UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





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





For the quarterly period ended July 31, 2010





or





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








Commission File Number: 0-30121





ULTICOM, INC.


(Exact name of registrant as specified in its charter)





New Jersey

22-2050748(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)1020 Briggs Rd. Mt. Laurel, NJ

08054(Address of principal executive offices)

(Zip Code)





(856) 787-2700


(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.





x
Yes

 ̈
No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





 ̈
Yes

 ̈
No





Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).





 ̈
Yes

x
No





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





 ̈
Yes

x
No





The number of shares of Common Stock, no par value, outstanding as of September 7, 2010 was11,132,846.













TABLE OF CONTENTSPageForward Looking Statements

iiPART I - Financial InformationITEM 1.

Condensed Consolidated Financial Statements (Unaudited).Condensed Consolidated Balance Sheets as of January 31, 2010 and July 31, 2010

1Condensed Consolidated Statements of Operations for the Three and Six Months ended July 31, 2009 and 2010

2Condensed Consolidated Statements of Cash Flows for the Six Months ended July 31, 2009 and 2010

3Notes to Condensed Consolidated Financial Statements

4ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

9ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk.

19ITEM 4.

Controls and Procedures.

19PART II - Other InformationITEM 1.

Legal Proceedings.

21ITEM 1A.

Risk Factors.

21ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

32ITEM 3.

Defaults Upon Senior Securities.

32ITEM 4.

Removed and Reserved.

32ITEM 5.

Other Information.

32ITEM 6.

Exhibits.

33SIGNATURES

33EX-31.1

(CERTIFICATION OF CHIEF EXECUTIVE OFFICER)EX-31.2

(CERTIFICATION OF CHIEF FINANCIAL OFFICER)EX-32.1

(CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER)

















FORWARD-LOOKING STATEMENTS








Certain statements by Ulticom, Inc. (referred to herein as “Ulticom,” the “Company,” “we,” “our” or “us”) appearing in Item 2 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and elsewhere in this Quarterly Report on Form 10-Q constitute “forward-looking statements” for purposes of the Private Securities Litigation Reform Act of 1995.Forward-looking statements include financial projections, statements of plans and objectives for future operations, statements of future economic performance, and statements of assumptions relating thereto.  In some cases, forward-looking statements can be identified by the use of future or conditional words such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “intends,” “seeks,” “projected,” “believes,” “potential,” “continue” or the negative thereof or other comparable terminology.





There can be no assurances that forward-looking statements will be achieved. By their very nature, forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results or performance to differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties may also give rise to future claims and increase our exposure to contingent liabilities.  These risks and uncertainties arise from (among other factors):




·
our incurring substantial expenses for litigation and governmental enforcement actions and our potential exposure to contingent liabilities because of historical improper accounting practices which required restatement adjustments to be made in our consolidated financial statements as disclosed in the Annual Report on Form 10-K for the fiscal year ended January 31, 2009 (the “2008 Form 10-K”) and resulted in our inability to file required periodic reports with the SEC during the period from December 2005 to September 30, 2009;


·
a Final Judgment that was entered in connection with our settlement of an SEC enforcement proceeding that permanently enjoins us from violating Section 17(a) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and (B) and 14(a) of the Securities Exchange Act of 1934 and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9;


·
our directors and officers liability insurance is unlikely to cover potential expenses or liabilities relating to our historical improper option-related accounting practices, and could result in significant indemnification liabilities being uninsured, which could have a material adverse effect on our business, financial position, results of operations or cash flows;


·
changes in our capital structure, including, but not limited to changes relating to our payment of a special dividend in April 2009;


·
inaccuracies in our historical periodic reports filed with the SEC prior to the September 30, 2009 filing of the 2008 Form 10-K, and, as indicated in our Current Report on Form 8-K dated April 16, 2006, such reports cannot be relied upon;


·
our majority shareholder, Comverse Technology, Inc., controls the outcome of all matters submitted for shareholder action, including the composition of our Board of Directors and the approval of significant corporate transactions and the interests of our majority shareholder may not be aligned with the interests of our other shareholders;


·
our dependence on sales of our Signalware products and the possibility of such products becoming outdated because of new technology;






ii






·
our ability to (i) identify and respond to emerging technological trends in our target markets; (ii) develop and maintain competitive solutions that meet customers’ changing needs; and (iii) enhance existing products by adding features and functionality that differentiate our products from those of our competitors;


·
our investment in sales and marketing and research and development are a significant percentage of our revenues, and the failure for a market to emerge for these new products or customers to accept them could adversely affect our business and the investments may be lost;


·
our dependence on a limited number of telecommunication industry customers for a significant percentage of our revenues, which customers may experience difficulties due to the current market environment and reductions in capital spending by telecommunication service providers on projects that incorporate our products;


·
aggressive competition which may force us to reduce prices;


·
our holding a large proportion of our assets in investments in marketable debt securities;


·
our products being dependent upon their ability to operate on and support new hardware and operating systems, signaling systems and protocols of other companies and we are subject to risks associated with the integration of our products with those of equipment manufacturers and application developers and our ability to establish and maintain channel and marketing relationships with leading equipment manufacturers and application developers;


·
our products having long sales cycles and our ability to forecast the timing and amount of product sales is limited;


·
our reliance on a limited number of independent manufacturers to manufacture boards for our products and on a limited number of suppliers for board components;


·
our becoming subject to, defending and resolving allegations or claims of infringement of intellectual property rights; risks associated with others infringing on our intellectual property rights and the inappropriate use by others of our proprietary technology;


·
the impact changes in general economic conditions may have on our business;


·
our ability to maintain the listing of our common stock on a national securities exchange;


·
our dependence on customers outside of the United States for a significant portion of our total revenues and our exposure to particular risks associated with international transactions, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer; and


·
our ability to recruit and retain qualified personnel.





These risks and uncertainties, as well as other factors, are discussed in greater detail in Item 1A (Risk Factors) in this Quarterly Report on Form 10-Q. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date any such statement is made, except where otherwise required by law.











iii








PART I – FINANCIAL INFORMATION





ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.





ULTICOM, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)


(In thousands, except share data)





January 31,



July 31,2010*



2010ASSETSCurrent Assets:Cash and cash equivalents

$
13,190


$
66,821Short-term investments


65,087



10,013Accounts receivable, net


10,657



8,732Inventories


1,019



1,056Prepaid expenses and other current assets


7,444



7,111Total current assets


97,397



93,733Property and equipment, net


1,872



1,466Other assets


1,411



373Deferred income taxes


6,377



6,785Total assets

$
107,057


$
102,357LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:Accounts payable and accrued expenses

$
6,598


$
4,351Deferred revenue


2,945



4,480Total current liabilities


9,543



8,831Long-term Liabilities:Deferred revenue


3,682



3,495Unrecognized income tax benefits


1,640



541Other long-term liabilities


35



-Total liabilities


14,900



12,867Commitments and ContingenciesShareholders’ Equity:Common stock, no par value, 50,000,000 shares authorized, 11,044,685 and 11,132,846 shares issued and outstanding as of January 31, 2010 and July 31, 2010, respectively


-



-Additional paid-in capital


96,691



96,737Accumulated deficit


(3,582
)


(6,048
)Accumulated other comprehensive loss


(952
)


(1,199
)Total shareholders’ equity


92,157



89,490Total liabilities and shareholders’ equity

$
107,057


$
102,357





* The Condensed Consolidated Balance Sheet as of January 31, 2010 has been derived from the Company’s audited Consolidated Balance Sheet as of that date.





The accompanying notes are an integral part of these unaudited financial statements.


1


ULTICOM, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)


(In thousands, except per share data)








Three months ended


Six months endedJuly 31,


July 31,


July 31,


July 31,2009


2010


2009


2010Revenues from:Products
$
8,527


$
5,440


$
16,831


$
10,403Services

3,337



3,456



6,589



6,879Total revenues

11,864



8,896



23,420



17,282Cost of revenues:Product costs

1,628



1,344



3,435



2,720Service costs

1,262



1,097



2,473



2,304Total cost of revenues

2,890



2,441



5,908



5,024Gross profit

8,974



6,455



17,512



12,258Operating expenses:Research and development

3,367



2,904



6,857



5,950Selling, general and administrative

6,732



4,036



14,077



9,936Loss from operations

(1,125
)


(485
)


(3,422
)


(3,628
)Interest and other income, net

373



314



1,226



686Loss before income taxes

(752
)


(171
)


(2,196
)


(2,942
)Income tax expense (benefit)

(237
)


1,055



(770
)


(476
)Net loss
$
(515
)

$
(1,226
)

$
(1,426
)

$
(2,466
)Loss per share:Basic
$
(0.05
)

$
(0.11
)

$
(0.13
)

$
(0.22
)Diluted
$
(0.05
)

$
(0.11
)

$
(0.13
)

$
(0.22
)






















The accompanying notes are an integral part of these unaudited financial statements.








2





ULTICOM, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In thousands)








Six months endedJuly 31,



July 31,2009



2010Cash flows from operating activities:Net loss

$
(1,426
)

$
(2,466
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation and amortization


808



578Deferred income taxes


(852
)


(808
)Share-based payment expense


356



267Net realized gain on sales of investments


(128
)


(69
)Changes in operating assets and liabilities:Accounts receivable, net


874



1,924Inventories


(133
)


(37
)Prepaid expenses and other current assets


2,386



340Accounts payable and accrued expenses


(2,004
)


(2,252
)Deferred revenue


1,571



1,348Other, net


(628
)


19Net cash provided by (used in) operating activities


824



(1,156
)Cash flows from investing activities:Purchases of property and equipment


(163
)


(261
)Purchases of investments


(67,468
)


(29,998
)Maturities and sales of investments


77,330



85,025Net cash provided by investing activities


9,699



54,766Cash flows from financing activities:Proceeds from exercises of stock options


-



156Payment of special dividend


(199,643
)


-Net cash provided by (used in) financing activities


(199,643
)


156Effect of exchange rate changes on cash and cash equivalents


266



(135
)Net increase (decrease) in cash and cash equivalents


(188,854
)


53,631Cash and cash equivalents, beginning of period


206,771



13,190Cash and cash equivalents, end of period

$
17,917


$
66,821




















The accompanying notes are an integral part of these unaudited financial statements.


3


ULTICOM, INC. AND SUBSIDIARIES


Notes to Condensed Consolidated Financial Statements


(Unaudited)







1.           BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Company Business and Background -Ulticom, Inc. (together with its subsidiaries, the “Company”), a New Jersey corporation and a majority-owned subsidiary of Comverse Technology, Inc., designs, develops, markets, licenses, and supports service enabling signaling software for fixed, mobile, and internet communications software and hardware for use in the communications industry.





Basis of Presentation -The accompanying financial information should be read in conjunction with the consolidated financial statements, including the notes thereto, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010. The condensed consolidated financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair statement of results for the interim periods. The results of operations for the three and six months ended July 31, 2009 and 2010 are not necessarily indicative of the results to be expected for the full year.





Recent Accounting Guidance Not Yet Adopted -In October 2009, the FASB issued an accounting standards update that provides authoritative guidance regarding revenue arrangements with multiple deliverables. The guidance in this update:





·
provides principles and application guidance on whether a revenue arrangement contains multiple deliverables, how the arrangement should be separated, and how the arrangement consideration should be allocated;


·
requires an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the 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, instead, requires an entity to allocate revenue using the relative selling price method; and


·
expands disclosure requirements with respect to multiple-deliverable revenue arrangements.





Also, in October 2009, the FASB issued an accounting standards update that applies to multiple-deliverable revenue arrangements that contain both software and hardware elements. This update removes tangible products from the scope of the existing 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 guidance. The guidance in both accounting standards updates should be applied on a prospective basis for applicable multiple-deliverable revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, an entity can elect to adopt the provisions of the guidance on a retrospective basis. The Company is assessing the potential impact that the application of this guidance may have on its consolidated financial statements and disclosures.








4








2.
SPECIAL DIVIDEND (FISCAL YEAR 2009)





On April 20, 2009, the Company paid a special cash dividend to its shareholders of record as of the close of business on April 13, 2009.  The total amount of the dividend was approximately $199.8 million.  As of July 31, 2010, a portion of the special dividend, totaling approximately $0.1 million, was payable to holders of deferred stock units awarded under the Company’s equity incentive plan pending delivery of the shares of common stock subject to such awards. The Company’s retained earnings as of the date of the dividend was approximately $65.9 million.  As the amount of the dividend exceeded the Company’s retained earnings as of the date of the dividend, the remaining portion of the dividend, approximately $133.9 million, reduced additional paid-in capital.  The Company’s accumulated deficit as of January 31, 2010 represented the net loss of the Company from April 21, 2009 through January 31, 2010.





3.
SHORT-TERM INVESTMENTS AND CASH EQUIVALENTS





As of January 31, 2010 and July 31, 2010, all of the Company’s short-term investments were marketable debt securities that were classified as available-for-sale and summarized in the following table:





(Amounts in thousands)
Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Ranking of Market Price ObservabilityAs of January 31, 2010U.S. government agency obligations
$
64,959

$
285

$
(157
)
$
65,087

Level 2As of July 31, 2010U.S. government agency obligations
$
10,000

$
13

$
-

$
10,013

Level 2





The Company’s measurements of the fair values of these financial instruments are performed on a recurring basis and, as of January 31, 2010 and July 31, 2010, were based on non-binding market consensus prices that can be corroborated with observable market data. The valuation techniques used to determine these prices are primarily income-based approaches, the inputs to which generally consist of yield curves and other factors considering the risk attributes of the investment security. Accordingly, the inputs to the valuation techniques used to measure the fair values of these instruments were ranked, according to their market price observability, as Level 2 inputs.





As of January 31, 2010 and July 31, 2010, the Company’s cash equivalents primarily consisted of investments in institutional money market funds placed with high credit-quality financial institutions.  Due to the short-term nature of the Company’s cash and cash equivalents, the carrying amounts are not generally subject to price risk that may result from fluctuations in interest rates.





4.           INVENTORIES





As of January 31, 2010 and July 31, 2010, the Companies inventories principally consisted of finished goods, as the carrying amounts of raw material inventories were not significant.







5










5.           INTEREST AND OTHER INCOME, NET





Interest and other income, net consisted of the following:





(Amounts in thousands)
Three months ended

Six months endedJuly 31,


July 31,


July 31,


July 31,2009


2010


2009


2010Interest income
$
422


$
240


$
1,159


$
619Realized gains on sales of investments, net

4



73



128



69Other

(53
)


1



(61
)


(2
)$
373


$
314


$
1,226


$
686





6.           COMPREHENSIVE INCOME (LOSS)





The components of comprehensive income (loss) were as follows:





(Amounts in thousands)
Three months ended


Six months endedJuly 31,


July 31,


July 31,


July 31,2009


2010


2009


2010Net loss
$
(515
)

$
(1,226
)

$
(1,426
)

$
(2,466
)Unrealized losses on investments, net of reclassification adjustments and income taxes

(187
)


(134
)


(317
)


(72
)Foreign currency translation adjustments

80



(69
)


132



(175
)Total comprehensive loss
$
(622
)

$
(1,429
)

$
(1,611
)

$
(2,713
)





Upon the sale of an available-for-sale investment security, the cumulative unrealized gain or loss associated with the sold security that was previously recorded in accumulated other comprehensive income (loss) is reclassified into the condensed consolidated statement of operations as a realized gain (loss).  For each of the three and six months ended July 31, 2009 and 2010, realized gains, net of applicable income taxes, reclassified into the condensed consolidated statements of operations were less than $0.1 million.





7.           EARNINGS (LOSS) PER SHARE





Basic earnings (loss) per share is determined by using the weighted average number of shares of common stock outstanding during each period. Diluted earnings per share further assumes the issuance of common shares for all dilutive potential shares outstanding.  The share amounts used in the computations of basic and diluted loss per share were as follows:





(Amounts in thousands)
Three months ended


Six months endedJuly 31,


July 31,


July 31,


July 31,2009


2010


2009


2010Basic share amounts

10,902



10,984



10,888



10,969Effect of dilutive potential shares:Options

-



-



-



-Restricted stock and deferred stock units

-



-



-



-Diluted share amounts

10,902



10,984



10,888



10,969





For purposes of computing basic earnings (loss) per share, nonvested shares of restricted stock that have been issued by the Company and are contingently returnable to the Company are











6








excluded from the weighted average number of shares of common stock outstanding. Incremental potential common shares from stock options and nonvested restricted stock and deferred stock units (“DSUs”) are included in the computation of diluted earnings per share except when the effect would be antidilutive. Accordingly, diluted loss per share for the three  and six months ended July 31, 2009 excluded approximately 0.8 million potential common shares associated with outstanding stock options and nonvested restricted stock and DSUs and diluted loss per share for the three and six months ended July 31, 2010 excluded approximately 0.6 million potential common shares associated with outstanding stock options and nonvested restricted stock and DSUs, as these potential common shares would have had an antidilutive effect.





8.              RELATED PARTY TRANSACTIONS





The Company sells products and provides services to other subsidiaries of Comverse Technology, Inc.  For the three months ended July 31, 2009 and 2010, the Company’s revenues included sales to subsidiaries of Comverse Technology, Inc. of approximately $0.3 million and $0.2 million, respectively.  For the six months ended July 31, 2009 and 2010, the Company’s revenues included sales to subsidiaries of Comverse Technology, Inc. of approximately $0.8 million and $0.6 million, respectively.





As of January 31, 2010 and July 31, 2010, the amount due from subsidiaries of Comverse Technology, Inc. was approximately $0.3 million and $0.1 million, respectively.





9.           SHARE-BASED PAYMENT TRANSACTIONS





Equity Award Grants





In February 2010, the independent directors of the Company’s Board of Directors were awarded, in the aggregate, approximately 9,300 DSUs for their service during the fiscal year ending January 31, 2011.  The DSUs vest 25% on April 30, 2010; 25% on July 31, 2010; 25% on October 31, 2010; and 25% on January 31, 2011.  Shares of the Company’s common stock equal to the number of vested DSUs will be issued to these directors on or before January 2, 2012.  Based on the fair market value of the Company’s common stock at the date of the grant, the total share-based payment cost of the DSU grants was approximately $0.1 million and is recognized in the condensed consolidated statement of operations on a pro rata basis in proportion to the number of vested DSUs at each vesting date.





In April 2010, executive officers of the Company were granted, in the aggregate, approximately 110,000 shares of restricted common stock, of which 40% of these shares vest over a three-year service period (“time-based awards”) while vesting of the remaining shares is contingent on the achievement of defined operating income targets during fiscal year 2010 (“performance-based awards”). Based on the fair market value of the Company’s common stock as of the grant date, the total share-based payment costs of the time-based awards and performance-based awards were approximately $0.4 million and $0.7 million, respectively. The cost of the time-based awards is recognized into expense in the consolidated statement of operations on a straight-line basis over the vesting period of each grant. No share-based payment expense was recognized for the performance-based awards during the three and six months ended July 31, 2010, as the Company determined that satisfaction of the award’s performance conditions, and therefore








7








vesting of each award, was not a probable outcome. If, during the remainder of fiscal year 2010, circumstances change and it is determined that satisfaction of the performance conditions is a probable outcome, share-based payment expense will be recognized for each performance-based award over the award’s vesting period, which is three years commencing with the grant date.





10.          INCOME TAXES





The Company and its subsidiaries are subject to U.S. federal income tax, as well as income tax of multiple foreign and state jurisdictions. For all periods presented in the condensed consolidated statements of operations, the Company’s income tax expense (benefit) reflects current and deferred income taxes associated with each of these taxing jurisdictions.  During the year ended January 31, 2010, the Company established a valuation allowance against a portion of the deferred income tax assets associated with U.S. foreign tax credit carryforwards, as the benefits of such carryforwards were not expected to be fully realized prior to the expected carryforward expiration dates. For the six months ended July 31, 2010, the Company’s effective income tax rate, as computed in relation to loss before income tax benefit, was approximately 18% lower than the statutory federal income tax rate of 34%, due primarily to the offsetting effects of recognizing additional valuation allowance against the deferred tax benefits associated with such foreign tax credits and certain state deferred tax assets.





During May 2010, the Company effectively settled income tax positions associated with benefits realized in tax returns previously filed with a foreign taxing jurisdiction.  Prior to this settlement, the Company considered these positions to be uncertain as to their being sustained upon the foreign taxing authority’s examination of such positions. Previously included in the Company’s liability for unrecognized income tax benefits, the benefit attributable to these positions, approximately $1.0 million, was recognized in the Company’s income tax provision in the second quarter of fiscal year 2010.  Partially offsetting this benefit in the Company’s income tax provision was the write-off of an income tax receivable, totaling approximately $0.9 million, which was originally established to account for the anticipated U.S. income tax benefits that would have been realized by the Company had the foreign taxing authority’s examination resulted in an unfavorable outcome.  Additional changes in the Company’s unrecognized income tax benefit obligation within the next twelve months are not expected to be material.





11.          COMMITMENTS AND CONTINGENCIES





Subject to certain limitations, the Company has agreed to indemnify its current and former directors, officers and employees in connection with any regulatory or litigation matter relating to the improper stock option granting practices described in the Company’s 2008 Form 10-K. Such obligations may arise under the terms of the Company’s articles of incorporation, as amended, the Company’s amended and restated bylaws, applicable agreements and New Jersey law. An obligation to indemnify generally means that the Company is required to pay or reimburse the individual’s reasonable legal expenses and possibly damages and other liabilities that may be incurred. The Company’s insurance policies for periods prior to June 29, 2007 are unlikely to provide adequate coverage for expenses resulting from the historical stock option granting practices and any such coverage may have to be shared with related parties. Factors that may affect such coverage are minimum retention requirements and exceptions for certain non-qualifying expenses. Additionally, the Company’s current director and officer liability insurance does not provide coverage with respect to its historical stock option granting practices.


8







ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.


The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2010 and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.  The discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from the results contemplated in these forward-looking statements as a result of factors including, but not limited to, those described in Item 1A (Risk Factors).





OVERVIEW OF THE COMPANY’S OPERATIONS


The Company designs, develops, markets, licenses and supports network signaling solutions. Its products are sold primarily through direct sales to network equipment manufacturers, application developers, and service providers that include the Company’s products within their systems or services. Product revenues consist primarily of sales of software licenses and interface boards. Service revenues consist primarily of software maintenance fees related to previously deployed licenses of the Company’s products and fees for support services. Service revenues are expected to show less volatility than product revenues. The key drivers of the Company’s financial results are:





·
product price and volume;


·
cost to support new and existing customer deployments of its products;


·
investments in product enhancements and expansion into new markets; and


·
interest income earned on its cash equivalents and short-term investments.





During fiscal years 2008 and 2009, the Company’s financial results were adversely affected by the ongoing slowdown of infrastructure spending by communication service providers and by declines in technology expenditures, resulting in a significant decline in quarterly revenues. In response to these circumstances, the Company took measures during these years to lower its costs to operate more effectively at these lower sales levels.  Such actions principally consisted of reductions in the numbers of personnel in substantially all areas of its operations, the largest of which occurred in September 2009.





As compared to the same period in fiscal year 2009,revenues for the six months ended July 31, 2010 declined by approximately $6.1 million, primarily resulting from lowersales volumes of boards and licenses.  Continued weakness in infrastructure spending on the Company’s component products by communication service providers was the primary cause of the decline in revenues.  Based on the performance in the first half of fiscal year 2010and the protracted delays in the timing of anticipated customer orders for the Company’s systems products, the Company expects total revenues for fiscal year 2010 to range from $36.5 million to $39.0 million.





The Company continues to focus on the key elements of its strategy to expand its role as a premium provider of signaling solutions to the telecommunications industry. These elements include the Company leveraging its strengths to maintain and expand its market share in the








9








wireless broadband services and communication infrastructure markets. Specifically, the Company is currently focusing on further developing the following strengths of its business:





·
comprehensive product portfolio – signaling component and system solutions;


·
high-value customer base – established and emerging equipment manufacturers and service providers; and


·
increasing operational efficiency – continuous process innovation and talent management.








RESULTS OF OPERATIONS





Three Months Ended July 31, 2010 Compared to Three Months Ended July 31, 2009





Revenues.





Three Months Ended(in thousands)
July 31,

July 31,2009

2010

ChangeProduct revenues
$
8,527


$
5,440


$
(3,087
)Service revenues

3,337



3,456



119Total revenues
$
11,864


$
8,896


$
(2,968
)





The decrease in product revenues was due to lower sales of boards and licenses of approximately $1.3 million and $1.6 million, respectively.  The Company’s three largest customers comprised approximately $3.0 million of the total decrease in product revenues.  The continued weakness in infrastructure spending on the Company’s component products by communication service providers was the primary cause of the decline in product revenues.  Based on the performance in the first half of fiscal year 2010and the protracted delays in the timing of anticipated customer orders for the Company’s systems products, the Company expects total revenues for fiscal year 2010 to range from $36.5 million to $39.0 million. This projection includes revenues, totaling approximately $0.7 million, from maintenance and support services previously performed that have been deferred to the second half of fiscal year 2010, due to a possible contract amendment referring to such services.





Cost of Revenues.





Three Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeProduct costs
$
1,628


$
1,344


$
(284
)Service costs

1,262



1,097



(165
)Total cost of revenues
$
2,890


$
2,441


$
(449
)Gross margin (as a percentage of revenues)

76%



73%





The decrease in costs of revenues was primarily attributable to reductions in the number of production personnel and, to a lesser extent, lower materials and production costs from the lower volume of board and license sales.








10






Research and Development Expenses.





Three Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeResearch and development expenses
$
3,367


$
2,904


$
(463
)As a percentage of revenues

28%



33%





Reductions in the number of research and development personnel, mostly resulting from the reduction in force occurring in September 2009, resulted in lower research and development expenses of approximately $0.7 million in the second quarter of fiscal year 2010.





Selling, General and Administrative Expenses.





Three Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeSelling, general and administrative expenses
$
6,732


$
4,036


$
(2,696
)As a percentage of revenues

57%



45%





Included in selling, general and administrative expenses for the three months ended July 31, 2009 were various costs incurred to complete the restatement of the Company’s financial statements that were included in the 2008 Form 10-K, totaling approximately $1.3 million, and retention and workforce reduction expenses of approximately $0.5 million.





Excluding the expenses described above, selling, general and administrative expenses decreased by approximately $0.9 million during the three months ended July 31, 2010.  Reductions in the number of sales, marketing and administrative personnel during fiscal year 2009, mostly resulting from the reduction in force occurring in September 2009, resulted in lower selling, general and administrative expenses of approximately $1.3 million in the second quarter of fiscal year 2010.





Interest and Other Income, net.  Interest and other income, net was approximately $0.4 million and $0.3 million for the three months ended July 31, 2009 and 2010, respectively.





Income Tax Expense (Benefit).  Income tax expense (benefit) for the three months ended July 31, 2009 was a benefit of approximately $0.2 million, as compared to an expense of approximately $1.1 million in the second quarter of fiscal year 2010.  During the second quarter of fiscal year 2010, the Company’s projection of taxable income for fiscal year 2010 changed from taxable income, as projected during the first quarter of fiscal year 2010, to a tax loss position.  As a consequence of this change and the effect of recognizing additional valuation allowance against certain deferred tax assets, the projected effective tax rate for fiscal year 2010 has decreased from 56% during the three months ended April 30, 2010 to a 21% rate, as computed in the determination of the Company’s income tax benefit for the six months ended July 31, 2010.  These factors resulted in the recognition of a significant amount of income tax expense for the three months ended July 31, 2010, as compared to the amount of loss before income taxes for this period.











11








Six Months Ended July 31, 2010 Compared to Six Months Ended July 31, 2009





Revenues.





Six Months Ended(in thousands)
July 31,

July 31,2009

2010

ChangeProduct revenues
$
16,831


$
10,403


$
(6,428
)Service revenues

6,589



6,879



290Total revenues
$
23,420


$
17,282


$
(6,138
)





The decrease in product revenues was due to lower sales of boards and licenses of approximately $3.0 million and $3.2 million, respectively, primarily due to lower sales volume.  The Company’s three largest customers comprised approximately $6.6 million of the total decrease in product revenues.  Continued weakness in infrastructure spending on the Company’s component products by communication service providers was the primary cause of the decline in product revenues.





Cost of Revenues.





Six Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeProduct costs
$
3,435


$
2,720


$
(715
)Service costs

2,473



2,304



(169
)Total cost of revenues
$
5,908


$
5,024


$
(884
)Gross margin (as a percentage of revenues)

75%



71%





Lower materials and production costs from the lower volume of board and license sales resulted in an approximate $0.5 million decrease in cost of product revenues. The remaining decrease in costs of revenues was primarily attributable to reductions in the number of production personnel.





Research and Development Expenses.





Six Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeResearch and development expenses
$
6,857


$
5,950


$
(907
)As a percentage of revenues

29%



34%





Reductions in the number of research and development personnel, mostly resulting from the reduction in force occurring in September 2009, lowered research and development expenses by approximately $1.1 million.








12











Selling, General and Administrative Expenses.





Six Months Ended(dollar amounts in thousands)
July 31,

July 31,2009

2010

ChangeSelling, general and administrative expenses
$
14,077


$
9,936


$
(4,141
)As a percentage of revenues

60%



57%





Included in selling, general and administrative expenses for the six months ended July 31, 2009 were various costs incurred to complete the restatement of the Company’s financial statements that were included in the 2008 Form 10-K, totaling approximately $2.5 million, retention and workforce reduction expenses of approximately $0.8 million and fees paid in connection with the evaluation of the special dividend paid in April 2009 of approximately $0.3 million.  Included in selling, general and administrative expenses for the six months ended July 31, 2010 were costs associated with restatement-related matters, totaling approximately $0.2 million, and certain severance and termination benefits, totaling approximately $0.6 million.





Excluding the expenses described above, selling, general and administrative expenses decreased by approximately $1.3 million during the six months ended July 31, 2010.  Reductions in the number of sales, marketing and administrative personnel during fiscal year 2009, mostly resulting from the reduction in force occurring in September 2009, lowered selling, general and administrative expenses by approximately $1.7 million during the first six months of fiscal year 2010.





Interest and Other Income, net.  Interest and other income, net was approximately $1.2 million and $0.7 million for the six months ended July 31, 2009 and 2010, respectively. The payment of the special dividend on April 20, 2009 lowered the Company’s total cash equivalents and short-term investments by approximately $200 million, resulting in lower interest income of approximately $0.4 million.





Income Tax Expense (Benefit).  For the first six months of fiscal years 2009 and 2010, the Company recorded income tax benefits of approximately $0.8 million and $0.5 million, respectively. For the six months ended July 31, 2010, the Company’s effective income tax rate, as computed in relation to loss before income tax benefit, was approximately 18% lower than the statutory federal income tax rate of 34%, due primarily to the offsetting effects of recognizing additional valuation allowance against the deferred tax benefits associated with such foreign tax credits and certain state deferred tax assets.








LIQUIDITY AND CAPITAL RESOURCES





At January 31, 2010 and July 31, 2010, the Company’s cash and cash equivalents and short-term investments totaled approximately $78.3 million and $76.8 million, respectively.  On April 20, 2009, the Company paid a special cash dividend to its shareholders, totaling approximately $200 million.  Any future determination as to the declaration and payment of dividends will be made by the Company’s Board of Directors in its discretion and will depend upon the Company’s earnings, financial condition, capital requirements, and other relevant factors.








13











The Company believes that its cash, cash equivalent and short-term investment balances will be sufficient to meet anticipated cash needs for working capital, capital expenditures, research and development and other activities for the foreseeable future.  However, if current sources are not sufficient to meet the Company’s needs, it may seek additional debt or equity financing.





Although there are no present understandings, commitments, or agreements with respect to acquisitions of other businesses, products, or technologies, the Company may, in the future, consider such transactions, which may require debt or additional equity financing.  The issuance of debt or equity securities may have a dilutive impact on the Company’s shareholders, and any acquired business may not contribute positive operating results commensurate with the associated investment.





Analysis of Cash Flows





Although the Company made significant reductions in the aggregate amount of cash used for personnel-related expenses and nonrecurring costs (e.g., restatement related expenses) during first six months of fiscal year 2010, operations for the six months ended July 31, 2010 used cash of approximately $1.2 million, mostly due to an approximate $2.3 million reduction in accounts payable and accrued expenses that primarily resulted from payments of certain commission and other compensation-related expenses incurred during the fourth quarter of fiscal year 2009.





Throughout fiscal year 2009 and the first six months of fiscal year 2010, the Company’s cash provided by or used in investing activities primarily reflected the Company’s shifts between cash equivalents and short-term investments, as capital expenditures were not significant.  For fiscal year 2010, the Company expects that its capital expenditures will be less than $0.8 million.





From April 17, 2006 through December 10, 2009, holders of options to purchase common stock under the Company’s equity incentive plans were prohibited from exercising their vested options until the time that the Company became current in its reporting obligations under applicable securities laws and had an effective registration statement on Form S-8 on file with the SEC, both of which occurred on December 10, 2009.  The resumption of option exercises on December 11, 2009 has provided a source of cash from financing activities.








CRITICAL ACCOUNTING POLICIES AND ESTIMATES





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  The Company evaluates these estimates and judgments on an ongoing basis, and the estimates are based on experience, current and expected future conditions, third-party evaluations and various other assumptions that the Company believes are reasonable under the circumstances.  The results of estimates form the basis for making judgments about the carrying amounts of assets and liabilities, as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results could differ from those estimates.










14







Critical accounting policies are those that are both most important to the portrayal of a company’s financial position and results of operations and require management to make difficult, subjective, or complex judgments.





The Company’s accounting policies that require a significant amount of estimation or judgment in their application include:





·
revenue recognition;


·
allowance for doubtful accounts receivable;


·
reserve for obsolete or excess inventory;


·
accounting for share-based payment transactions; and


·
accounting for income taxes.





Revenue Recognition





Product revenues, which include software license and hardware revenue, are generally recognized in the period in which persuasive evidence of a sale or service arrangement exists, the products are delivered and accepted by the customer, the fee is fixed and determinable, and collection is considered probable.  When the Company has significant obligations subsequent to shipment, revenues are not recognized until the obligations are fulfilled. Revenues from arrangements that include significant acceptance terms are not recognized until acceptance has occurred. The Company provides its customers with post-contract support services, which generally consist of bug-fixing and telephone access to the Company’s technical personnel, but may also include the right to receive unspecified product updates, upgrades, and enhancements, when and if available. Revenue from these services is recognized ratably over the contract period.  Post-contract support services included in the initial licensing fee are allocated from the total contract amount based on the relative fair value of vendor-specific objective evidence (“VSOE”). For multiple element software arrangements, the fair value of any undelivered element is determined using VSOE. The Company allocates revenue based on VSOE to the undelivered elements and the residual revenue to the delivered elements. Where VSOE of the undelivered element cannot be determined, the Company defers revenue for the delivered elements until the undelivered elements are delivered.





Sales of development kits are deferred and recognized as revenue over the estimated period of future customer software deployments and related maintenance, which the Company considers to be the economic life of the development kit.  Additional development license fees are deferred and recognized as revenue over the remaining estimated economic life of the development kit. The estimation of the economic life of the development kit requires significant management judgment and is based on the customer’s historical project experience. Any change in the estimated economic life of the development kit would affect the amount of revenue recognized in future periods.





Allowance for Doubtful Accounts Receivable





The collectability of the Company’s accounts receivable requires a considerable amount of judgment when assessing the realization of these receivables, including reviewing the current creditworthiness, current and historical collection history, and the related aging of past due








15








balances of each customer.  The Company evaluates specific accounts when it becomes aware of information indicating that a customer may not be able to meet its financial obligations due to deterioration of its financial condition, lower credit ratings, bankruptcy, or other factors affecting the ability to render payment.  Reserve requirements are based on the facts available and are re-evaluated and adjusted each accounting period as additional information is received.





Reserve for Obsolete or Excess Inventory





Inventory reserves for excess and obsolete inventory are determined primarily by future demand forecasts and charges are recorded to cost of revenues.  Demand forecasts are assessed on at least a quarterly basis.  Charges are recorded to reduce inventory to its estimated net realizable value and there is no increase in its carrying value due to subsequent changes in demand forecasts.





Accounting for Share-based Payment Transactions





For all share-based payment transactions in which the Company acquires services from employees or directors by issuing shares of the Company’s common stock, options to purchase shares or other equity instruments, the Company recognizes the cost of awarded equity instruments that are ultimately expected to vest based on each instrument’s grant-date fair value over the period during which the employee or director is required to provide service in exchange for the award.  For purposes of calculating each stock option’s fair value, the Company uses the Black-Scholes option pricing model, which involves the determination of assumptions that become inputs into the model.  The primary inputs are expected volatility, expected term of the option, risk-free interest rate and dividend yield. Expected volatility is based on the historical performance of the Company’s common stock.  Prior to the option award made in January 2010, the Company had not made an option award since December 2005 and all holders of options were prohibited from exercising their vested options from April 17, 2006 through December 10, 2009.  Accordingly, sufficient recent data regarding exercise behavior did not exist in a form that could reasonably predict the term, or life, of an option.  Therefore, for the options granted during January 2010, the Company estimated the expected term using the “simplified method.”  Until such time that Company has sufficient data regarding exercise behavior, the Company expects to employ the simplified method to estimate expected term.  The risk-free interest rate is the implied yield available as of the grant date on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term. Prior to the Company’s special cash dividend paid on April 20, 2009, the Company had not paid dividends and had not declared any intentions of doing so. Accordingly, the dividend yield is assumed to be zero.





The Black-Scholes model was developed for use in estimating the fair value of traded options and does not consider the non-traded nature of employee stock options, vesting and trading restrictions, lack of transferability or the possibility that employees may forfeit their options prior to expiration.  Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in subjective input assumptions can materially affect the fair value estimate, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of the options granted under the Company’s equity incentive plans.





The total cost to recognize as share-based payment expense over the requisite service period is based on the number of awards that are ultimately expected to vest.  Accordingly, the Company








16








develops expectations with respect to forfeitures of awards, based on historical experience regarding employee turnover or, in the case of awards that vest upon the satisfaction of predetermined performance conditions, on the probable outcome of the performance conditions.  Upon vesting of awards, the Company’s share-based payment expense is adjusted to reflect the effects of actual forfeitures.





Accounting for Income Taxes





The Company accounts for income taxes using an asset and liability approach, which requires estimates of taxes payable or refunds for the current period and estimates of deferred income tax assets and liabilities for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities for financial reporting purposes and the corresponding amounts used for income tax purposes.  Current and deferred tax assets and liabilities are based on provisions of the enacted tax laws and are measured using the enacted tax rates and laws that are expected to be in effect when the future tax events are expected to reverse. The effects of future changes in tax laws or rates are not anticipated.





Significant judgment is required in evaluating the Company's income tax positions and measuring any related future benefit that may result from such positions. In its determination of income tax expense, the Company does not recognize any benefit from tax positions it considers to be uncertain.  Only benefits that may result from tax positions that are more likely than not of being sustained on audit, based on the technical merits of the position, are recognized.  Further, the effect on the Company’s income tax provision of these tax positions is measured at the largest amount of benefit that is greater than 50% likely of being realized upon the ultimate settlement.  Differences between the amount of benefits taken or expected to be taken in the Company’s income tax returns and the amount of benefits recognized based on the evaluation and measurement of the related tax positions represent unrecognized income tax benefits, the total of which is reflected as a liability in the consolidated balance sheet.





The portion of any deferred tax asset for which it is more likely than not that a tax benefit will not be realized is offset by recording a valuation allowance.  Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character (for example, ordinary income or capital gain) within the carryforward period available under the tax law. The Company’s policy is to consider the following sources of taxable income, which may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards:





·
future reversals of existing taxable temporary differences;


·
future taxable income exclusive of reversing temporary differences and carryforwards;


·
taxable income in prior carryback year(s) if carryback is permitted under the tax law; and


·
tax planning strategies that would, if necessary, be implemented to:


(1)  accelerate taxable amounts to utilize expiring carryforwards;


(2)  change the character of taxable or deductible amounts from ordinary income or loss to capital gain or loss; and


(3)  switch from tax-exempt to taxable investments.





Evidence available about each of those possible sources of taxable income will vary between tax jurisdictions and, possibly, from year to year. To the extent evidence about one or more sources








17








of taxable income is sufficient to support a conclusion that a valuation allowance is not necessary, the Company’s policy is that other sources need not be considered. Consideration of each source is required, however, to determine the amount of the valuation allowance that may be required to be recognized for deferred tax assets.





For any specific jurisdiction where a history of three years of cumulative losses has occurred or where there has been a substantial change in the business, the Company does not rely on projections of future taxable income as described above. Instead, the Company determines its need for a valuation allowance on deferred tax assets, if any, by determining an average steady-state normalized taxable income amount over the last three years. The Company will also consider the following positive evidence in the above scenarios, if present:





·
existing customer contracts that will produce more than enough taxable income to realize the deferred tax asset based on existing sales prices and cost structures; and


·
an excess of appreciated asset value over the tax basis of the entity’s net assets in an amount sufficient to realize the deferred tax asset.








RECENT ACCOUNTING GUIDANCE NOT YET ADOPTED





In October 2009, the FASB issued an accounting standards update that provides authoritative guidance regarding revenue arrangements with multiple deliverables. The guidance in this update:





·
provides principles and application guidance on whether a revenue arrangement contains multiple deliverables, how the arrangement should be separated, and how the arrangement consideration should be allocated;


·
requires an entity to allocate revenue in a multiple-deliverable arrangement using estimated selling prices of the 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, instead, requires an entity to allocate revenue using the relative selling price method; and


·
expands disclosure requirements with respect to multiple-deliverable revenue arrangements.





Also, in October 2009, the FASB issued an accounting standards update that applies to multiple-deliverable revenue arrangements that contain both software and hardware elements. This update removes tangible products from the scope of the existing 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 guidance. The guidance in both accounting standards updates should be applied on a prospective basis for applicable multiple-deliverable revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, an entity can elect to adopt the provisions of the guidance on a retrospective basis. The Company is assessing the potential impact that the application of this guidance may have on its consolidated financial statements and disclosures.











18








ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





The Company is exposed to financial market risks, primarily from changes in interest rates that may impact the fair values of the Company’s short-term investments in marketable debt securities. Derivative financial instruments have not been used to manage these risks.





As discussed in Note 3 to the Condensed Consolidated Financial Statements, short-term investments as of July 31, 2010 consisted of marketable debt securities, principally U.S. government agency obligations, which the Company deemed to be available-for-sale. The Company’s investment policy provides guidelines relative to diversification and maturities designed to maintain reasonable levels of safety and liquidity.  At any given time, the Company’s mix of investments held as cash and cash equivalents versus short-term investments is dependent upon the Company’s view of each prospective investment’s price risk relative to the attainment of potentially higher yields or returns on its invested cash.  A 10% increase or decrease in the fair values of the Company’s short-term investments held at July 31, 2010 would have a material effect on the Company's consolidated financial position.





As of the end of each reporting period, the Company adjusts the carrying amount of each short-term investment to its fair value. For each of the Company’s marketable debt securities held as of July 31, 2010, the Company’s measurements of fair value were based on non-binding market consensus prices that can be corroborated with observable market data.  As of each reporting date, the Company monitors the liquidity of each investment it holds by analyzing current trading activity, to the extent such activity exists and is verifiable.  The Company obtains alternate fair value estimates for each of its investments from independent pricing services as a means of verifying the prices used to measure fair value.





As of July 31, 2010, cash and cash equivalents and short-term investments totaled approximately $76.8 million. If, during the fiscal year ending January 31, 2011, average short-term interest rates increase or decrease by 50 basis points relative to average rates realized during the year ended January 31, 2010, the Company’s projected interest income from cash and cash equivalents and short-term investments would increase or decrease by approximately $0.4 million, assuming a similar level of investments as held at July 31, 2010.





As of July 31, 2010, the Company’s cash equivalents primarily consisted of investments in institutional money market funds placed with high credit-quality financial institutions.  Due to the short-term nature of the Company’s cash and cash equivalents, the carrying amounts are not generally subject to price risk that may result from fluctuations in interest rates.








ITEM 4.
CONTROLS AND PROCEDURES.





EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES





Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are controls and other procedures designed to ensure that information required to be disclosed in reports filed or








19








submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the rules and forms promulgated by the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.





In connection with the preparation of this Quarterly Report on Form 10-Q, the Company completed an evaluation, as of July 31, 2010, under the supervision of and with the participation of the Company’s management, including the Chief Executive and Chief Financial Officers, as to the effectiveness of the Company’s disclosure controls and procedures.  Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of July 31, 2010, the Company’s disclosure controls and procedures were effective.





It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.







CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING





There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

















20


PART II – OTHER INFORMATION







ITEM 1.
LEGAL PROCEEDINGS.




From time to time, the Company is subject to claims in legal proceedings arising in the normal course of its business. The Company does not believe that it is currently party to any pending legal actions that could reasonably be expected to have a material adverse effect on its business, financial condition, results of operations or cash flows.




ITEM 1A.
RISK FACTORS.




The risks and uncertainties described below could adversely affect our results of operations or financial condition and cause our actual results to differ materially from those expressed in forward-looking statements made by us.This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 31, 2010.




Risks Relating to Investing in Our Common Stock




We have incurred substantial expenses for litigation and governmental enforcement action and may continue to have increased exposure to contingent liabilities because of historical improper accounting practices which required restatement adjustments to be made in our consolidated financial statements as disclosed in the 2008 Form 10-K and resulted in our inability to file required periodic reports with the SEC during the period from December 2005 to September 30, 2009.




As disclosed in our 2008 Form 10-K, we have made certain restatement adjustments in our consolidated financial statements as of February 1, 2005 in connection with (a) improper historical option grant practices and other unrelated historical accounting practices; (b) our evaluation of our software revenue recognition policies for complex contractual arrangements; and (c) our evaluation of our accounting practices with respect to the recognition of depreciation expense.  Due to the pendency of the restatement adjustments, we were unable to make required filings of Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K from December 2005 until September 30, 2009.  These issues have exposed us to risks associated with litigation, regulatory proceedings and government enforcement actions as well as substantial expenses for legal, accounting, tax and other professional services and have diverted management’s attention from our business.




In addition, the Company and certain of our officers and directors were named as nominal defendants in three derivative actions relating to our historical accounting practices for stock option grants issued beginning in fiscal year 2000.  Although these suits have been dismissed, there is risk that other actions could be filed against us and certain current or former officers and directors based on allegations relating to our historical stock option grant practices, the associated restatement adjustments or our failure to file required periodic reports with the SEC.  We have incurred and may incur substantial additional defense costs with respect to potential future claims, regardless of their outcome.  Likewise, these claims might continue to cause a diversion of our management’s time and attention.








21






Because we were not current in our Exchange Act reporting obligations and did not file required periodic reports with the SEC prior to September 30, 2009, we were unable to utilize a Form S-8 Registration Statement and accordingly, unable to permit employees to exercise stock options during the period from April 17, 2006 through December 10, 2009.  We have received correspondence from counsel representing three former employees, one of whom is a former officer, indicating that we have been sued by such parties in connection with their inability to exercise stock options. It is possible that we may be sued by other employees in connection with their stock options, employment terminations and other matters.  These lawsuits may be time consuming, expensive, and may cause further distraction from the operation of the business.




No assurance can be given regarding the outcomes from any litigation, regulatory proceedings or government enforcement actions.  The resolution of any such matters may be time consuming, expensive, and may distract management from the conduct of our business.  Furthermore, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.




Our directors and officers liability insurance is unlikely to provide coverage for potential expenses or liability relating to our historical improper option-related accounting practices and, accordingly, significant indemnification liabilities are likely to be uninsured and could have a material adverse effect on our business, financial position, results of operations or cash flows.




We are obligated, subject to certain limitations, to indemnify our current and former directors, officers and employees against personal liability for their actions in service to the Company, which would include regulatory or litigation matters relating to our historical improper stock option granting practices.  Such obligations may arise under the terms of our amended and restated certificate of incorporation, our amended and restated bylaws, applicable agreements or New Jersey law.  An obligation to indemnify generally means that we are required to pay or reimburse damages and other liabilities that may be incurred, as well as the individual’s legal expenses that may be incurred in defending the matter.  Our insurance coverage for periods prior to June 29, 2007 is unlikely to provide coverage for expenses resulting from our historical improper stock option granting practices and any such coverage is shared with Comverse Technology, Inc. and related parties.  Factors that may affect any available coverage are minimum retention requirements and exceptions for certain non-qualifying expenses.  Additionally, our current directors and officers liability insurance does not provide coverage with respect to our historical stock option granting practices.




No assurance can be given regarding the outcomes from any obligation to indemnify our current and former directors, officers and employees in connection with any regulatory or litigation matter.  The resolution of these matters may be time consuming, expensive, and may distract management from the conduct of our business; the effect of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.









22






The Company was a defendant in an SEC enforcement action and the Company and its agents are permanently enjoined from violations of Section 17(a) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and (B) and 14(a) of the Exchange Act, and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9.




On June 18, 2009, the SEC announced that it had filed a civil injunctive action against the Company, in the U.S. District Court for the Eastern District of New York (the “Court”), for violations of:




1)
Section 17(a) of the Securities Act of 1933 which prohibits any knowing misrepresentation in the offer or sale of any security;




2)
Section 13(a) of the Exchange Act and SEC Rules 13a-1, 13a-11, and 13a-13 which require filing of required reports and prohibit the use of any untrue statements of material facts, omission of material facts or misleading information;




3)
Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act which require (i) keeping books and records in reasonable detail to accurately reflect transactions and disposition of assets and (ii) devising and maintaining a system of internal accounting controls that can ensure transactions are properly recorded;  and




4)
Section 14(a) of the Exchange Act and SEC Rule 14a-9, which prohibit any solicitation by means of a proxy statement or other written or oral communication that is false or misleading with respect to any material fact or omits to state any material fact.




Simultaneous with the filing of the Complaint, without admitting or denying the allegations therein, we consented to the issuance of a Final Judgment (the “Final Judgment”).  The Court imposed the Final Judgment on July 22, 2009, ordering that the Company and its agents are permanently restrained and enjoined from any violations, directly or indirectly of Section 17(a) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and (B) and 14(a) of the Exchange Act and SEC Rules 13a-1, 13a-11, 13a-13 and 14a-9.  The Final Judgment provided that the Company must become current in its reporting obligations under Section 13(a) of the Exchange Act on or before November 9, 2009.




We believe that we have complied with the Final Judgment. Future violations, however, of the Final Judgment could require us to pay material fines or suffer other penalties, each of which could have a material adverse effect on our business, results of operations, financial condition and cash flows.




Certain of our periodic reports filed with the SEC are inaccurate and cannot be relied upon.




We have not amended and do not plan to amend our Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q that we have filed prior to September 30, 2009.  Accordingly, the consolidated financial statements and related financial information contained in such reports should not be relied upon as described in our Current Report on Form 8-K dated April 16, 2006.  For the same reason, investors also should not rely on the unaudited financial results reported in Current Reports on Form 8-K prior to September 30, 2009.








23








Our past failure to file reports on Form 10-K and Form 10-Q in a timely manner will result in our ineligibility to register securities on Form S-3.




As a result of our failure to timely file our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K for the fiscal years ended January 31, 2006, 2007, 2008 and 2009, we will be ineligible to register our securities on Form S-3 for sale by us or resale by others until we have timely filed all periodic reports under the Exchange Act, as amended, for a period of twelve months and any portion of a month from the due date of the last untimely report.  We may attempt to use Form S-1 to raise capital or complete acquisitions using our securities, but doing so could increase transaction costs and adversely affect our ability to raise capital or complete such acquisitions in a timely manner.




We are controlled by our majority shareholder, Comverse Technology, Inc. whose interests may not be aligned with the interests of our other shareholders.




Comverse Technology, Inc. beneficially owns a majority of our outstanding shares of common stock.  Consequently, Comverse Technology, Inc. controls the outcome of all matters submitted for shareholder action, including the composition of our Board of Directors and the approval of significant corporate transactions.  Through its representation on our Board of Directors, Comverse Technology, Inc. has a controlling influence on our strategic direction, policies and management, including the ability to appoint and remove officers.  As a result, Comverse Technology, Inc. may cause us to take actions that may not be aligned with the interests of other shareholders.  For example, Comverse Technology, Inc. may prevent, delay or accelerate any transaction involving a change in control of us or in which our shareholders might receive a premium over the prevailing market price for their shares, or may determine to pursue a transaction not involving a premium.




We paid a special dividend that reduced our cash reserves available to fund future growth or pay unanticipated contingent liabilities.




Prior to April 20, 2009, we held approximately $280 million of cash.  On April 2, 2009, our Board of Directors declared a special cash dividend (the “Special Dividend”) of approximately $200 million, payable on April 20, 2009 to our shareholders of record as of the close of business on April 13, 2009.  After giving effect to the Special Dividend, our cash assets were reduced by approximately $200 million.  Our cash reserves may be inadequate to fund unanticipated contingent liabilities or any significant changes in or expansions to our business plan.




Risks Related to the Communications Industry




Adverse conditions in the communications industry have harmed and may continue to harm our business, financial condition and results of operations.




Our business is particularly dependent on, and we derive substantially all of our revenue from, the communications industry, which has experienced a challenging capital spending environment in recent years.  Our sales to equipment manufacturers and application developers that supply the communications industry have been adversely affected by the ongoing slowdown of infrastructure purchases by communication service providers and by declines in technology expenditures.  In addition to loss of revenue, weakness in the communications industry may








24








affect our business by increasing the risks of credit or business failures of suppliers, customers or distributors, by delays and defaults in customer or distributor payments, and by price reductions instituted by competitors to retain or acquire market share.




Our quarterly revenues and operating results can fluctuate substantially and can be difficult to forecast due to the nature of our business.




Because a significant proportion of our revenues are dependent upon deployment of our products by our customers, we lack visibility to the ultimate timing of a sale.  A delay, cancellation or other factors resulting in the loss or deferral of a sale may not be discernible until the end of a financial reporting period.  Accordingly, it has been and continues to be very difficult for us to accurately forecast future revenues and operating results. If we fail to adequately forecast revenues, we may have incurred planned expenditures that are not warranted given revenue levels and accordingly could report a loss.




Consolidation in the communications industry could result in a further increase in our dependence on a small number of customers as well as increased pricing pressures on us.




To the extent that our customer base consolidates as a result of mergers in the communications industry, we may have an increased dependence on a few customers who may be able to exert increased pressure on our prices and contractual terms in general.  Consolidation also may result in the loss of both our existing and potential customers.




Changes in the communications industry may lead to increased competition and harm our business.




The communications industry continues to undergo significant change as a result of deregulation and privatization worldwide, reducing restrictions on competition in the industry.  We believe that existing competitors will continue to present substantial competition, and that other companies, many with considerably greater financial, marketing, and sales resources than us, may enter the markets for our products.  In addition, we may lose sales to companies operating in regions such as India and China as a result of pricing competition because of their lower operating costs.




Our competitors may be able to develop more quickly or adapt faster to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, and sale of their products.  Some of our competitors have longer operating histories, larger customer bases, longer standing relationships with customers, greater name recognition, and significantly greater financial, technical, marketing, customer service, public relations, distribution, and other resources.  New competitors continue to emerge, which may create pricing pressure and reduce our market share. In addition, some of our customers may in the future decide to internally develop their own solutions instead of purchasing them from us.  Increased competition could force us to lower our prices or take other actions to differentiate our products.




Because the market for our products is characterized by rapidly changing technology, our future success depends on our ability to enhance our existing products and the timely and cost-effective development, marketing, and adoption of new products.


The communications industry is subject to rapid technological change.  The introduction of new technologies in the communications market, including the delay in the adoption of such new technologies and new alternatives for the delivery of services, are having, and can be expected to








25








continue to have, a profound effect on competitive conditions in the market and the success of market participants, including us.  Our continued success will depend on the ability to correctly anticipate technological trends, to react quickly and effectively to such trends, enhance our existing product line, and to introduce new products on a timely and cost-effective basis.  The life cycle of our product line is difficult to estimate.  Discontinuing a product line may result in the incurrence of special charges, such as costs associated with a reduction in workforce.  These strategic decisions could result in changes to determinations regarding a product’s useful life and the recoverability of the carrying basis of certain assets.




Moreover, most of our products are designed to support SS7 and SIGTRAN protocols.  If future networks do not utilize these protocols, because they are using newer technology, and we are unable to adapt our products to work with other appropriate signaling protocols, our products will become less competitive or obsolete.  A reduction in the demand for these products could adversely affect our business and operating results.




Risks Related to Our Business




We have a limited product portfolio and our primary source of revenue is from our Signalware AR products.




Over 90% of our revenue is derived from our Signalware AR products and related services.  Signalware AR is based on a technology that may become obsolete as it is replaced by new network technologies and protocols.  The demand for this product has decreased in recent fiscal periods and if it continues to decrease or if we are unable to replace this product and related service revenue with revenue from a product that has similar acceptance with our customers, this would cause a material adverse effect on our business. In recent fiscal periods, we have reduced R&D expenditures in order to conserve capital given the uncertain economic environment and decreased levels of revenue, which reduction may adversely impact our competitive position in development of new products and enhancements to offset declines in revenues from our Signalware AR products and related services.




We are endeavoring to migrate our largest selling product to new network technologies and protocols; however, even if this development is successful, it may not be as profitable.




Signalware AR is based on a technology that relies on an infrastructure that may become obsolete as it is replaced by new network technologies and protocols.  Even if we successfully migrate our Signalware products to these new network technologies and protocols, the replacement products may not be as profitable.




We may incur significant costs related to undetected product defects, errors or operational problems.




Our products involve sophisticated technology that performs critical functions to highly demanding standards.  If our current or future products develop operational problems, we may incur fees and penalties in connection with such problems, which could have an adverse effect on us.  We offer complex products that may contain undetected defects or errors, particularly when first introduced or as new versions are released.  We may not discover such defects, errors, or operational problems until after a product has been released and used by the customer.  Significant costs may be incurred to correct undetected defects, errors or operational problems in








26








our products and these defects, errors, or operational problems could result in future lost sales. Defects, errors, or operational problems in our products also may result in product liability claims, which could cause adverse publicity and impair their market acceptance.




We depend on a limited number of manufacturers and suppliers, and any failure of those parties to fulfill their obligations may disrupt our product supply.




Because we rely on a limited number of independent manufacturers to produce boards for our products, if these manufacturers experience financial, operational or other difficulties, we may experience disruptions to our product supply.  We may not be able to find alternate manufacturers that meet our requirements and existing or alternative sources for boards may not continue to be available at favorable prices.  We also rely on a limited number of suppliers for our board components and we do not have any long-term supply agreements.  Thus, if there is a shortage of supply for these components, we may experience an interruption in our product supply, which could have an adverse effect on short term operating results.




We depend on a limited number of customers, and the loss of any of these customers or a significant order from any of these customers could adversely affect our business.




A limited number of customers have contributed to a significant percentage of our revenues; with 57% of our fiscal year 2009 revenues derived from only three customers (Nokia Siemens Networks, Alcatel-Lucent, and Sonus Networks, Inc.).  We anticipate that our operating results in any given period will continue to depend significantly upon revenues from a small number of customers.  The deferral or loss of one or more significant orders from any of these customers or the loss of any of these customers could have an adverse effect on our business and operating results.




Our business could be adversely affected if we are unable to attract new customers.




In order to increase our revenues and reduce our dependence on a limited number of customers, we will need to attract additional customers on an ongoing basis.  In addition, because our products have long sales cycles that typically range from six to twelve months, our ability to forecast the timing and amount for specific sales is limited.  The loss or deferral of one or more significant sales could have an adverse effect on our operating results in any fiscal quarter, especially if there are significant sales and marketing expenses associated with the deferred or lost sales.  Our software products are primarily sold to equipment manufacturers and application developers that integrate our products with their products and sell them to communications service providers.  The success of new products depends on our being able to successfully develop sales channels directly to service providers.  The success of our business and operating results is dependent upon our channel and marketing relationships with these manufacturers, developers and service providers and the successful development and deployment of their products.  If we cannot successfully establish channel and marketing relationships with leading equipment manufacturers, application developers and communications service providers or maintain these relationships on favorable terms, or our sales channels are affected by economic weakness, our business and operating results may be adversely affected.









27






Investment in sales and marketing and research and development are a significant percentage of our revenues, and the failure for a market to emerge for these new products or customers to accept them could adversely affect our business and the investments may be lost.




Our investments in the areas of sales and marketing, and research and development are a significant percentage of our revenues.  Our research and development activities include ongoing investment in the development of additional features and functionality for our products, including products based on emerging open standards for Internet protocols that facilitate the convergence of voice and data networks.  The success of these initiatives will be dependent upon, among other things, the emergence of a market for these types of products and their acceptance by existing and new customers.  Our business may be adversely affected by our failure to correctly anticipate the emergence of a market demand for certain products or services, or delays or changes in the evolution of market opportunities.  If a sufficient market does not emerge for new or enhanced products developed by us, or we are not successful in marketing such products, our growth could be adversely affected and our investment in those products may be lost.




Failure to attract and retain qualified personnel, including key management, could have an adverse effect on us.




Our success is dependent on recruiting and retaining key management and highly skilled technical, managerial, sales, and marketing personnel.  The market for highly skilled personnel remains very competitive.   Our ability to attract and retain employees also may be affected by, among other reasons, speculation regarding a potential change of control or cost control actions, which in the past and may again in the future, include reductions in our workforce and the associated reorganization of operations. If the costs of attracting and retaining qualified personnel increase significantly, our financial results could be adversely affected.




If we experience disruptions or systems failures, our ability to conduct our business would be materially harmed.




We are a highly automated business and a disruption or failure of our systems in the event of a catastrophic event, such as a major earthquake, tsunami, or other natural disaster, cyber-attack or terrorist attack could cause delays in completing sales and providing services.  A catastrophic event that results in the destruction or disruption of any of our critical business systems could severely affect our ability to conduct normal business operations and, as a result, the financial condition and operating results could be adversely affected.




In addition, “hackers” and others have, in the past, created a number of computer viruses or otherwise initiated “denial of service” attacks on computer networks and systems.  Our information technology infrastructure is regularly subject to various attacks and intrusion efforts of differing seriousness and sophistication.  If such “hackers” are successful, confidential information, including passwords, financial information, or other personal information may be improperly obtained and we may be subject to lawsuits and other liability.  Even if we are not held liable, a security breach could harm our reputation.  Even the perception of security risks, whether or not valid, could inhibit market acceptance of our products and could harm our business, financial condition, and operating results.  While we diligently maintain our information technology infrastructure and continuously implement protections against such








28








viruses, electronic break-ins, disruptions, or intrusions, if the defensive measures fail or should similar defensive measures by our customers fail, our business could be adversely affected.




Our international operations involve special challenges that we may not be able to meet, which could adversely affect our financial results.




We currently derive a majority of our total revenues from customers outside of the United States.  International transactions involve particular risks, including political decisions affecting tariffs and trade conditions, rapid and unforeseen changes in economic conditions in individual countries, difficulty in enforcing intellectual property rights, turbulence in foreign currency and credit markets, and increased costs resulting from lack of proximity to the customer.  In addition, legal uncertainties regarding liability, compliance with local laws and regulations, local taxes, labor laws, employee benefits, currency restrictions, difficulty in accounts receivable collection, longer collection periods, and other requirements may have a negative impact on our operating results.  Unforeseen changes in the regulatory environment, including, but not limited to changes in product requirements also may have an impact on our revenues, operations and/or costs in any given part of the world.  New manufacturing requirements for our products could also require us to redesign or find alternatives to such products, resulting in delays and possibly lost sales.




Changes to licensing regulations abroad could adversely affect business, financial condition, results of operations and cash flows.




All of our products are of U.S. origin and are classified under the U.S. export regulations such that currently no licenses are required to export to the countries with which we currently conduct business.  In the future, we may be required to obtain export licenses and other authorizations from applicable governmental authorities for certain countries within which we conduct business and to comply with applicable export control laws generally.  The failure to receive any required license or authorization would hinder our ability to sell our products and could adversely affect our business, results of operations, financial condition or cash flows.  Export laws and regulations are revised from time to time and can be extremely complex in their application.  If we are found not to have complied with applicable export control laws, we may be penalized by, among other things, having our ability to receive export licenses curtailed or eliminated.  Our failure to comply with applicable export laws would hinder our ability to sell our products and could adversely affect our business, financial condition, and results of operations, and could subject us to civil and criminal penalties.




Our international operations subject us to currency exchange risk.




International sales are predominately denominated in U.S. dollars, and we have not been exposed to material fluctuations in foreign currency exchange rates related to sales.  We have certain expenses, however, denominated in foreign currency, which expose us to higher expenses due to fluctuations in foreign currency exchange rates.  From time to time, we may choose to limit our exposure by utilizing hedging strategies.  There can be no assurance that any such hedging strategies that we may undertake would be successful in avoiding exchange rate losses.




We may be unable to protect our intellectual property, which could adversely affect our business, financial condition, results of operations and cash flows, and any infringement or misappropriation of intellectual property rights could result in costly litigation.










29











While we generally require employees, independent contractors and consultants to execute non-competition and confidentiality agreements, our intellectual property or proprietary rights could be infringed or misappropriated, which could result in expensive and protracted litigation.  We rely on a combination of copyright, trade secret and trademark law to protect our technology.  Despite our efforts to protect our intellectual property and proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Effectively policing the unauthorized use of our products is time-consuming and costly, and the steps taken by us may not prevent misappropriation of our technology, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same level of protection as in the United States. In addition, the cost of any lawsuit to protect our rights may be expensive and time consuming.




Others may bring infringement claims against us, which could adversely affect our business, financial condition, results of operations and cash flows.




If others claim that our products infringe their intellectual property rights, we may be forced to seek expensive licenses, reengineer our products, engage in expensive and time-consuming litigation or stop marketing our products.  We attempt to avoid infringing known proprietary rights of third parties in our product development efforts.  We do not, however, regularly conduct comprehensive patent searches to determine whether the technology used in our products infringes patents held by third parties.  There are many issued patents, as well as patent applications, in the fields in which we are engaged.  Because patent applications in the United States are not publicly disclosed until published or issued, applications may have been filed which relate to our software and products.  If we were to discover that our products violated or potentially violated third-party proprietary rights, we might not be able to continue offering these products without obtaining licenses for those products or without substantial reengineering of the products.  Any reengineering effort may not be successful, and such licenses may not be available.  Even if such licenses were available, they may not be offered to us on commercially reasonable terms.




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




Our investment activities and changes in interest rates could adversely affect our financial position and results of operations.




We hold a large proportion of our assets in marketable debt securities.  Such investments subject us to the risks inherent in the capital markets generally. Given the relatively high proportion of








30








our liquid assets relative to our overall size, the results of our operations are materially affected by the results of our capital management and investment activities and the risks associated with those activities.  In addition, changes in interest rates may in the future have an adverse effect on our results of operations.




We could be required to register as an investment company and become subject to substantial regulation that would interfere with our ability to conduct our business.




The Investment Company Act of 1940 requires the registration of companies which are engaged primarily in the business of investing, reinvesting or trading in securities, or which are engaged in the business of investing, reinvesting, owning, holding or trading in securities and which own or propose to acquire investment securities with a value of more than 40% of its assets on an unconsolidated basis (other than U.S. government securities and cash). We are not engaged primarily in the business of investing, reinvesting or trading in securities, and we intend to invest our cash and cash equivalents in U.S. government securities and money market funds to the extent necessary to take advantage of the 40% safe harbor. To manage our cash holdings, we invest in short-term instruments consistent with prudent cash management and the preservation of capital and not primarily for the purpose of maximizing investment returns. U.S. government securities and money market funds generally yield lower rates of income than other short-term instruments in which we have invested to date. Accordingly, investing substantially all of our cash and cash equivalents in U.S. government securities and money market funds could result in lower levels of interest income and net income.




If we were deemed an investment company and were unable to rely upon a safe harbor or exemption under the Investment Company Act, we would, among other things, be prohibited from engaging in certain businesses or issuing certain securities. Certain of our contracts might be voidable, and we could be subject to civil and criminal penalties for noncompliance.





Our Board of Directors may issue additional shares of stock without shareholder approval that could result in issuance of stock with rights superior to the rights of shareholders of our common stock or make it more difficult to acquire control of us.





Our Board of Directors has the authority to cause us to issue, without vote or action of our shareholders, up to 2,500,000 shares of undesignated stock and has the ability to divide such undesignated shares into one or more classes of common or preferred stock and to further divide any classes of preferred stock into series.  Any such series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, or other rights superior to the rights of holders of our common stock.  We are also authorized to issue, without shareholder approval, common stock.  The issuance of either preferred or common stock could have the effect of making it more difficult for a person to acquire, or could discourage a person from seeking to acquire control of us.  If this occurs, investors could lose the opportunity to receive a premium on the sale of their shares in a change of control transaction.





Our results of operations could vary as a result of the methods, estimates, and judgments that we use in applying our accounting policies.


The methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on our results of operations (see “Critical Accounting Policies and Estimates”








31








in Part I, Item 2 of this Quarterly Report on Form 10-Q). Such methods, estimates, and judgments are, by their nature, subject to substantial risks, uncertainties, and assumptions, and factors may arise over time that lead us to change our methods, estimates, and judgments. Changes in those methods, estimates, and judgments could significantly affect our results of operations.





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.


32


ITEM 6.
EXHIBITS.


(a)  Exhibit Index.





10.1 Ulticom, Inc., 2010 Stock Incentive Compensation Plan, effective as of June 3, 2010, is incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K, filed on June 7, 2010.





31.1           Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





31.2           Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.





32.1           Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








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.








ULTICOM, INC.Dated:

September 13, 2010
/s/ Shawn K. OsborneShawn K. OsbornePresident and Chief Executive OfficerDated:

September 13, 2010
/s/ Mark A. KissmanMark A. KissmanSenior Vice President and Chief Financial Officer





33