. The cost of products and services, excluding depreciation and amortization, was 24.9% of revenue for the three months ended September 30, 2011 as compared to 36.2% of revenue for the three months ended September 30, 2010. The decrease in percentage of cost of products and services was due to a decrease in costs and corresponding 30.8% increase in revenues.

Patent License Fee and Enforcement Cost

Patent license fee and enforcement cost for the three months ended September 30, 2011 increased by $6,928, or 220.0%, to $3,775 as compared to a credit of $3,153 for the three months ended September 30, 2010. The increase was primarily due to an adjustment to the estimated legal accrual being recognized in the three months ended September 30, 2010.

Selling, General and Administrative Costs

Selling, general and administrative expenses for the three months ended September 30, 2011 increased $520,486, or 28.9%, to $2,320,750 compared to $1,800,264 for the three months ended September 30, 2010. The increase in selling, general and administrative expenses was primarily due to increased selling costs related to the increase in revenue and severance costs incurred in the amount of approximately $289,000.

Research and Development Expense

Research and development expense for the three months ended September 30, 2011 increased $45,924, or 8.0%, to $617,906 as compared to $571,982 for the three months ended September 30, 2010. Research and development costs that were capitalized during the three months ended September 30, 2011 and September 30, 2010 amounted to $76,605 and $80,495, respectively.

Depreciation and Amortization

Depreciation and amortization for the three months ended September 30, 2011 increased $69,674, or 16.0%, to $504,787 from $435,113 in the three months ended September 30, 2010. The increase was primarily associated with depreciation and amortization of fixed assets acquired and software capitalized in 2010.

Amortization expense of developed software amounted to $242,544 and $251,553 for the three months ended September 30, 2011 and 2010, respectively. Amortization expense of developed software, which relates to cost of sales, was included in depreciation and amortization expense.

Other Income and Expense

Interest expense decreased $27,249, or 86.9%, to $4,100 for the three months ended September 30, 2011 compared to $31,349 for the three months ended September 30, 2010. The decrease in interest expense was primarily due to the Company paying all notes payable in 2011.

The Company realized other (income) / loss on disposal of equipment of ($994) and $0 for the three months ended September 30, 2011 and 2010, respectively.

Taxes

The Company records a valuation allowance against its net deferred tax asset to the extent management believes that it is more likely than not that the asset will not be realized. As of September 30, 2011, the Company’s valuation allowance related to the net deferred tax assets in the United States.

For the three months ended September 30, 2011 and September 30, 2010, the Company had $17,518 and $26,559 of income tax expense, respectively. The income tax expense was primarily related to the United Kingdom operations.

Net Loss

Net loss decreased $549,550 to $178,838 for the three months ended September 30, 2011 compared to a net loss of $728,388 for the three months ended September 30, 2010. The decrease in net loss was primarily associated with the increase in revenue. Included in the net loss for the three months ended September 30, 2011 is approximately $289,000 severance costs for a reduction in workforce that occurred in the three months ended September 30, 2011.

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 $3,137,975 to $3,818,021 as of September 30, 2011 compared to $680,046 as of December 31, 2010.The increase in cash, cash equivalents, and short-term investments during the nine months ended September 30, 2011 was predominately related to cash provided by operating activities which amounted to $5,853,604, primarily related to a large sale that was recorded as deferred revenue and depreciation and amortization of $1,452,128 partially off-set by the net operating loss of $803,052. The deferred revenue relates to a prepaid order of approximately $6 million in May 2011. Cash spent on property, equipment, and software of $1,264,433 and cash used in financing activities of $1,330,016 partially offset the cash provided by operating activities. The effect of foreign currency exchange rates on cash and cash equivalents was a loss of $121,180.

Cash is generated from (or utilized in) the income/(loss) from operations for each segment (see Note 11 to the Consolidated Financial Statements (unaudited) of Part I, Item 1 of this Form 10-Q). The EIM, Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations for the nine months ended September 30, 2011 of $1,049,499, $545,481, $(1,462,215) and $54,531, respectively. The Corporate Allocation expense generated an operating loss of $(805,952) for the nine months ended September 30, 2011. The United States location generated a loss from operations for the nine months ended September 30, 2011 of $(1,260,181) which was primarily associated with losses generated in the VoIP segment and the Corporate Allocations expense. The United Kingdom location generated an income from operations for the same period of $641,525. For the nine months ended September 30, 2010, the EIM, Telemanagement, VoIP, and Patent Enforcement segments represented income / (loss) from operations of $1,021,170, $399,025, $(1,885,984) and $32,697, respectively. The Corporate Allocation expense generated an operating loss of $(840,243) for the nine months ended September 30, 2010. The United States location generated a loss from operations for the nine months ended September 30, 2010 of $(950,634) which was primarily associated with losses generated in the VoIP segment and the Corporate Allocations expense. The United Kingdom location generated a loss from operations for the same period of $(322,721).

The Company had available a revolving loan with PNC Bank (“PNC”). The revolving loan expired on December 30, 2010.

The loan agreement allowed for repayment to be made within ten days of the maturity date before a default in debt would be declared. Outstanding principal under the Loan Agreement amounted to $825,000 on December 30, 2010. On January 3, 2011, in order to supplement the Company’s liquidity which enabled the Company to repay the revolving loan facility with PNC, Fairford Holdings Limited, a British Virgin Islands company (“Fairford”) advanced $825,000 to the Company. As of September 30, 2011, Fairford beneficially owned 63.7% of the Company’s outstanding Class A common stock. On January 20, 2011, the board of directors approved the terms of Fairford’s advancement and the form of demand note. Subsequent to the advancement and approval by the board of directors, the Company issued to Fairford a demand note, in the aggregate principal amount of $825,000 bearing interest at LIBOR plus 4%. The demand note had no term and was due on demand.

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 Form 10-K for the year ended December 31, 2010.

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. 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. As of September 30, 2011, the Company’s valuation allowance related only to net deferred tax assets in the United States. As a result, the Company’s tax expense related 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 recognizes a tax position 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 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 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 September 30, 2011.

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. 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 on October 1 and between annual tests in certain circumstances, and written down when impaired. There was an impairment of $2,127,401 on goodwill in 2010 and no further impairment has been identified in 2011. 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.

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. The Company last performed its annual impairment analysis on goodwill as of October 1, 2010, 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 a Step One impairment as of the date of our annual impairment determination and the Step Two impairment resulted in a $2,127,401 impairment to goodwill and no impairment to intangibles.

The Company’s Class A common stock price dropped significantly in the fourth quarter of 2008 and has remained at low levels. As of November 2, 2011, the Company’s Class A common stock closed at $0.08 per share and the “market cap” for the Company’s stock was approximately $2.3 million which was well below the Company’s reported book value at September 30, 2011 of approximately $4.5 million.

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 78%) is beneficially owned by a 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 the Company’s business indicate that it is not impaired. The Company will continue in the future to be aware of the market cap in the Company’s assessment of its goodwill and may more frequently update its analysis of goodwill impairment in light of this situation.

Because of the Company’s continued low “market cap”, 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 believes that the year-end analysis is sufficiently current and no formal analysis has been performed at September 30, 2011.

Long-Lived Assets.The Company reviews the recoverability of the carrying value of its long-lived assets on an annual basis. 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 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. 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 the guidance related to software revenue recognition. If the criteria for separate accounting are not met, the entire arrangement is accounted for in conformity with guidance related to contract accounting. 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 recognizes 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. The Company uses the Black-Scholes-Merton formula to calculate the fair value of the stock options.

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 $41,000, $33,000, $9,000 and $6,000 for the fiscal years ending December 31, 2011, 2012, 2013 and 2014, respectively, of compensation costs for nonvested stock options previously granted to employees.

New Accounting Pronouncements

FASB ASU No. 2009-13 — Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. This ASU also provides principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and the consideration allocated, requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price, eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method. The consensus significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. This ASU should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted. Alternatively, an entity can elect to adopt this ASU on a retrospective basis. The adoption of this ASU had no effect on the Company’s results of operations or financial position.

FASB ASU No. 2009-14 — Software (Topic 985): Certain Revenue Arrangements That Include Software Elements. This ASU removes tangible products from the scope of the software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are within the scope of the software revenue model or the guidance in revenue arrangements with multiple deliverables model, ASU No. 2009-13. Generally, if the software contained in or part of the arrangement with the tangible product is essential to the tangible product’s functionality, then the software is excluded from the software revenue guidance. The ASU also provides factors to consider in evaluating whether the software was essential to the tangible product or not. The disclosure requirements, effective date, and transition methods for this ASU are the same as those for ASU No. 2009-13. An entity must adopt both ASUs in the same period using the same transition method. The adoption of this ASU had no effect on the Company’s results of operations or financial position.


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 as of September 30, 2011, the Company’s disclosure controls and procedures were 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, the 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 United States District Court for the Southern District of Indiana denied the motions. Fact discovery closed on December 23, 2008. Expert discovery was completed on April 1, 2009. On October 29, 2009, the United States District Court for the Southern District of Indiana ruled on the parties’ patent invalidity and noninfringement summary judgment motions. The United States District Court for the Southern District of Indiana held that the Company’s U.S. Patent No. 5,287,270 was valid but not infringed by the Qwest entities. In November 2009, the Company filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit (Federal Circuit). The Qwest entities subsequently cross appealed. Briefing before the Federal Circuit was completed, and, on January 20, 2011, the Federal Circuit reversed the district court’s decision. On February 22, 2011, the Qwest entities filed a Petition for a Rehearing en banc. That Petition was denied on April 25, 2011. Following remand, the United States District Court for the Southern District of Indiana permitted the parties to file motions for summary judgment with respect to issues not decided by the Federal Circuit’s opinion. On September 16, 2011 the parties filed cross-motions for summary judgment directed to infringement. Oppositions were filed on October 17, 2011, and the reply briefs were due on November 10, 2011. It is anticipated that the United States District Court for the Southern District of Indiana will take at least four months after briefing is completed to issue its ruling on the cross-motions. The United States District Court for the Southern District of Indiana will establish a pretrial schedule after it rules on the cross-motions for summary judgment, presuming the case survives Qwest’s motion for summary judgment.

Item 1A — Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010 which could materially affect our business, financial condition or future results. The risk factors in our Annual Report on Form 10-K have not materially changed. The risks in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

None.

Item 3 — Defaults Upon Senior Securities.

None.

Item 4 — (Removed and Reserved)

Item 5 — Other Information.

None

Item 6 — Exhibits.


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

Exhibit 101—		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for each of the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for each of the nine months ended September 30, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements.*


*		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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.


CTI Group (Holdings) Inc.

/s/ John Birbeck

John Birbeck		Date: November 14, 2011
Chief Executive Officer
(Principal Executive Officer)

/s/ Manfred Hanuschek

Manfred Hanuschek		Date: November 14, 2011
Chief Financial Officer
(Principal Accounting and Financial Officer)

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Cti (CTIG) Inactive 10-Q2011 Q3 Quarterly report

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