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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarterly period ended December 31, 2010

or



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

For the transition period from 
to

Commission File Number: 001-16073





OPENWAVE SYSTEMS INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 94-3219054                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|2100 Seaport Blvd.                       |  |           
|Redwood City, California                 |  | 94063     
|(Address of principal executive offices) |  | (Zip Code)

(650)
480-8000

(Registrants telephone number, including area code)





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

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ̈    No  x

As of
January 31, 2011 there were 84,821,257 shares of the registrants Common Stock outstanding.









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##### Table of Contents

OPENWAVE SYSTEMS INC.

Table of Contents



|                              |  |                                                                                       |    |  |    | 
|----------------------------- |  | ------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I. FINANCIAL INFORMATION | 
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements:                                                                 |    |  |    | 
|                              |  | Condensed Consolidated Balance Sheets                                                 |    |  | 3  | 
|                              |  | Condensed Consolidated Statements of Operations                                       |    |  | 3  | 
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |    |  | 5  | 
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |    |  | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations |    |  | 24 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |    |  | 38 | 
|Item 4.                       |  | Controls and Procedures                                                               |    |  | 40 | 
|                             
|PART II. OTHER INFORMATION    | 
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |    |  | 41 | 
|Item 1A.                      |  | Risk Factors                                                                          |    |  | 41 | 
|Item 6.                       |  | Exhibits                                                                              |    |  | 53 | 
|                              | 
|SIGNATURES                    |  |                                                                                       | 54 | 



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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED
BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                            |  |              |            |   |          |   |            |  
|----------------------------------------------------------- |  | ------------ | ---------- | - | -------- | - | ---------- | -
|                                                            |  | December 31, |            |   | June 30, |  
|                                                            |  | 2010         |            |   | 2010     |  
|ASSETS                                                      |  |              |            |   |          |   |            |  
|Current assets:                                             |  |              |            |   |          |   |            |  
|Cash and cash equivalents                                   |  | $            | 55,541     |   |          | $ | 60,935     |  
|Short-term investments                                      |  |              | 43,938     |   |          |   | 45,211     |  
|Accounts receivable, net of allowance for doubtful accounts |  |              | 22,627     |   |          |   | 31,160     |  
|Prepaid and other current assets                            |  |              | 19,195     |   |          |   | 18,018     |  
|                                                            |  |              |            |   |          |   |            |  
|Total current assets                                        |  |              | 141,301    |   |          |   | 155,324    |  
|Property and equipment, net                                 |  |              | 7,873      |   |          |   | 8,365      |  
|Long-term investments, and restricted cash and investments  |  |              | 13,876     |   |          |   | 13,222     |  
|Deposits and other assets                                   |  |              | 7,564      |   |          |   | 9,231      |  
|Goodwill                                                    |  |              | 267        |   |          |   | 267        |  
|Intangible assets, net                                      |  |              | 1,371      |   |          |   | 2,200      |  
|                                                            |  |              |            |   |          |   |            |  
|Total assets                                                |  | $            | 172,252    |   |          | $ | 188,609    |  
|                                                            |  |              |            |   |          |   |            |  
|LIABILITIES AND STOCKHOLDERS EQUITY                        |  |              |            |   |          |   |            |  
|                                                            |  |             
|Current liabilities:                                        |  |              |            |   |          |   |            |  
|Accounts payable                                            |  | $            | 2,244      |   |          | $ | 4,658      |  
|Accrued liabilities                                         |  |              | 21,258     |   |          |   | 20,584     |  
|Accrued restructuring costs                                 |  |              | 14,258     |   |          |   | 15,128     |  
|Deferred revenue                                            |  |              | 32,838     |   |          |   | 35,132     |  
|                                                            |  |              |            |   |          |   |            |  
|Total current liabilities                                   |  |              | 70,598     |   |          |   | 75,502     |  
|Accrued restructuring costs, net of current portion         |  |              | 18,547     |   |          |   | 23,820     |  
|Deferred revenue, net of current portion                    |  |              | 7,887      |   |          |   | 11,800     |  
|Deferred rent obligations and other                         |  |              | 4,687      |   |          |   | 4,728      |  
|                                                            |  |              |            |   |          |   |            |  
|Total liabilities                                           |  |              | 101,719    |   |          |   | 115,850    |  
|                                                            |  |              |            |   |          |   |            |  
|Commitments and contingencies                               |  |              |            |   |          |   |            |  
|                                                            |  |             
|Stockholders equity:                                       |  |              |            |   |          |   |            |  
|Common stock                                                |  |              | 85         |   |          |   | 84         |  
|Additional paid-in capital                                  |  |              | 3,189,367  |   |          |   | 3,187,265  |  
|Accumulated other comprehensive loss                        |  |              | (2,381     | ) |          |   | (2,515     | )
|Accumulated deficit                                         |  |              | (3,116,538 | ) |          |   | (3,112,075 | )
|                                                            |  |              |            |   |          |   |            |  
|Total stockholders equity                                  |  |              | 70,533     |   |          |   | 72,759     |  
|                                                            |  |              |            |   |          |   |            |  
|Total liabilities and stockholders equity                  |  | $            | 172,252    |   |          | $ | 188,609    |  
|                                                            |  |              |            |   |          |   |            |  

See accompanying notes to condensed consolidated financial statements



3



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OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                   |  | Three Months Ended |        |   | Six Months Ended |  
|                                                                                   |  | December 31,       |        |   | December 31,     |  
|                                                                                   |  | 2010               |        |   | 2009             |   |        | 2010 |  |   | 2009   |  
|Revenues:                                                                          |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|License                                                                            |  | $                  | 10,072 |   |                  | $ | 13,283 |      |  | $ | 22,404 |   |  | $ | 23,708 |  
|Maintenance and support                                                            |  |                    | 13,913 |   |                  |   | 16,168 |      |  |   | 27,906 |   |  |   | 31,966 |  
|Services                                                                           |  |                    | 15,925 |   |                  |   | 20,291 |      |  |   | 27,128 |   |  |   | 43,910 |  
|Patents                                                                            |  |                    | 1      |   |                  |   |       |      |  |   | 4,001  |   |  |   |       |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                                                     |  |                    | 39,911 |   |                  |   | 49,742 |      |  |   | 81,439 |   |  |   | 99,584 |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |  
|Cost of revenues:                                                                  |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|License                                                                            |  |                    | 481    |   |                  |   | 665    |      |  |   | 920    |   |  |   | 1,304  |  
|Maintenance and support                                                            |  |                    | 3,981  |   |                  |   | 4,668  |      |  |   | 8,133  |   |  |   | 8,995  |  
|Services                                                                           |  |                    | 11,594 |   |                  |   | 15,075 |      |  |   | 20,481 |   |  |   | 32,848 |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues                                                             |  |                    | 16,056 |   |                  |   | 20,408 |      |  |   | 29,534 |   |  |   | 43,147 |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                                       |  |                    | 23,855 |   |                  |   | 29,334 |      |  |   | 51,905 |   |  |   | 56,437 |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                                                |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                                           |  |                    | 10,439 |   |                  |   | 9,667  |      |  |   | 21,869 |   |  |   | 19,531 |  
|Sales and marketing                                                                |  |                    | 11,357 |   |                  |   | 11,052 |      |  |   | 22,178 |   |  |   | 21,763 |  
|General and administrative                                                         |  |                    | 5,457  |   |                  |   | 6,710  |      |  |   | 12,069 |   |  |   | 14,635 |  
|Restructuring and other related costs                                              |  |                    | 856    |   |                  |   | 1,353  |      |  |   | 1,564  |   |  |   | 1,775  |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                           |  |                    | 28,109 |   |                  |   | 28,782 |      |  |   | 57,680 |   |  |   | 57,704 |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Operating income (loss) from continuing operations                                 |  |                    | (4,254 | ) |                  |   | 552    |      |  |   | (5,775 | ) |  |   | (1,267 | )
|Interest income                                                                    |  |                    | 105    |   |                  |   | 214    |      |  |   | 265    |   |  |   | 482    |  
|Interest expense                                                                   |  |                    | (80    | ) |                  |   | (73    | )    |  |   | (163   | ) |  |   | (175   | )
|Other income (expense), net                                                        |  |                    | 185    |   |                  |   | (361   | )    |  |   | 145    |   |  |   | (1,736 | )
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations before provision for income taxes         |  |                    | (4,044 | ) |                  |   | 332    |      |  |   | (5,528 | ) |  |   | (2,696 | )
|Income tax expense                                                                 |  |                    | 491    |   |                  |   | 119    |      |  |   | 1,172  |   |  |   | 617    |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) from continuing operations                                       |  |                    | (4,535 | ) |                  |   | 213    |      |  |   | (6,700 | ) |  |   | (3,313 | )
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Discontinued operations:                                                           |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Gain on sale of discontinued operation, net of tax                                 |  |                    |       |   |                  |   |       |      |  |   | 2,236  |   |  |   | 4,516  |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                  |  | $                  | (4,535 | ) |                  | $ | 213    |      |  | $ | (4,464 | ) |  | $ | 1,203  |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |  
|Basic net income (loss) per share from:                                            |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                                              |  | $                  | (0.05  | ) |                  | $ | 0.00   |      |  | $ | (0.08  | ) |  | $ | (0.04  | )
|Discontinued operations                                                            |  |                    |       |   |                  |   |       |      |  |   | 0.03   |   |  |   | 0.05   |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                  |  | $                  | (0.05  | ) |                  | $ | 0.00   |      |  | $ | (0.05  | ) |  | $ | 0.01   |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |  
|Diluted net income (loss) per share from:                                          |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Continuing operations                                                              |  | $                  | (0.05  | ) |                  | $ | 0.00   |      |  | $ | (0.08  | ) |  | $ | (0.04  | )
|Discontinued operations                                                            |  |                    |       |   |                  |   |       |      |  |   | 0.03   |   |  |   | 0.05   |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                                                  |  | $                  | (0.05  | ) |                  | $ | 0.00   |      |  | $ | (0.05  | ) |  | $ | 0.01   |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |  
|Shares used in computing basic net income (loss) per share                         |  |                    | 84,324 |   |                  |   | 83,408 |      |  |   | 84,170 |   |  |   | 83,352 |  
|                                                                                   |  |                    |        |  
|Shares used in computing diluted net income (loss) per share                       |  |                    | 84,324 |   |                  |   | 84,910 |      |  |   | 84,170 |   |  |   | 83,352 |  
|                                                                                   |  |                    |        |  
|Supplemental disclosures:                                                          |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total other-than-temporary impairments                                             |  | $                  |       |   |                  | $ | (202   | )    |  | $ |       |   |  | $ | (2,026 | )
|Portion of other-than-temporary impairments included in other comprehensive income |  |                    |       |   |                  |   |       |      |  |   |       |   |  |   | 360    |  
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Net other-than-temporary impairments                                               |  |                    |       |   |                  |   | (202   | )    |  |   |       |   |  |   | (1,666 | )
|Other investment gain                                                              |  |                    |       |   |                  |   | (449   | )    |  |   |       |   |  |   | (370   | )
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  
|Total net investment losses in Other income (expense), net                         |  | $                  |       |   |                  | $ | (651   | )    |  | $ |       |   |  | $ | (2,036 | )
|                                                                                   |  |                    |        |   |                  |   |        |      |  |   |        |   |  |   |        |  

See accompanying notes to condensed consolidated financial statements



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OPENWAVE SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                               |  |                  |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | - | ------- | -
|                                                                                               |  | Six Months Ended |        
|                                                                                               |  | December 31,     |        
|                                                                                               |  | 2010             |         |   | 2009 |  
|Cash flows from operating activities:                                                          |  |                  |         |   |      |   |         |  
|Net income (loss)                                                                              |  | $                | (4,464  | ) |      | $ | 1,203   |  
|Gain on sale of discontinued operation                                                         |  |                  | (2,236  | ) |      |   | (4,516  | )
|Adjustments to reconcile net income to net cash used for operating activities:                 |  |                  |         |   |      |   |         |  
|Depreciation and amortization of intangibles                                                   |  |                  | 3,383   |   |      |   | 3,824   |  
|Stock-based compensation                                                                       |  |                  | 1,279   |   |      |   | 985     |  
|Non-cash restructuring charges                                                                 |  |                  | 605     |   |      |   | 760     |  
|Accelerated depreciation on restructured property and equipment                                |  |                  |        |   |      |   | 181     |  
|Recovery of doubtful accounts, net                                                             |  |                  | (213    | ) |      |   | (319    | )
|Loss on disposal of property and equipment                                                     |  |                  |        |   |      |   | 989     |  
|Amortization of premiums/discounts on investments, net                                         |  |                  | 684     |   |      |   | 224     |  
|Realized losses and impairments of non-marketable securities                                   |  |                  |        |   |      |   | 2,036   |  
|Changes in operating assets and liabilities, net of effect of acquired assets and liabilities: |  |                  |         |   |      |   |         |  
|Accounts receivable                                                                            |  |                  | 8,746   |   |      |   | 1,024   |  
|Prepaid assets, deposits, and other assets                                                     |  |                  | 490     |   |      |   | 4,404   |  
|Accounts payable                                                                               |  |                  | (1,841  | ) |      |   | (1,656  | )
|Accrued liabilities                                                                            |  |                  | 636     |   |      |   | (1,561  | )
|Accrued restructuring costs                                                                    |  |                  | (6,748  | ) |      |   | (7,859  | )
|Deferred revenue                                                                               |  |                  | (6,207  | ) |      |   | (2,242  | )
|                                                                                               |  |                  |         |   |      |   |         |  
|Net cash used for operating activities                                                         |  |                  | (5,886  | ) |      |   | (2,523  | )
|                                                                                               |  |                  |         |   |      |   |         |  
|Cash flows from investing activities:                                                          |  |                  |         |   |      |   |         |  
|Purchases of property and equipment                                                            |  |                  | (2,635  | ) |      |   | (921    | )
|Proceeds from sale of discontinued operation, net                                              |  |                  | 2,236   |   |      |   | 4,516   |  
|Purchases of short-term investments                                                            |  |                  | (17,479 | ) |      |   | (23,938 | )
|Proceeds from sales and maturities of short-term investments                                   |  |                  | 23,332  |   |      |   | 10,348  |  
|Purchases of long-term investments                                                             |  |                  | (6,057  | ) |      |   | (10,379 | )
|Proceeds from sales and maturities of long-term investments                                    |  |                  | 57      |   |      |   | 2,541   |  
|Release of restricted cash and investments                                                     |  |                  | 216     |   |      |   | 409     |  
|                                                                                               |  |                  |         |   |      |   |         |  
|Net cash used for investing activities                                                         |  |                  | (330    | ) |      |   | (17,424 | )
|                                                                                               |  |                  |         |   |      |   |         |  
|Cash flows from financing activities:                                                          |  |                  |         |   |      |   |         |  
|Proceeds from issuance of common stock, net                                                    |  |                  | 601     |   |      |   | 129     |  
|Employee stock purchase plan                                                                   |  |                  | 221     |   |      |   | 121     |  
|                                                                                               |  |                  |         |   |      |   |         |  
|Net cash provided by financing activities                                                      |  |                  | 822     |   |      |   | 250     |  
|                                                                                               |  |                  |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                      |  |                  | (5,394  | ) |      |   | (19,697 | )
|Cash and cash equivalents at beginning of period                                               |  |                  | 60,935  |   |      |   | 91,545  |  
|                                                                                               |  |                  |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                     |  | $                | 55,541  |   |      | $ | 71,848  |  
|                                                                                               |  |                  |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements



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OPENWAVE SYSTEMS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

(1) Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission (SEC). Accordingly, they do not contain all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of
management of Openwave Systems Inc. (the Company or Openwave), the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the Companys financial position as of December 31, 2010 and June 30, 2010, and the results of operations for the three and six months ended December 31, 2010 and 2009 and cash flows for the six months ended
December 31, 2010 and 2009. The following information should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 2010.

Use of Estimates and Business Risks

The preparation of condensed consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

The Company derives approximately half of its revenues from U.S.
customers, which consists primarily of sales to Sprint Nextel. Individual sales to this customer can be significant and the timing of these transactions can create significant variability in the timing and level of Company revenues and
profitability.

Revenue Recognition

With the exception of the adoption of several accounting pronouncements related to revenue recognition, discussed below in Recently Adopted Accounting Pronouncements, there have been no material
changes to our significant accounting policies as compared with the Companys revenue recognition policies from the information provided in Note 2 to the consolidated financial statements included in the Companys Annual Report on Form
10K for the fiscal year ended June 30, 2010.

During the first quarter of fiscal 2011, the Company entered into a license agreement
with a competitor whereby the Company licensed rights to certain of its patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010.
Under this agreement, the Company agreed with the competitor not to assert certain patents against the competitor or its customers for their use of the competitors products for 3.5 years. As part of the Companys strategy for fiscal 2011
and beyond, the Company intends to seek monetization opportunities for its intellectual property. This could include licensing the Companys patents as well as seeking damages for past infringements. However, there can be no guarantee that the
Companys patent licensing or enforcement efforts will be successful. Further, effectively policing and enforcing the Companys intellectual property is time consuming and costly.



6



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##### Table of Contents

Stock Based Compensation

The following table illustrates stock-based compensation recognized in the condensed consolidated statements of operations by category of award (in thousands):



|                                                                                           |  |                    |     |   |                  |   |     |      |  |   |       |  |  |   |     | 
|------------------------------------------------------------------------------------------ |  | ------------------ | --- | - | ---------------- | - | --- | ---- |  | - | ----- |  |  | - | --- | 
|                                                                                           |  | Three Months Ended |     |   | Six Months Ended |  
|                                                                                           |  | December 31,       |     |   | December 31,     |  
|                                                                                           |  | 2010               |     |   | 2009             |   |     | 2010 |  |   | 2009  | 
|Stock-based compensation related to:                                                       |  |                    |     |   |                  |   |     |      |  |   |       |  |  |   |     | 
|Grants of nonvested stock                                                                  |  | $                  | 42  |   |                  | $ | (14 | )    |  | $ | 98    |  |  | $ | 38  | 
|Stock options granted to employees and directors                                           |  |                    | 582 |   |                  |   | 415 |      |  |   | 1,105 |  |  |   | 844 | 
|Employee stock purchase plan                                                               |  |                    | (6  | ) |                  |   | 37  |      |  |   | 76    |  |  |   | 103 | 
|                                                                                           |  |                    |     |   |                  |   |     |      |  |   |       |  |  |   |     | 
|Stock-based compensation recognized in the condensed consolidated statements of operations |  | $                  | 618 |   |                  | $ | 438 |      |  | $ | 1,279 |  |  | $ | 985 | 
|                                                                                           |  |                    |     |   |                  |   |     |      |  |   |       |  |  |   |     | 

During the three and six months ended December 31, 2010 and 2009, the tax benefits related to stock option expense were
immaterial.

The Company amortizes stock-based compensation for awards granted on a straight-line basis over the requisite service (vesting)
period for the entire award.



| | (a) | Assumptions and Activity
| | --- | ------------------------

The fair value
of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model and assumptions noted in the following table.



|                         |  |                    |  |                  |  |              |  |             
|------------------------ |  | ------------------ |  | ---------------- |  | ------------ |  | ------------
|                         |  | Three Months Ended |  | Six Months Ended
|                         |  | December 31,       |  | December 31,    
|                         |  | 2010               |  | 2009             |  | 2010         |  | 2009        
|Expected volatility      |  | 60.6 - 62.5%       |  | 65.8 - 76.4%     |  | 60.6 - 65.4% |  | 65.8 - 76.4%
|Expected dividends       |  |                   |  |                 |  |             |  |            
|Expected term (in years) |  | 3.90 - 6.16        |  | 3.66 - 6.01      |  | 3.90 - 6.16  |  | 3.52 - 6.01 
|Risk-free rate           |  | 1.1 - 1.8%         |  | 1.6 - 2.6%       |  | 1.1 - 1.8%   |  | 1.6 - 2.6%  

The Company estimates
the expected term for new grants based upon actual post-vesting option cancellation and exercise experience, as well as the average midpoint between vesting and the contractual term for outstanding options. The Companys expected volatility for
the expected term of the option is based upon the historical volatility experienced in the Companys stock price, as well as implied volatility in the market traded options on Openwave common stock, when appropriate. The risk-free rate for the
expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company determines the fair value of nonvested shares based on the NASDAQ closing stock price on the date of grant.



| | (b) | Employee Stock Purchase Plan
| | --- | ----------------------------

Under the
Openwave Systems Inc. 1999 Employee Stock Purchase Plan (ESPP), eligible employees may purchase common stock through payroll deductions at a price equal to 85% of the lower of the fair market value of the Companys common stock as
of the beginning and the end of the six month offering periods. The amount of stock-based compensation expense recognized relating to the ESPP during the six months ended December 31, 2010 and 2009 was $0.1 million and $0.1 million,
respectively.



7



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##### Table of Contents

The fair value used in recording the stock-based compensation expense associated with the ESPP is estimated
for each offering period using the Black-Scholes-Merton option pricing model.

The expected term is six months, coinciding with each offering
period. Expected volatilities are based on the historical volatility experienced in the Companys stock price, as well as implied volatility in the market traded options on Openwave common stock, when appropriate. The risk-free rate for the
expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. These amounts and assumptions are noted in the following table.



|                         |  |                                    |      |   |      |  |      |  
|------------------------ |  | ---------------------------------- | ---- | - | ---- |  | ---- | -
|                         |  | For the Three and Six Months Ended |     
|                         |  | December 31,                       |     
|                         |  | 2010                               |      |   | 2009 | 
|Expected volatility      |  |                                    | 47.1 | % |      |  | 62.5 | %
|Expected dividends       |  |                                    |     |   |      |  |     |  
|Expected term (in years) |  |                                    | 0.5  |   |      |  | 0.5  |  
|Risk-free rate           |  |                                    | 0.2  | % |      |  | 0.2  | %



| | (c) | Equity awards activity
| | --- | ----------------------

A summary of
option activity from July 1, 2010 to December 31, 2010 is presented below (in thousands except per share and year amounts):



|                                                 |  |        |        |   |                              |   |      |                                                 |  |  |                          |  |  |   |       | 
|------------------------------------------------ |  | ------ | ------ | - | ---------------------------- | - | ---- | ----------------------------------------------- |  |  | ------------------------ |  |  | - | ----- | 
|Options                                          |  | Shares |        |   | WeightedAverageExercisePrice |   |      | WeightedAverageRemainingContractualTerm (years) |  |  | AggregateIntrinsic
Value | 
|                                                 |  |        |       
|                                                 |  |        |       
|                                                 |  |        |       
|                                                 |  |        |       
|Outstanding at July 1, 2010                      |  |        | 8,828  |   |                              | $ | 3.51 |                                                 |  |  |                          |  |  |   |       | 
|Options granted                                  |  |        | 3,360  |   |                              |   | 2.06 |                                                 |  |  |                          |  |  |   |       | 
|Exercised                                        |  |        | (361   | ) |                              |   | 1.67 |                                                 |  |  |                          |  |  |   |       | 
|Forfeited, canceled or expired                   |  |        | (468   | ) |                              |   | 4.13 |                                                 |  |  |                          |  |  |   |       | 
|                                                 |  |        |        |   |                              |   |      |                                                 |  |  |                          |  |  |   |       | 
|Outstanding at December 31, 2010                 |  |        | 11,359 |   |                              | $ | 3.11 |                                                 |  |  | 8.01                     |  |  | $ | 4,201 | 
|                                                 |  |        |        |   |                              |   |      |                                                 |  |  |                          |  |  |   |       | 
|Vested and expected to vest at December 31, 2010 |  |        | 9,875  |   |                              | $ | 3.27 |                                                 |  |  | 7.84                     |  |  | $ | 3,741 | 
|                                                 |  |        |        |   |                              |   |      |                                                 |  |  |                          |  |  |   |       | 
|Exercisable at December 31, 2010                 |  |        | 5,081  |   |                              | $ | 4.49 |                                                 |  |  | 6.82                     |  |  | $ | 2,007 | 
|                                                 |  |        |        |   |                              |   |      |                                                 |  |  |                          |  |  |   |       | 

The weighted average grant date fair values of options granted during the six months ended December 31, 2010 and 2009
were $0.86 and $1.37, respectively. The total intrinsic value of options exercised during the six months ended December 31, 2010 and 2009 was $0.1 million and $0.1 million, respectively. Upon the exercise of options, the Company issues new
common stock from its authorized shares.



8



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##### Table of Contents

A summary of the activity of the Companys nonvested share awards from July 1, 2010 to
December 31, 2010 is presented below (in thousands except per share amounts):



|                               |  |        |     |   |                                              |   |      | 
|------------------------------ |  | ------ | --- | - | -------------------------------------------- | - | ---- | 
|Nonvested Shares               |  | Shares |     |   | WeightedAverageGrant DateFair ValuePer Share |  
|                               | 
|                               | 
|                               | 
|                               | 
|Nonvested at July 1, 2010      |  |        | 222 |   |                                              | $ | 1.98 | 
|Nonvested shares granted       |  |        | 108 |   |                                              |   | 2.37 | 
|Vested                         |  |        | (79 | ) |                                              |   | 1.98 | 
|Forfeited                      |  |        | (23 | ) |                                              |   | 2.07 | 
|                               |  |        |     |   |                                              |   |      | 
|Nonvested at December 31, 2010 |  |        | 228 |   |                                              | $ | 2.14 | 
|                               |  |        |     |   |                                              |   |      | 

The total fair value of shares vested during the six months ended December 31, 2010 and 2009 was $0.2 million and $0.1
million, respectively. As of December 31, 2010, there was $5.0 million of total unrecognized compensation cost related to all unvested share awards. That cost is expected to be recognized as the awards vest over the next four years.

Stock-based compensation expense impacted the Companys results of operations as follows (in thousands):



|                                      |  |                    |     |  |                  |   |     |      |  |   |       |  |  |   |     | 
|------------------------------------- |  | ------------------ | --- |  | ---------------- | - | --- | ---- |  | - | ----- |  |  | - | --- | 
|                                      |  | Three Months Ended |     |  | Six Months Ended |  
|                                      |  | December 31,       |     |  | December 31,     |  
|                                      |  | 2010               |     |  | 2009             |   |     | 2010 |  |   | 2009  | 
|Stock-based compensation by category: |  |                    |     |  |                  |   |     |      |  |   |       |  |  |   |     | 
|Maintenance and support services      |  | $                  | 40  |  |                  | $ | 32  |      |  | $ | 85    |  |  | $ | 70  | 
|Services                              |  |                    | 46  |  |                  |   | 36  |      |  |   | 105   |  |  |   | 112 | 
|Research and development              |  |                    | 115 |  |                  |   | 42  |      |  |   | 246   |  |  |   | 140 | 
|Sales and marketing                   |  |                    | 161 |  |                  |   | 127 |      |  |   | 317   |  |  |   | 273 | 
|General and administrative            |  |                    | 256 |  |                  |   | 201 |      |  |   | 526   |  |  |   | 390 | 
|                                      |  |                    |     |  |                  |   |     |      |  |   |       |  |  |   |     | 
|                                      |  | $                  | 618 |  |                  | $ | 438 |      |  | $ | 1,279 |  |  | $ | 985 | 
|                                      |  |                    |     |  |                  |   |     |      |  |   |       |  |  |   |     | 

Recently Adopted Accounting Pronouncements

Effective July 1, 2010, the Company adopted the following accounting guidance for revenue recognition on a prospective basis for any contacts entered into after the date of adoption:

Accounting Standards Update 2009-13, Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements (Update 2009-13).
Update 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for non-software products or services (deliverables) separately based on the value allocated to each element using vendor specific objective
evidence, third party evidence, or estimated selling prices determined by management. The adoption of Update 2009-13 did not have a material impact on the Companys condensed consolidated financial position, results of operations or cash flows.

Accounting Standards Update 2009-14, Software (Topic 985), Certain Revenue Arrangements that Include Software Elements (Update
2009-14). Update 2009-14 addresses concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. The adoption of Update 2009-14 did not have a material impact on the
Companys condensed consolidated financial position, results of operations or cash flows.



9



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##### Table of Contents

Accounting Standards Update No. 2010-17, Revenue RecognitionMilestone Method (Topic 605) 
Milestone Method of Revenue Recognition(Update 2010-17). Update 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development
transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the
milestone is achieved, if the milestone meets all the criteria to be considered substantive. The adoption of Update 2009-14 did not have a material impact on the Companys condensed consolidated financial position, results of operations or cash
flows.

Recently Issued Accounting Pronouncements

Accounting Standards Update No. 2010-28, IntangiblesGoodwill and Other (Topic 350)  When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts(Update 2010-28). Update 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative
factors indicate that it is more likely than not that a goodwill impairment exists. Update 2010-28 is effective for fiscal years beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on
the Companys condensed consolidated financial position, results of operations or cash flows.

(2) Net Income (Loss) Per Share

Basic net income (loss) per common share has been computed using the weighted average number of shares of common stock outstanding during
the period, less shares subject to repurchase. The following table reconciles the number of shares used in the basic and diluted net income (loss) per share computations for the periods presented (in thousands):



|                                                                                   |  |                                |        |  |                              |  |        |      |  |  |        |  |  |  |        | 
|---------------------------------------------------------------------------------- |  | ------------------------------ | ------ |  | ---------------------------- |  | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                                                   |  | Three Months EndedDecember 31, |        |  | Six Months EndedDecember 31, | 
|                                                                                   |  | 2010                           |        |  | 2009                         |  |        | 2010 |  |  | 2009   | 
|Weighted average shares used in computing basic net income (loss) per common share |  |                                | 84,324 |  |                              |  | 83,408 |      |  |  | 84,170 |  |  |  | 83,352 | 
|Dilutive effect of restricted stock subject to repurchase                          |  |                                |       |  |                              |  | 198    |      |  |  |       |  |  |  |       | 
|Dilutive effect of employee stock options                                          |  |                                |       |  |                              |  | 1,304  |      |  |  |       |  |  |  |       | 
|                                                                                   |  |                                |        |  |                              |  |        |      |  |  |        |  |  |  |        | 
|Weighted average shares used in computing diluted net income (loss) per share      |  |                                | 84,324 |  |                              |  | 84,910 |      |  |  | 84,170 |  |  |  | 83,352 | 
|                                                                                   |  |                                |        |  |                              |  |        |      |  |  |        |  |  |  |        | 

The Company excludes potentially dilutive securities from its diluted net income (loss) per share computation when their
effect would be anti-dilutive to the net income (loss) from continuing operations per share computation. The following table sets forth potential shares of common stock that are not included in the diluted net income (loss) per share calculation
because to do so would be anti-dilutive for the periods indicated below (in thousands):



|                                                                                                                                                                                                     |  |                                |       |  |                              |  |       |      |  |  |       |  |  |  |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----- |  | ---------------------------- |  | ----- | ---- |  |  | ----- |  |  |  | ----- | 
|                                                                                                                                                                                                     |  | Three Months EndedDecember 31, |       |  | Six Months EndedDecember 31, | 
|                                                                                                                                                                                                     |  | 2010                           |       |  | 2009                         |  |       | 2010 |  |  | 2009  | 
|Weighted average effect of potential common stock:                                                                                                                                                   |  |                                |       |  |                              |  |       |      |  |  |       |  |  |  |       | 
|Unvested common stock subject to repurchase                                                                                                                                                          |  |                                | 213   |  |                              |  |      |      |  |  | 215   |  |  |  | 195   | 
|Options that would have been included in the computation of dilutive shares outstanding had the Company reported net income from
continuing operations, prior to applying the treasury method        |  |                                | 3,901 |  |                              |  |      |      |  |  | 2,726 |  |  |  | 5,196 | 
|Options that were excluded from the computation of dilutive shares outstanding because the total assumed proceeds exceeded the
average market value of the Companys common stock during the quarter |  |                                | 7,410 |  |                              |  | 3,696 |      |  |  | 8,097 |  |  |  | 3,572 | 



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##### Table of Contents

(3) Discontinued Operations



| | a) | Client Operations
| | -- | -----------------

During fiscal 2008,
the Company sold its Client operations to Purple Labs, a private company based in Chambéry, France. The terms of the agreement include initial consideration of $20.0 million in cash received by the Company in June 2008, and a note receivable
of $5.8 million that was paid in July 2008.

Additionally, upon the sale in June 2008, $4.2 million was placed in escrow by Purple Labs,
originally to be held until September 30, 2009, to secure indemnification claims made by Purple Labs, if any. On September 23, 2009, Myriad AG (formerly known as Purple Labs) made claims against the escrow in excess of $4.2 million and
therefore the funds were not released from escrow. On September 24, 2010, the parties agreed to release $2.0 million from the escrow to Myriad and the remaining balance of $2.2 million, plus accrued interest, to Openwave. This amount was
recognized as a gain on sale of discontinued operations in the first quarter of fiscal 2011.

The Client operations financial results have
been classified as a discontinued operation in the Companys condensed consolidated statements of operations for each period presented.

The financial results of Client operations included in discontinued operations were as follows (in thousands):



|                                         |  |                                 |   |  |                               |   |   |      |  |   |       |  |  |   |   | 
|---------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - | - | ---- |  | - | ----- |  |  | - | - | 
|                                         |  | Three Months Ended December 31, |   |  | Six Months Ended December 31, |  
|                                         |  | 2010                            |   |  | 2009                          |   |   | 2010 |  |   | 2009  | 
|Gain on sale of discontinued operation   |  | $                               |  |  |                               | $ |  |      |  | $ | 2,236 |  |  | $ |  | 
|                                         |  |                                 |   |  |                               |   |   |      |  |   |       |  |  |   |   | 
|Total income from discontinued operation |  | $                               |  |  |                               | $ |  |      |  | $ | 2,236 |  |  | $ |  | 
|                                         |  |                                 |   |  |                               |   |   |      |  |   |       |  |  |   |   | 

As of December 31, 2010, there were no operational assets or liabilities attributable to Client operations due to the
sale of the discontinued operation in June 2008.



| | b) | Musiwave
| | -- | --------

On December 31, 2007, the
Company sold Musiwave to Microsoft Corporation (Microsoft) for $41.4 million in cash, a note receivable of $5.9 million, and $4.6 million that Microsoft placed in escrow to secure indemnification claims made by Microsoft, if any. The
Company received and recorded the payment on the note receivable in July 2008, which had increased in value to $6.5 million due to the loan being denominated in Euros. During the first quarter of fiscal 2010, the escrowed funds were distributed
pursuant to certain agreements reached with Microsoft, resulting in a gain on sale of discontinued operations of $4.5 million.

The financial
results of Musiwave included in discontinued operations were as follows (in thousands):



|                                         |  |                                 |   |  |                               |   |   |      |  |   |      |  |  |   |       | 
|---------------------------------------- |  | ------------------------------- | - |  | ----------------------------- | - | - | ---- |  | - | ---- |  |  | - | ----- | 
|                                         |  | Three Months Ended December 31, |   |  | Six Months Ended December 31, |  
|                                         |  | 2010                            |   |  | 2009                          |   |   | 2010 |  |   | 2009 | 
|Gain on sale of discontinued operation   |  | $                               |  |  |                               | $ |  |      |  | $ |     |  |  | $ | 4,516 | 
|                                         |  |                                 |   |  |                               |   |   |      |  |   |      |  |  |   |       | 
|Total income from discontinued operation |  | $                               |  |  |                               | $ |  |      |  | $ |     |  |  | $ | 4,516 | 
|                                         |  |                                 |   |  |                               |   |   |      |  |   |      |  |  |   |       | 

As of December 31, 2010, there were no remaining assets or liabilities attributable to Musiwave due to the sale of the
discontinued operation on December 31, 2007.



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##### Table of Contents

(4) Geographic, Segment and Significant Customer Information

The Companys Chief Executive Officer (CEO) is considered to be the Companys chief operating decision maker. The CEO reviews
financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance.

The Company has organized its operations based on a single operating segment.

The Company markets its products primarily from its operations in the United States. International sales are primarily to customers in Japan and Europe, Middle East and Africa. Information regarding the
Companys revenues in different geographic regions is as follows (in thousands):



|                                      |  |                    |        |  |                  |   |        |      |  |   |        |  |  |   |        | 
|------------------------------------- |  | ------------------ | ------ |  | ---------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                      |  | Three Months Ended |        |  | Six Months Ended |  
|                                      |  | December 31,       |        |  | December 31,     |  
|                                      |  | 2010               |        |  | 2009             |   |        | 2010 |  |   | 2009   | 
|United States                         |  | $                  | 18,817 |  |                  | $ | 26,197 |      |  | $ | 37,821 |  |  | $ | 54,116 | 
|Americas, excluding the United States |  |                    | 4,414  |  |                  |   | 4,430  |      |  |   | 9,352  |  |  |   | 8,835  | 
|Europe, Middle East, and Africa       |  |                    | 5,457  |  |                  |   | 6,453  |      |  |   | 11,329 |  |  |   | 13,420 | 
|Japan                                 |  |                    | 8,357  |  |                  |   | 10,467 |      |  |   | 17,554 |  |  |   | 18,265 | 
|Asia Pacific, excluding Japan         |  |                    | 2,866  |  |                  |   | 2,195  |      |  |   | 5,383  |  |  |   | 4,948  | 
|                                      |  |                    |        |  |                  |   |        |      |  |   |        |  |  |   |        | 
|Total revenues                        |  | $                  | 39,911 |  |                  | $ | 49,742 |      |  | $ | 81,439 |  |  | $ | 99,584 | 
|                                      |  |                    |        |  |                  |   |        |      |  |   |        |  |  |   |        | 

The Companys long-lived assets residing in countries other than in the United States are insignificant and thus have
not been disclosed.

The majority of the Companys revenues have been from a limited number of customers and the Companys sales are
concentrated in a single industry segment. During the periods noted below the Company had one significant customer, as shown in the following table:



|              |  |                                                  |    |   |                                                |  |    |      |  |  |      |   |  |  |    |  
|------------- |  | ------------------------------------------------ | -- | - | ---------------------------------------------- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|              |  | % of Total RevenueThree Months EndedDecember 31, |    |   | % of Total RevenueSix Months EndedDecember 31, | 
|              |  | 2010                                             |    |   | 2009                                           |  |    | 2010 |  |  | 2009 |  
|Customer:     |  |                                                  |    |   |                                                |  |    |      |  |  |      |   |  |  |    |  
|Sprint Nextel |  |                                                  | 27 | % |                                                |  | 36 | %    |  |  | 24   | % |  |  | 38 | %

As noted in the tables above, the Company
has derived a significant portion of its revenues from sales to U.S.-based customers during the six months ended December 31, 2010 and 2009, of which slightly more than half consisted of sales to Sprint Nextel. Although the Company intends to
broaden its markets, there can be no assurance that this objective will be achieved.



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##### Table of Contents

(5) Balance Sheet Components



| | (a) | Accounts Receivable, net
| | --- | ------------------------

The following
table presents the components of accounts receivable as of the dates noted (in thousands):



|                                |  |                   |        |   |               |   |        |  
|------------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                                |  | December 
31,2010 |        |   | June 
30,2010 |  
|                                | 
|Accounts receivable             |  | $                 | 15,257 |   |               | $ | 26,935 |  
|Unbilled accounts receivable    |  |                   | 8,265  |   |               |   | 5,272  |  
|Allowance for doubtful accounts |  |                   | (895   | ) |               |   | (1,047 | )
|                                |  |                   |        |   |               |   |        |  
|                                |  | $                 | 22,627 |   |               | $ | 31,160 |  
|                                |  |                   |        |   |               |   |        |  

Significant customer accounts receivable balances as a percentage of total gross accounts receivable were as follows:



|                          |  |                               |    |   |               |  |    |  
|------------------------- |  | ----------------------------- | -- | - | ------------- |  | -- | -
|                          |  | % of Total AccountsReceivable |   
|                          |  | December 
31,2010             |    |   | June 
30,2010 | 
|                          | 
|Customer:                 |  |                               |    |   |               |  |    |  
|Sprint Nextel             |  |                               | 16 | % |               |  | 22 | %
|Telefonica Moviles Espana |  |                               | 9  | % |               |  | 14 | %
|AT&T                      |  |                               | 12 | % |               |  | 3  | %
|Itochu                    |  |                               | 15 | % |               |  | 10 | %



| | (b) | Goodwill and Intangible Assets, net
| | --- | -----------------------------------

The
following table presents activity recorded to goodwill and intangible assets from June 30, 2010 to December 31, 2010 (in thousands):



|                              |  |                            |       |  |              |   |      |                                |  |   |       | 
|----------------------------- |  | -------------------------- | ----- |  | ------------ | - | ---- | ------------------------------ |  | - | ----- | 
|                              |  | Balance as 
ofJune 30,2010 |       |  | Amortization |   |      | Balance as 
ofDecember 31,2010 | 
|                              |  |                           
|Goodwill                      |  | $                          | 267   |  |              | $ |     |                                |  | $ | 267   | 
|Intangible assets:            |  |                            |       |  |              |   |      |                                |  |   |       | 
|Developed and core technology |  |                            | 2,183 |  |              |   | (812 | )                              |  |   | 1,371 | 
|Customer contracts - support  |  |                            | 17    |  |              |   | (17  | )                              |  |   |      | 
|                              |  |                            |       |  |              |   |      |                                |  |   |       | 
|                              |  | $                          | 2,467 |  |              | $ | (829 | )                              |  | $ | 1,638 | 
|                              |  |                            |       |  |              |   |      |                                |  |   |       | 

Total amortization related to intangible assets was as follows (in thousands):



|                                        |  |                                 |     |  |                               |   |     |      |  |   |      |  |  |   |     | 
|--------------------------------------- |  | ------------------------------- | --- |  | ----------------------------- | - | --- | ---- |  | - | ---- |  |  | - | --- | 
|                                        |  | Three Months 
EndedDecember 31, |     |  | Six Months EndedDecember 
31, |  
|                                        |  | 2010                            |     |  | 2009                          |   |     | 2010 |  |   | 2009 | 
|Developed and core technology           |  | $                               | 403 |  |                               | $ | 409 |      |  | $ | 812  |  |  | $ | 818 | 
|Customer contracts - support            |  |                                 | 6   |  |                               |   | 11  |      |  |   | 17   |  |  |   | 22  | 
|                                        |  |                                 |     |  |                               |   |     |      |  |   |      |  |  |   |     | 
|Total amortization of intangible assets |  |                                 | 409 |  |                               |   | 420 |      |  |   | 829  |  |  |   | 840 | 
|                                        |  |                                 |     |  |                               |   |     |      |  |   |      |  |  |   |     | 

Amortization of acquired developed and core technology and customer license contracts is included in Cost of Revenues 
License. Amortization of acquired customer support contracts is included in Cost of Revenue  Maintenance and Support.



13



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The following tables set forth the carrying amount of intangible assets, net as of the dates noted (in
thousands):



|                              |  |                     |        |  |                         |   |         |                   |  |   |                     |  |  |                         |        |  |                   |   |         |   |  |   |       | 
|----------------------------- |  | ------------------- | ------ |  | ----------------------- | - | ------- | ----------------- |  | - | ------------------- |  |  | ----------------------- | ------ |  | ----------------- | - | ------- | - |  | - | ----- | 
|                              |  | December 31, 2010   |        |  | June 30, 2010           |  
|                              |  | GrossCarryingAmount |        |  | AccumulatedAmortization |   |         | NetCarryingAmount |  |   | GrossCarryingAmount |  |  | AccumulatedAmortization |        |  | NetCarryingAmount |  
|                              |  |                     |        |  |                        
|                              |  |                     |        |  |                        
|Developed and core technology |  | $                   | 19,294 |  |                         | $ | (17,923 | )                 |  | $ | 1,371               |  |  | $                       | 19,294 |  |                   | $ | (17,111 | ) |  | $ | 2,183 | 
|Customer contracts - support  |  |                     | 220    |  |                         |   | (220    | )                 |  |   |                    |  |  |                         | 220    |  |                   |   | (203    | ) |  |   | 17    | 
|                              |  |                     |        |  |                         |   |         |                   |  |   |                     |  |  |                         |        |  |                   |   |         |   |  |   |       | 
|                              |  | $                   | 19,514 |  |                         | $ | (18,143 | )                 |  | $ | 1,371               |  |  | $                       | 19,514 |  |                   | $ | (17,314 | ) |  | $ | 2,200 | 
|                              |  |                     |        |  |                         |   |         |                   |  |   |                     |  |  |                         |        |  |                   |   |         |   |  |   |       | 

The following table presents the estimated future amortization of intangible assets, based upon the recorded intangible
assets as of December 31, 2010 (in thousands):



|                 |  |              |       | 
|---------------- |  | ------------ | ----- | 
|Fiscal Year      |  | Amortization |      
|2011 (remaining) |  | $            | 818   | 
|2012             |  |              | 553   | 
|                 |  |              |       | 
|                 |  | $            | 1,371 | 
|                 |  |              |       | 



| | (c) | Deferred Revenue
| | --- | ----------------

As of December 31,
2010 and June 30, 2010, the Company had deferred revenue of $40.7 million and $46.9 million, respectively, consisting of deferred license fees, new version coverage, maintenance and support fees, and professional services fees. Deferred revenue
results from amounts billed to the customer but not yet recognized as revenue as of the balance sheet date, since the billing related to one or more of the following:



| |  |  | amounts billed prior to acceptance of product or service;
| | - |  | ---------------------------------------------------------



| |  |  | new version coverage and/or maintenance and support elements prior to the time service is delivered;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | subscriber licenses committed in excess of subscribers activated for arrangements being recognized on a subscriber activation basis; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | license arrangements amortized over a specified future period due to the provision of unspecified future products.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Amounts in accounts receivable that have corresponding balances included in deferred revenue aggregated to approximately $5.3 million and $7.6 million as
of December 31, 2010 and June 30, 2010, respectively.



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##### Table of Contents

| | (d) | Accumulated Other Comprehensive Loss
| | --- | ------------------------------------

The
components of accumulated other comprehensive loss were as follows as of the dates noted (in thousands):



|                                                                             |  |                   |        |   |               |   |        |  
|---------------------------------------------------------------------------- |  | ----------------- | ------ | - | ------------- | - | ------ | -
|                                                                             |  | December 
31,2010 |        |   | June 
30,2010 |  
|                                                                             | 
|Net unrealized gains (losses) on marketable securities:                      |  |                   |        |   |               |   |        |  
|Unrealized gain on marketable securities not other-than-temporarily impaired |  | $                 | 180    |   |               | $ | 46     |  
|Unrealized loss on marketable securities other-than-temporarily impaired     |  |                   | (1,790 | ) |               |   | (1,790 | )
|                                                                             |  |                   |        |   |               |   |        |  
|Net unrealized loss on marketable securities                                 |  |                   | (1,610 | ) |               |   | (1,744 | )
|Cumulative translation adjustments                                           |  |                   | (771   | ) |               |   | (771   | )
|                                                                             |  |                   |        |   |               |   |        |  
|Total Accumulated other comprehensive loss                                   |  | $                 | (2,381 | ) |               | $ | (2,515 | )
|                                                                             |  |                   |        |   |               |   |        |  

Comprehensive loss is comprised of net income (loss) and changes in unrealized loss on marketable securities (in thousands):



|                                                   |  |                                 |        |   |                              |   |       |      |  |   |        |   |  |   |       | 
|-------------------------------------------------- |  | ------------------------------- | ------ | - | ---------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | 
|                                                   |  | Three Months 
EndedDecember 31, |        |   | Six Months
EndedDecember 31, |  
|                                                   |  | 2010                            |        |   | 2009                         |   |       | 2010 |  |   | 2009   |  
|Net income (loss)                                  |  | $                               | (4,535 | ) |                              | $ | 213   |      |  | $ | (4,464 | ) |  | $ | 1,203 | 
|Other comprehensive income:                        |  |                                 |        |   |                              |   |       |      |  |   |        |   |  |   |       | 
|Change in unrealized loss on marketable securities |  |                                 | 49     |   |                              |   | 1,491 |      |  |   | 134    |   |  |   | 2,751 | 
|                                                   |  |                                 |        |   |                              |   |       |      |  |   |        |   |  |   |       | 
|Total comprehensive income                         |  | $                               | (4,486 | ) |                              | $ | 1,704 |      |  | $ | (4,330 | ) |  | $ | 3,954 | 
|                                                   |  |                                 |        |   |                              |   |       |      |  |   |        |   |  |   |       | 

(6) Financial Instruments

Cash and cash equivalents

Cash and cash equivalents are comprised of cash and highly
liquid investments with remaining maturities of 90 days or less at the date of purchase. Cash equivalents are comprised of short-term investments with an investment rating of any two of the following: Moodys of A-2 or higher, or by
Standard & Poors of A1 or higher. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extent the amounts recorded on the balance sheet are in excess of
amounts that are insured by the FDIC.

Investments

The Companys investment policy is consistent with the definition of available-for-sale securities. From time to time, the Company may sell certain securities but the objectives are generally not to
generate profits on short-term differences in price. The following tables show the Companys available-for-sale investments within investments and cash and cash equivalents in the condensed consolidated balance sheet (in thousands):



|                         |  |                                                |        |  |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 
|------------------------ |  | ---------------------------------------------- | ------ |  | ---------- | - | ----- | ---------- |  | - | ---------------------- |  |  | ---------------------- | ------ |  |  | - | ------ | 
|                         |  | Expected maturity for the year ending June 30, |        |  | Cost Value |   |       | Fair Value | 
|                         |  | 2011                                           |        |  | 2012       |   |       | Thereafter |  |   | December 31,2010 Total |  |  | December 31,2010 Total |       
|U.S. Government Agencies |  | $                                              | 14,374 |  |            | $ | 2,841 |            |  | $ | 299                    |  |  | $                      | 17,514 |  |  | $ | 17,521 | 
|Commercial Paper         |  |                                                | 10,195 |  |            |   | 998   |            |  |   |                       |  |  |                        | 11,193 |  |  |   | 11,194 | 
|Corporate Bonds          |  |                                                | 15,105 |  |            |   | 6,068 |            |  |   | 2,301                  |  |  |                        | 23,474 |  |  |   | 23,608 | 
|Auction Rate Securities  |  |                                                |       |  |            |   |      |            |  |   | 11,069                 |  |  |                        | 11,069 |  |  |   | 9,279  | 
|                         |  |                                                |        |  |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 
|                         |  | $                                              | 39,674 |  |            | $ | 9,907 |            |  | $ | 13,669                 |  |  | $                      | 63,250 |  |  | $ | 61,602 | 
|                         |  |                                                |        |  |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 



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##### Table of Contents

|                         |  |                   |        |  |                 |   |     |                  |  |   |                     |   |  |   |        | 
|------------------------ |  | ----------------- | ------ |  | --------------- | - | --- | ---------------- |  | - | ------------------- | - |  | - | ------ | 
|                         |  | December 31, 2010 |       
|                         |  | Amortizedcost     |        |  | Unrealizedgains |   |     | Unrealizedlosses |  |   | Estimatedfair value |  
|U.S. Government Agencies |  | $                 | 17,514 |  |                 | $ | 8   |                  |  | $ | (1                  | ) |  | $ | 17,521 | 
|Commercial Paper         |  |                   | 11,193 |  |                 |   | 1   |                  |  |   |                    |   |  |   | 11,194 | 
|Corporate Bonds          |  |                   | 23,474 |  |                 |   | 148 |                  |  |   | (14                 | ) |  |   | 23,608 | 
|Auction Rate Securities  |  |                   | 11,069 |  |                 |   |    |                  |  |   | (1,790              | ) |  |   | 9,279  | 
|                         |  |                   |        |  |                 |   |     |                  |  |   |                     |   |  |   |        | 
|                         |  | $                 | 63,250 |  |                 | $ | 157 |                  |  | $ | (1,805              | ) |  | $ | 61,602 | 
|                         |  |                   |        |  |                 |   |     |                  |  |   |                     |   |  |   |        | 
|                         | 
|                         |  | June 30, 2010     |       
|                         |  | Amortizedcost     |        |  | Unrealizedgains |   |     | Unrealizedlosses |  |   | Estimatedfair value |  
|U.S. Government Agencies |  | $                 | 18,094 |  |                 | $ | 15  |                  |  | $ | (3                  | ) |  | $ | 18,106 | 
|Commercial Paper         |  |                   | 8,094  |  |                 |   |    |                  |  |   |                    |   |  |   | 8,094  | 
|Certificates of Deposit  |  |                   | 1,930  |  |                 |   |    |                  |  |   |                    |   |  |   | 1,930  | 
|Corporate Bonds          |  |                   | 22,613 |  |                 |   | 81  |                  |  |   | (47                 | ) |  |   | 22,647 | 
|Auction Rate Securities  |  |                   | 11,069 |  |                 |   |    |                  |  |   | (1,790              | ) |  |   | 9,279  | 
|                         |  |                   |        |  |                 |   |     |                  |  |   |                     |   |  |   |        | 
|                         |  | $                 | 61,800 |  |                 | $ | 96  |                  |  | $ | (1,840              | ) |  | $ | 60,056 | 
|                         |  |                   |        |  |                 |   |     |                  |  |   |                     |   |  |   |        | 

Temporary and Other-Than-Temporary Impairments On Available-For-Sale Securities

The Company reviews its investments in an unrealized loss position as of each balance sheet date for impairment in accordance with guidance issued by the
FASB and the SEC in order to determine whether an impairment is temporary or other-than-temporary (OTTI). When an unrealized loss on a security is considered temporary, the Company records the unrealized loss in other comprehensive
income (loss) and not in earnings.

An OTTI occurs when it is anticipated that the amortized cost will not be recovered for a security in an
unrealized loss position. In such situations, the amount of OTTI recorded in earnings is the entire difference between the securitys amortized cost and its fair value when either: (i) the Company has the intent to sell the security; or
(ii) it is more likely than not that the Company will be required to sell the security before recovery of the decline in fair value below amortized cost. If neither of these two conditions exists, only the difference between the amortized cost
basis of the security and the present value of projected future cash flows expected to be collected is recognized as an OTTI charge in earnings (credit loss). If the fair value is less than the present value of projected future cash
flows expected to be collected, this portion of OTTI relates to other-than credit factors (noncredit loss) and is recorded as other comprehensive income (loss) within stockholders equity.

During the six months ended December 31, 2010 there were no OTTI charges in earnings. During the six months ended December 31, 2009, the
Company had OTTI charges in earnings of $1.7 million recorded in other income (expense), net.



16



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##### Table of Contents

The following tables show the gross unrealized losses and fair value of the Companys investments with
unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):



|                         |  |                         |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  
|------------------------ |  | ----------------------- | ------ |  | -------------------- | - | --- | ---------- |  | - | -------------- |  |  | ---------- | ------ | - | -------------- | - | ------ |  |  | - | ------ | -
|                         |  | As of December 31, 2010 |       
|                         |  | Less Than 12 Months     |        |  | 12 Months or Greater |   |     | Total      | 
|                         |  | Fair Value              |        |  | UnrealizedLoss       |   |     | Fair Value |  |   | UnrealizedLoss |  |  | Fair Value |        |   | UnrealizedLoss |  
|Corporate Bonds          |  | $                       | 14,578 |  |                      | $ | (14 | )          |  | $ |               |  |  | $          |       |   |                | $ | 14,578 |  |  | $ | (14    | )
|U.S. Government Agencies |  |                         | 8,451  |  |                      |   | (1  | )          |  |   |               |  |  |            |       |   |                |   | 8,451  |  |  |   | (1     | )
|Auction Rate Securities  |  |                         |       |  |                      |   |    |            |  |   | 9,279          |  |  |            | (1,790 | ) |                |   | 9,279  |  |  |   | (1,790 | )
|                         |  |                         |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  
|                         |  | $                       | 23,029 |  |                      | $ | (15 | )          |  | $ | 9,279          |  |  | $          | (1,790 | ) |                | $ | 32,308 |  |  | $ | (1,805 | )
|                         |  |                         |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  

As of December 31, 2010, the Company had 28 investments in an unrealized loss position.



|                         |  |                     |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  
|------------------------ |  | ------------------- | ------ |  | -------------------- | - | --- | ---------- |  | - | -------------- |  |  | ---------- | ------ | - | -------------- | - | ------ |  |  | - | ------ | -
|                         |  | As of June 30, 2010 |       
|                         |  | Less Than 12 Months |        |  | 12 Months or Greater |   |     | Total      | 
|                         |  | Fair Value          |        |  | UnrealizedLoss       |   |     | Fair Value |  |   | UnrealizedLoss |  |  | Fair Value |        |   | UnrealizedLoss |  
|U.S. Government Agencies |  | $                   | 3,803  |  |                      | $ | (3  | )          |  | $ |               |  |  | $          |       |   |                | $ | 3,803  |  |  | $ | (3     | )
|Corporate Bonds          |  |                     | 16,311 |  |                      |   | (43 | )          |  |   | 1,214          |  |  |            | (4     | ) |                |   | 17,525 |  |  |   | (47    | )
|Auction Rate Securities  |  |                     |       |  |                      |   |    |            |  |   | 9,279          |  |  |            | (1,790 | ) |                |   | 9,279  |  |  |   | (1,790 | )
|                         |  |                     |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  
|                         |  | $                   | 20,114 |  |                      | $ | (46 | )          |  | $ | 10,493         |  |  | $          | (1,794 | ) |                | $ | 30,607 |  |  | $ | (1,840 | )
|                         |  |                     |        |  |                      |   |     |            |  |   |                |  |  |            |        |   |                |   |        |  |  |   |        |  

As of June 30, 2010, the Company had 32 investments in an unrealized loss position.

The table below presents activity related to the credit loss component recognized in earnings (in thousands):



|                                                                 |  |   |        |  
|---------------------------------------------------------------- |  | - | ------ | -
|Cumulative OTTI credit losses recognized as of June 30, 2010     |  | $ | (7,791 | )
|OTTI charges related to securities with previous credit losses   |  |   |       |  
|                                                                 |  |   |        |  
|Cumulative OTTI credit losses recognized as of December 31, 2010 |  | $ | (7,791 | )
|                                                                 |  |   |        |  

The redemption of an enhanced cash money market fund resulted in proceeds of $1.4 million and the recognition of realized
gains of $0.1 million in the first quarter of fiscal 2010.

In December 2009, one of the ARS was tendered and resulted in proceeds of $2.3
million and recognition of realized loss of $0.4 million in the second quarter of fiscal 2010. In December 2009, the Company had the intent to sell three of the ARS investments and in January 2010, four of the ARS were sold. The sale of
these ARS resulted in proceeds of $3.0 million and recognition of an OTTI charge of $0.2 million in the second quarter of fiscal 2010.

There
were no realized gains or realized losses recorded during the six months ended December 31, 2010 from the sales of available-for-sale securities. Realized gains and losses are included in other income (expense), net in the condensed
consolidated statement of operations.

Fair Value Measurement

The FASB has established a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level. The
following are the hierarchical levels of inputs to measure fair value:



| |  |  | Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



17



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##### Table of Contents

| |  |  | Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or
liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Unobservable inputs reflecting the Companys own assumptions incorporated in valuation techniques used to determine fair value. These
assumptions are required to be consistent with market participant assumptions that are reasonably available.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following
table summarizes the Companys financial assets and liabilities measured at fair value on a recurring basis, by level within the fair value hierarchy (in thousands):



|                         |  |                                                              |        |  |                                              |   |     |                                          |  |   |       |  |  |   |         | 
|------------------------ |  | ------------------------------------------------------------ | ------ |  | -------------------------------------------- | - | --- | ---------------------------------------- |  | - | ----- |  |  | - | ------- | 
|                         |  | Fair value of securities as of December 31, 2010             |       
|                         |  | Quoted Prices in ActiveMarkets for IdenticalAssets (Level 1) |        |  | Significant 
OtherObservableInputs (Level 2) |   |     | SignificantUnobservableInputs 
(Level 3) |  |   | Total | 
|Money Market Funds       |  | $                                                            | 45,373 |  |                                              | $ |    |                                          |  | $ |      |  |  | $ | 45,373  | 
|Certificates of Deposit  |  |                                                              |       |  |                                              |   | 141 |                                          |  |   |      |  |  |   | 141     | 
|Corporate Bonds          |  |                                                              | 23,306 |  |                                              |   |    |                                          |  |   | 302   |  |  |   | 23,608  | 
|Commercial Paper         |  |                                                              | 11,194 |  |                                              |   |    |                                          |  |   |      |  |  |   | 11,194  | 
|U.S. Government Agencies |  |                                                              | 17,521 |  |                                              |   |    |                                          |  |   |      |  |  |   | 17,521  | 
|Auction Rate Securities  |  |                                                              |       |  |                                              |   |    |                                          |  |   | 9,279 |  |  |   | 9,279   | 
|                         |  |                                                              |        |  |                                              |   |     |                                          |  |   |       |  |  |   |         | 
|                         |  | $                                                            | 97,394 |  |                                              | $ | 141 |                                          |  | $ | 9,581 |  |  | $ | 107,116 | 
|                         |  |                                                              |        |  |                                              |   |     |                                          |  |   |       |  |  |   |         | 

The table above includes $0.1 million of restricted cash related to the Level 2 Certificates of Deposit.

Auction Rate Securities

As of
December 31, 2010, $9.3 million in auction rate securities, recorded in long-term investments on the condensed consolidated balance sheet, were considered illiquid based upon a lack of auction results beginning in fiscal 2008. The Company
estimated the fair value of these auction rate securities based on probabilities of potential scenarios: (1) successful auction/early redemption; (2) failing auctions until maturity; or (3) default and the estimated cash flows for
each scenario. Other factors were considered, such as the value of the investments held by the issuer and the financial condition and credit ratings of the issuer, insurers, and parent companies, as applicable.

These ARS were issued by four different entities and are held by two investment firms on the Companys behalf. Three of these securities are
Triple X structured obligations of special purpose reinsurance entities associated with life insurance companies. One ARS is related to federal education student loans programs. As of December 31, 2010, these instruments were all
rated A, A-, and BBB by Standard and Poors and Aaa by Moodys and all of the $12.5 million par value of these illiquid investments is insured against defaults of principal and interest by third party insurance companies.

The Companys ARS were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended
December 31, 2010. The fair value was $9.3 million as of December 31, 2010 and June 30, 2010.



18



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##### Table of Contents

(7) Borrowings

Credit Agreement

On January 23, 2009, the Company and Silicon Valley Bank entered
into a secured revolving credit facility for up to $40.0 million. On January 20, 2010, the Company entered into two amendments to the $40.0 million revolving credit facility with Silicon Valley Bank to modify the definition of EBITDA.
Additionally, on April 14, 2010, the Company entered into another amendment to the $40.0 million revolving credit facility with Silicon Valley Bank to extend the maturity date to January 23, 2012, as well as to modify the commitment fee
and several definitions, including EBITDA, Borrowing Base, and Investments. The Company may borrow, repay and re-borrow under the revolving credit facility at any time up to the maturity date. As of December 31, 2010, the revolving credit
facility bears interest at 4% per annum. Monthly, the Company is required to pay a fee of 0.03% on any undrawn amounts under the revolving credit facility. For each letter of credit issued, the Company is required to pay 0.75% per annum on
the face amount of the letter of credit. Annually, the Company is required to pay a commitment fee to the lender. In January 2010, the Company paid a $0.2 million commitment fee to the lender. In January 2011, the Company paid a $0.1 million
commitment fee to the lender.

As of December 31, 2010, the Company had letters of credit outstanding against the revolving credit
facility totaling $17.9 million, reducing the available borrowings on the revolving credit facility. The revolving credit facility requires a monthly borrowing base calculation to determine the amount of the revolving credit facility available
for the Company to borrow (Borrowing Base). The Borrowing Base calculation is $30.0 million plus 75% of accounts receivables defined as eligible in the credit agreement. As of December 31, 2010, the Borrowing Base was
$34.6 million and the total available for the Company to borrow on the revolving credit facility was $16.7 million, which is the difference between the Borrowing Base calculation of $34.6 million and the amount of outstanding letters of credit
amount of $17.9 million.

The revolving credit line is secured by a blanket lien on all of the Companys assets and contains certain
financial and reporting covenants customary to these types of credit facilities agreements which the Company is required to satisfy as a condition of the agreement. In particular, the revolving credit facility requires that the Company meet certain
minimum four quarter EBITDA amounts, as well as meet a minimum monthly liquidity ratio. In addition, the revolving credit facility requires the Company to provide to the bank annual financial projections, promptly report any material legal actions,
and timely pay material taxes and file all required tax returns and reports. Further, without the banks consent, the Company cannot take certain material actions, such as change any material line of business, sell the Companys business,
acquire other entities, incur liens, make capital expenditures beyond a certain threshold, or engage in transactions with affiliates. As of December 31, 2010, the Company was not in compliance with the required minimum four quarter EBITDA
covenant and subsequently received a waiver from Silicon Valley Bank for the EBITDA covenant requirement as of December 31, 2010. There can be no guarantee that Silicon Valley Bank will issue another waiver in the future, if needed.

(8) Commitments and Contingencies

Litigation

IPO securities class action

On November 5, 2001, a securities fraud class action complaint was filed in the United States District Court for the Southern District of New York.
In re Openwave Systems Inc. Initial Public Offering Securities Litigation, Civ. No. 01-9744 (SAS) (S.D.N.Y.), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS) (S.D.N.Y.). It is brought purportedly on behalf of all
persons who purchased shares of the Companys common stock from June 11, 1999 through December 6, 2000. The defendants are the Company and five of its present or former officers (the Openwave Defendants), and several
investment banking firms that served as underwriters of the Companys initial public offering and



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secondary public offering. Three of the individual defendants were dismissed without prejudice, subject to a tolling of the statute of limitations. The complaint alleges liability under Sections
11 and 15 of the Securities Act of 1933 (the Securities Act) and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the Exchange Act), on the grounds that the registration statements for the offerings did
not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had arranged for certain customers to
purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued by Credit Suisse First Boston, Hambrecht & Quist, Robertson Stephens, and Piper Jaffray.
No specific damages are claimed. Similar allegations were made in over 300 other lawsuits challenging public offerings conducted in 1999 and 2000, and the cases were consolidated for pretrial purposes.

On April 2, 2009, the parties in all the lawsuits submitted a settlement for the Courts approval. Under the settlement, the Openwave
Defendants would not be required to make any cash payment. On October 6, 2009, the Court approved the settlement, under which the Openwave Defendants are not required to contribute any cash. Subsequently, the Court entered a judgment
on the settlement. Several notices of appeal have been filed by putative class members, challenging the settlement and the judgment. The Company believes a loss is not probable or reasonably estimable. Therefore no amount has been accrued
as of December 31, 2010.

Simmonds v. Credit Suisse Group, et al.,

On October 3, 2007, Vanessa Simmonds, a purported stockholder of the Company, filed suit in the U.S. District Court for the Western District of Washington against Credit Suisse Group, Bank of America
Corporation, and JPMorgan Chase & Co., the lead underwriters of the Companys initial public offering in June 1999, alleging violations of Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b). The
complaint seeks to recover from the lead underwriters any short-swing profits obtained by them in violation of Section 16(b). The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no
relief from the Company. Simmonds filed an Amended Complaint on February 25, 2008 (the Amended Complaint), naming as defendants Credit Suisse Securities (USA), Robertson Stephens, Inc., J.P. Morgan Securities, Inc., and again naming
Bank of America Corporation. The Amended Complaint asserts substantially similar claims as those set forth in the initial complaint. On July 25, 2008, 29 issuers filed the Issuer Defendants Joint Motion to Dismiss. Underwriter
Defendants also filed a Joint Motion to Dismiss on July 25, 2008. Plaintiff filed oppositions to both motions on September 8, 2008. All replies in support of the motions to dismiss were filed on October 23, 2008. The Company
joined the Issuer Defendants Joint Motion to Dismiss on December 1, 2008.

On March 12, 2009, the Court granted the Issuer
Defendants Joint Motion to Dismiss, dismissing the complaint without prejudice on the grounds that the Plaintiff had failed to make an adequate demand on the Company prior to filing her complaint. In its order, the Court stated it would
not permit the Plaintiff to amend her demand letters while pursuing her claims in the litigation. Because the Court dismissed the case on the ground that it lacked subject matter jurisdiction, it did not specifically reach the issue of whether
Plaintiffs claims were barred by the applicable statute of limitations. However, the Court also granted the Underwriters Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding that the cases were
barred by the applicable statute of limitations because the issuers shareholders had notice of the potential claims more than five years prior to filing suit. On April 10, 2009, the Plaintiff filed a Notice of Appeal, and the
underwriters subsequently filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving issuers should have been with prejudice because the claims were untimely under the applicable statute of
limitations. The Plaintiffs



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opening brief on appeal was filed on August 26, 2009; the Issuer and Underwriter Defendants opposition briefs and the Underwriter Defendants brief supporting their
cross-appeals were filed on October 2, 2009; Simmonds reply brief and opposition to the Underwriter Defendants cross-appeals were filed on November 2, 2009; and the Underwriter Defendants reply brief in support
of their cross-appeals was filed on November 17, 2009. On October 5, 2010, the Ninth Circuit Court of Appeals heard oral arguments regarding this matter.

On December 2, 2010, the Ninth Circuit Court of Appeals affirmed the District Courts decision to dismiss the moving issuers cases (including the Companys) on the grounds that
plaintiffs demand letters were insufficient to put the issuers on notice of the claims asserted against them and further ordered that the dismissals be made with prejudice. The Ninth Circuit, however, reversed and remanded the District
Courts decision on the underwriter motion to dismiss as to the claims arising from the non-moving issuers IPOs, finding plaintiffs claims were not time-barred under the applicable statute of limitations. In remanding, the
Ninth Circuit advised the non-moving issuers and underwriters to file in the District Court the same challenges to plaintiffs demand letters that moving issuers had filed.

On December 16, 2010, underwriters filed a petition for panel rehearing and petition for rehearing en banc. Appellant Vanessa Simmonds also filed a petition for rehearing en banc. On January 18,
2011, the Ninth Circuit denied the petition for rehearing and petitions for rehearing en banc. It further ordered that no further petitions for rehearing may be filed.

On January 24, 2011, the underwriters filed a motion to stay the issuance of the Ninth Circuits mandate in the cases involving the non-moving issuers. On January 25, 2011, the Ninth
Circuit granted the underwriters motion and ordered that the mandate in the cases involving the non-moving issuers is stayed for ninety days pending the filing of a petition for writ of certiorari in the United States Supreme Court. On
January 26, 2011, Appellant Vanessa Simmonds moved to join the underwriters motion and requested the Ninth Circuit stay the mandate in all cases. On January 26, 2011, the Ninth Circuit granted Appellants motion and ruled that
the mandate in all cases (including the Companys and other moving issuers) is stayed for ninety days pending Appellants filing of a petition for writ of certiorari in the United States Supreme Court.

No amount has been accrued as of December 31, 2010, as a loss is not considered probable or reasonably estimable.

From time to time, the Company may be involved in litigation or other legal proceedings, including those noted above, relating to or arising out of its
day-to-day operations or otherwise. Litigation is inherently uncertain, and the Company could experience unfavorable rulings. Should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its
financial condition, results of operations, cash flows or on its business for the period in which the ruling occurs and/or in future periods.

Indemnification claims

The
Companys software license and services agreements generally include a limited indemnification provision for claims from third parties relating to the Companys intellectual property. As of December 31, 2010, no amount is accrued for
indemnifications as there were no existing claims where a loss is considered probable. Historically, costs related to these indemnification provisions have been infrequent and the Company is unable to estimate the maximum potential impact of these
indemnification provisions on its future results of operations.



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(9) Restructuring and Other Related Costs

As a result of the Companys change in strategy and its desire to improve its cost structure, the Company announced a restructuring plan during fiscal year 2010, and various other restructurings in
fiscal years 2002 through 2009.

The Company implemented the FY2010 Restructuring to consolidate the Companys resources, primarily in
development, and improve operating efficiencies. As such, during the three months ended December 31, 2009, the Company incurred approximately $0.8 million in pre-tax restructuring and related charges associated with the FY2010
Restructurings employee termination benefits and $0.2 million in accelerated depreciation on fixed assets associated with a facility identified for restructuring. During the third and fourth quarters of fiscal 2010, the Company recognized $1.3
million in facilities charges associated with a facility the Company exited during the year as a result of the FY2010 Restructuring. The lease payments will be paid over the term of the remaining lease. Of the remaining $1.1 million facilities
related accrual, the Company expects to pay $0.4 million through June 30, 2011 and $0.7 million from July 2011 through January 2014.

The
following table sets forth the restructuring liability activity from June 30, 2010 through December 31, 2010 (in thousands):



|                                     |  |                |        |   |               |   |      |               |  |   |               |   |  |               |     |   |               |   |       |         |  |   |     |   |  |   |        |  
|------------------------------------ |  | -------------- | ------ | - | ------------- | - | ---- | ------------- |  | - | ------------- | - |  | ------------- | --- | - | ------------- | - | ----- | ------- |  | - | --- | - |  | - | ------ | -
|                                     |  | FY 02 to FY 06 |        |   | FY 08         |   |      | FY 09         |  |   | FY 09         |   |  | FY 10         |     |   | FY 10         |   |       |         | 
|                                     |  | Restructuring  |        |   | Restructuring |   |      | Restructuring |  |   | Restructuring |   |  | Restructuring |     |   | Restructuring |   |       |         | 
|                                     |  | Plans          |        |   | Plan          |   |      | Plan          |  |   | Plan          |   |  | Plan          |     |   | Plan          |   |       | Total   | 
|                                     |  | Facility       |        |   | Facility      |   |      | Facility      |  |   | Severance     |   |  | Facility      |     |   | Severance     |   |       | Accrual | 
|Accrual balances as of June 30, 2010 |  | $              | 33,814 |   |               | $ | 188  |               |  | $ | 3,655         |   |  | $             | 65  |   |               | $ | 1,110 |         |  | $ | 116 |   |  | $ | 38,948 |  
|New charges                          |  |                |       |   |               |   | 8    |               |  |   | 423           |   |  |               |     |   |               |   | (30   | )       |  |   |    |   |  |   | 401    |  
|Accretion expense                    |  |                | 289    |   |               |   |     |               |  |   | 21            |   |  |               |    |   |               |   | 5     |         |  |   |    |   |  |   | 315    |  
|Cash paid, net of sublease income    |  |                | (2,954 | ) |               |   |     |               |  |   | (561          | ) |  |               | (8  | ) |               |   | (172  | )       |  |   | (94 | ) |  |   | (3,789 | )
|                                     |  |                |        |   |               |   |      |               |  |   |               |   |  |               |     |   |               |   |       |         |  |   |     |   |  |   |        |  
|Balance as of September 30, 2010     |  | $              | 31,149 |   |               | $ | 196  |               |  | $ | 3,538         |   |  | $             | 57  |   |               | $ | 913   |         |  | $ | 22  |   |  | $ | 35,875 |  
|                                     |  |                |        |   |               |   |      |               |  |   |               |   |  |               |     |   |               |   |       |         |  |   |     |   |  |   |        |  
|New charges                          |  |                | 2      |   |               |   |     |               |  |   | 262           |   |  |               |    |   |               |   | 313   |         |  |   | (18 | ) |  |   | 559    |  
|Accretion expense                    |  |                | 264    |   |               |   |     |               |  |   | 21            |   |  |               |    |   |               |   | 5     |         |  |   |    |   |  |   | 290    |  
|Cash paid, net of sublease income    |  |                | (2,954 | ) |               |   | (196 | )             |  |   | (552          | ) |  |               | (44 | ) |               |   | (169  | )       |  |   | (4  | ) |  |   | (3,919 | )
|                                     |  |                |        |   |               |   |      |               |  |   |               |   |  |               |     |   |               |   |       |         |  |   |     |   |  |   |        |  
|Balance as of December 31, 2010      |  | $              | 28,461 |   |               | $ |     |               |  | $ | 3,269         |   |  | $             | 13  |   |               | $ | 1,062 |         |  | $ |    |   |  | $ | 32,805 |  
|                                     |  |                |        |   |               |   |      |               |  |   |               |   |  |               |     |   |               |   |       |         |  |   |     |   |  |   |        |  

As of December 31, 2010, the Company has sublease contracts in place for all but one of its exited facilities, which
provides for approximately $17.1 million of future sublease income from third parties out of total estimated sublease income of $18.4 million. Future minimum lease payments under non-cancelable operating leases, associated with exited facilities,
with terms in excess of one year and future contractual sublease income were as follows at December 31, 2010 (in thousands):



|                     |  |                            |        |  |                         |   |        |                           |  |   |                                 |   |  |   |        | 
|-------------------- |  | -------------------------- | ------ |  | ----------------------- | - | ------ | ------------------------- |  | - | ------------------------------- | - |  | - | ------ | 
|Year ending
June 30, |  | ContractualCash Obligation |        |  | EstimatedSubleaseIncome |   |        | ContractualSubleaseIncome |  |   | EstimatedFuture NetCash Outflow |  
|2011 (remaining)     |  | $                          | 11,026 |  |                         | $ | (56    | )                         |  | $ | (3,467                          | ) |  | $ | 7,503  | 
|2012                 |  |                            | 21,103 |  |                         |   | (319   | )                         |  |   | (7,115                          | ) |  |   | 13,669 | 
|2013                 |  |                            | 18,344 |  |                         |   | (542   | )                         |  |   | (5,605                          | ) |  |   | 12,197 | 
|2014                 |  |                            | 1,629  |  |                         |   | (325   | )                         |  |   | (666                            | ) |  |   | 638    | 
|2015                 |  |                            | 500    |  |                         |   |       |                           |  |   | (280                            | ) |  |   | 220    | 
|                     |  |                            |        |  |                         |   |        |                           |  |   |                                 |   |  |   |        | 
|                     |  | $                          | 52,602 |  |                         | $ | (1,242 | )                         |  | $ | (17,133                         | ) |  | $ | 34,227 | 
|                     |  |                            |        |  |                         |   |        |                           |  |   |                                 |   |  |   |        | 

Our restructuring liabilities are recorded at net present value. Over time, the net present value increases to equal the
amount of the net future cash payments, removing the need for time-based discounting. Accretion expense reflects the increase in the net present value during the relevant period. Future accretion expense on the restructured facility obligations
above is $1.4 million, which will be recorded as restructuring expense over the life of the respective leases.



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(10) Income Taxes

Income tax expense consisted of foreign withholding tax, foreign corporate tax and foreign deferred tax. Both foreign withholding tax and foreign corporate tax fluctuate quarterly based on the product and
geographic mix of the Companys revenue, with a resulting fluctuation in the Companys quarterly effective tax rate.

In light of
the Companys history of operating losses, the Company recorded a full valuation allowance for its U.S. federal and state deferred tax assets. The Company intends to maintain this valuation allowance until there is sufficient evidence to
conclude that it is more likely than not that the federal and state deferred tax assets will be realized. As of December 31, 2010, the Company has net foreign deferred tax assets recorded of approximately $2.7 million, which consists of $2.8
million of realizable deferred tax assets in selected countries based upon the Companys conclusion that it is more likely than not that these foreign subsidiaries will earn future taxable profit through transfer pricing; this is offset by $0.1
million of deferred tax liabilities recorded with respect to acquisitions for which the amortization expense of acquired intangibles is not deductible for tax purposes.

The unrecognized tax benefits activity is as follows (in thousands):



|                                                             |  |   |       |  
|------------------------------------------------------------ |  | - | ----- | -
|Balance as of July 1, 2010                                   |  | $ | 4,173 |  
|Additions based on tax positions related to the current year |  |   | 107   |  
|Additions based on tax positions related to prior years      |  |   | 92    |  
|Lapse of statute of limitations                              |  |   | (241  | )
|Foreign currency fluctuations                                |  |   | 81    |  
|                                                             |  |   |       |  
|Balance as of December 31, 2010                              |  | $ | 4,212 |  
|                                                             |  |   |       |  

The total amount of gross unrecognized tax benefits was $4.2 million as of December 31, 2010. Of this $4.2 million,
$1.0 million would affect the effective tax rate if realized, and $3.2 million would be recorded as net income from discontinued operations if realized. It is reasonably possible that the Companys existing liabilities for uncertain tax
benefits may significantly decrease due to the expirations of statutes of limitation. Up to $3.7 million of the unrecognized tax benefits are subject to such expiration within the next twelve months. Conversely, it is reasonably possible that the
Companys existing liabilities for uncertain tax benefits may significantly increase due to the progression of audits in process. The Company cannot reasonably estimate a range of potential increases, but does not anticipate a material
increase.

The Company has elected to include interest and penalties as a component of tax expense. Accrued interest and penalties was $0.6
million as of December 31, 2010 and $0.5 million as of June 30, 2010.

The Company files U.S. federal, U.S. state and foreign tax
returns. For federal returns, the Company is generally no longer subject to examinations for years prior to the fiscal year ended June 30, 2008. Because of net operating loss carryforwards, substantially all of the Companys tax years,
from fiscal year 1995 through fiscal year 2007, remain open to state tax examinations with the exception of Alabama, Massachusetts and Texas. Most of the Companys foreign jurisdictions have three or four tax years open to examinations at any
point in time.



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(11) Subsequent Events

On January 28, 2011, the Company committed to a restructuring plan to consolidate the Companys resources, primarily in development, and improve operating efficiencies (the Restructuring
Plan). The Restructuring Plan contemplates an approximate 7% reduction in workforce. The Company expects to incur approximately $2.0 million in restructuring charges related to employee severance arrangements for employees impacted by the
Restructuring Plan during the three months ending March 31, 2011, which will comprise future cash expenditures.

The Company expects to
substantially complete the activities related to the Restructuring Plan by June 30, 2011. The associated charges are expected to be recorded in the Companys third quarter results for fiscal year 2011.

The activities related to the Restructuring Plan, and other planned efficiencies, are expected to result in approximately $12.0 million in annual costs
savings.

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

Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based upon current expectations and beliefs of management and are subject to risks and uncertainties that may cause actual events, results or
performance to differ materially from those indicated by these statements. Words such as anticipates, expects, intends, plans, believes, seeks, estimates and similar
expressions identify forward-looking statements. Forward-looking statements include, among other things, statements regarding our ability to attract and retain customers, our ability to obtain and expand market acceptance for our products and
services, our expectations concerning our future financial performance and potential or expected competition and growth in our markets and markets in which we expect to compete, our business strategy, projected plans and objectives, anticipated cost
savings from restructurings, our ability to realize anticipated benefits of our acquisitions on a timely basis, our estimates with respect to future operating results, including, without limitation, earnings, cash flow and revenue and any statements
of assumptions underlying the foregoing. These forward-looking statements are only predictions. Risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements include the
limited number of potential customers, the highly competitive market for our products and services, technological changes and developments, potential delays in software development and technical difficulties that may be encountered in the
development or use of our software, patent litigation, our ability to retain management and key personnel, and the other risks discussed under the subheading Risk Factors in Item 1A, Part II of this Current Report on Form 10-Q, as
well as elsewhere in this report. The occurrence of the events described in Risk Factors could harm our business, results of operations and financial condition. These forward-looking statements are made as of the date of this Quarterly
Report on Form 10-Q and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements except as required by law. Readers should carefully review the risk factors described in this section
and in Risk Factors below and other risks identified from time to time in the Openwaves public statements and reports filed with the Securities and Exchange Commission.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, which was filed with the Securities and Exchange Commission on September 7, 2010,
and the unaudited condensed consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q.



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Overview of Our Business and Products

Openwave is a global software innovator delivering context-aware mediation and messaging solutions that enable communication service providers and the broader ecosystem to create and deliver smarter
services. Over the past few years, we have streamlined our business by selling non-core operations such as our prior Content product line, referred to by the entity name Musiwave, in December 2007 and our prior Client operations which
provided software for the mobile handset, in June 2008. In fiscal 2009 and fiscal 2010, we also consolidated the number of engineering facilities in order to improve efficiency, coordination, quality, and time-to-market. Although the
divestitures of discontinued operations and the cautious spending environment have reduced our revenues over the last year, we intend to grow our business by introducing new products to market, expanding our customer base in new regions, adding a
new tier of service provider customers, and monetizing our portfolio of intellectual property. Our success or failure in these endeavors could have a material effect on our financial condition.

We see demand building for mobile data as traditional voice revenues continue to flatten. This demand for data is fueling the growth of the mobile web,
with application stores, social networking and video leading the way. The continuous introduction of new devices such as smartphones, tablets and other mobile internet-capable devices encourages users to consume more data. The increase in demand for
mobile data may not result in an immediate or direct impact on our financial results, as we are dependent upon how and when the mobile carriers respond to these trends and how, whether, and when they invest in the required infrastructure.
Additionally, the sales cycle generally lasts several quarters, and often can be more than one year.

The key performance measures that we use
in assessing our business include bookings, backlog, gross margins, operating cash flows and disciplined management of operating expenses. Our goal is to maintain, over time, a book-to-bill ratio of 1:1 or better. This in turn builds backlog and,
therefore, predictability of future revenues.

Bookings comprise the aggregate value of all new arrangements executed during a period. We
define backlog as the aggregate value of all existing arrangements less revenue recognized to date under these arrangements. For the second quarter of fiscal 2011, bookings were approximately $40.2 million, down $6.3 million, or 14%, from
approximately $46.5 million for the second quarter of fiscal 2010. Backlog was approximately $174.0 million as of December 31, 2010, down from $188.5 million as of December 31, 2009. Many of our bookings include the ability for customers
to cancel services or maintenance. Cancellations of bookings from prior quarters, if any, are treated as a reduction in backlog. For example, during the second fiscal quarter of 2011, our largest booking was the renewal of maintenance for several
products for three years, totaling $25.4 million. After the first year, the customer may terminate the renewal for convenience. While we do not expect any material terminations from this booking, it is possible for the customer to do so without
penalty. Support or hosting agreements that cover multiple years can contribute to the variability in the quarterly amount of bookings achieved, as well as the timing of revenue, billings and collections from those bookings. Generally, revenue
resulting from bookings are recognized and collected over the subsequent 12 to 18 months, in accordance with our revenue recognition policy, unless the booking covers multiple years. Bookings related to royalty or usage arrangements are recognized
concurrently with the related revenue and therefore do not impact backlog. Bookings that span multiple years are generally recognized, billed and collected over the same period. Since 63% of our bookings in the second quarter of fiscal 2011 related
to the $25.4 million booking discussed above, this contributed to reduced accounts receivable as of December 31, 2010. As a result of this reduction, we expect collections to be lower than usual in the third quarter of fiscal 2011. We expect
the mix of bookings among license, services and maintenance to return to more traditional proportions for the balance of the fiscal year.



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The table below presents our gross margin on a GAAP basis and provides a reconciliation to the key metric
monitored by management. Because amortization of intangibles and stock-based compensation are non-cash items, management excludes them from the metric in order to compare Openwave with other companies, as many other companies also exclude these
items.



|                                                         |  |                                |        |  |                        |  |      |   |  |   |        |  |  |  |      |  
|-------------------------------------------------------- |  | ------------------------------ | ------ |  | ---------------------- |  | ---- | - |  | - | ------ |  |  |  | ---- | -
|                                                         |  | Three Months EndedDecember
31, |       
|                                                         |  | 2010                           |        |  | 2009                   | 
|                                                         |  | (dollars in thousands)         |        |  | (dollars in thousands) | 
|Gross Margin                                             |  | $                              | 23,855 |  |                        |  | 59.8 | % |  | $ | 29,334 |  |  |  | 59.0 | %
|Amortization of intangibles included in Cost of revenues |  |                                | 409    |  |                        |  | 1.0  | % |  |   | 420    |  |  |  | 0.8  | %
|Stock based compensation included in Cost of revenues    |  |                                | 86     |  |                        |  | 0.2  | % |  |   | 68     |  |  |  | 0.2  | %
|                                                         |  |                                |        |  |                        |  |      |   |  |   |        |  |  |  |      |  
|Management Metric                                        |  | $                              | 24,350 |  |                        |  | 61.0 | % |  | $ | 29,822 |  |  |  | 60.0 | %
|                                                         |  |                                |        |  |                        |  |      |   |  |   |        |  |  |  |      |  

We also strive to maintain gross margins excluding the impact of amortization of intangibles and stock based compensation of
approximately 60% or better. However, our gross margin will continue to fluctuate from quarter to quarter, depending on the mix of software, services, patent licensing and hardware delivered during the quarter, which is subject to our
customers schedules and demands. During the three months ended December 31, 2010, our overall gross margin excluding the impact of amortization of intangibles and stock based compensation was 61.0%, compared to 60.0% in the three months
ended December 31, 2009.

Since its inception in 1994, Openwave and its predecessor companies have invested in and patented certain
intellectual property for the mobile internet industry. We have commenced plans to monetize this intellectual property. For example, during the first quarter of fiscal 2011 we licensed certain patents to a competitor which generated $4.0 million in
patent revenue for the period. As we execute our monetization plans, we anticipate the related patent revenue in future periods to be unpredictable and volatile.

Overview of Financial Results During the Three and Six Months Ended December 31, 2010

The following table represents a summary of our operating results from continuing operations for the three and six months ended December 31, 2010
compared with the three and six months ended December 31, 2009 (dollars in thousands):



|                                             |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |      |  
|-------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ---------------- |  |  | ------- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | ---- | -
|                                             |  | Three Months Ended |        |   |         |   |        | Six Months Ended |  |  |         |  
|                                             |  | December 31,       |        |   | Percent |   |        | December 31,     |  |  | Percent |  
|                                             |  | 2010               |        |   | 2009    |   |        | Change           |  |  | 2010    |   |  | 2009 |        |   | Change |  
|                                             |  | (unaudited)        |        |   |         |   |        | (unaudited)      |  |  |         |  
|Revenues                                     |  | $                  | 39,911 |   |         | $ | 49,742 |                  |  |  | -20     | % |  | $    | 81,439 |   |        | $ | 99,584 |   |  |  | -18  | %
|Cost of revenues                             |  |                    | 16,056 |   |         |   | 20,408 |                  |  |  | -21     | % |  |      | 29,534 |   |        |   | 43,147 |   |  |  | -32  | %
|                                             |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |      |  
|Gross profit                                 |  |                    | 23,855 |   |         |   | 29,334 |                  |  |  | -19     | % |  |      | 51,905 |   |        |   | 56,437 |   |  |  | -8   | %
|                                             |  |                    |        |   |         |  
|Operating expenses                           |  |                    | 28,109 |   |         |   | 28,782 |                  |  |  | -2      | % |  |      | 57,680 |   |        |   | 57,704 |   |  |  | 0    | %
|                                             |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |      |  
|Operating income (loss)                      |  |                    | (4,254 | ) |         |   | 552    |                  |  |  | -871    | % |  |      | (5,775 | ) |        |   | (1,267 | ) |  |  | 356  | %
|                                             |  |                    |        |   |         |  
|Interest and other expense, net              |  |                    | 210    |   |         |   | (220   | )                |  |  | -195    | % |  |      | 247    |   |        |   | (1,429 | ) |  |  | -117 | %
|Income tax expense                           |  |                    | 491    |   |         |   | 119    |                  |  |  | 313     | % |  |      | 1,172  |   |        |   | 617    |   |  |  | 90   | %
|                                             |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |      |  
|Net income (loss) from continuing operations |  | $                  | (4,535 | ) |         | $ | 213    |                  |  |  | -2229   | % |  | $    | (6,700 | ) |        | $ | (3,313 | ) |  |  | 102  | %
|                                             |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |      |  

Revenues decreased during the three and six months ended December 31, 2010 compared to the corresponding periods of the
prior year. Revenues during the six months ended December 31, 2010 included $4.0 million in Patent revenue. See discussion of Revenues below under the Summary of Operating Results.

Overall, operating expenses decreased $0.7 million during the three months ended December 31, 2010 compared with the corresponding period of the prior year. This decrease can be primarily attributed
to decreases in general and administrative spending, as discussed in further detail under Summary of Operating Results below. Operating expenses for the six months ended December 31, 2010 remained relatively consistent when compared with the
same period in the prior year due to increases in research and development expenses, offset in part by decreases in general and administrative spending, in the first quarter of fiscal 2011.



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Operating Environment During the Three and Six Months Ended December 31, 2010

Although mobile data services revenues are growing, the average revenue per user, commonly referred to as ARPU, has remained flat over the last several
years for many of Openwaves mobile operator customers. Many operators moved to flat rate mobile data revenue plans which have successfully driven mobile data usage. This increased demand is fueling the dramatic growth of mobile web traffic,
with application stores, social networking and video leading the way. The continuous introduction of new devices (Android-based smartphones, iPhones, tablets and other connected devices) encourages users to consume more
data, driving ever-increasing levels of traffic to mobile networks.

Mobile networks were built and managed on the underlying
assumption of predictable consumption. Even some 3G networks will not be able to handle the expected increase in mobile traffic. Although operators have announced their planned migrations to next-generation 4G networks, upgrades of their
software infrastructure continue to be incremental, with minimal commitment and smaller capacity purchases.

In the infrastructure market
overall, we expect to see continued, but cautious capital equipment spending levels by the operators. We believe that some of the products Openwave and our competitors sell will continue to be viewed by operators as necessary costs that will
maintain, but not grow, monthly ARPU. Other Openwave products and those of our competitors are being viewed as ways to drive additional revenue though innovative ways to monetize the increasing demand for mobile services.

Recent Executive Officer Changes

On
January 31, 2011, the employment of Martin McKendry, Senior Vice President Engineering, terminated with the Company.

Critical
Accounting Policies and Judgments

We believe that there are several accounting policies that are critical to understanding our business
and prospects for our future performance, as these policies affect the reported amounts of revenue and other significant areas that involve managements judgment and estimates. These significant accounting policies are:



| |  |  | Revenue recognition;
| | - |  | --------------------



| |  |  | Allowance for doubtful accounts;
| | - |  | --------------------------------



| |  |  | Impairment assessment of goodwill and identifiable intangible assets;
| | - |  | ---------------------------------------------------------------------



| |  |  | Stock-based compensation;
| | - |  | -------------------------



| |  |  | Valuation of investments; and
| | - |  | -----------------------------



| |  |  | Restructuring-related assessments.
| | - |  | ----------------------------------

Revenue Recognition

With the exception of the adoption of several accounting
pronouncements related to revenue recognition, discussed in Note 1 in the Notes to the condensed consolidated financial statements, there have been no material changes to our critical accounting policies and estimates since our fiscal year end on
June 30, 2010. For further discussion of our critical accounting policies and judgments, please refer to the Notes to our condensed consolidated financial statements included in this Form 10-Q and to our Managements Discussion and
Analysis of Financial Condition and Results of Operations and audited consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.



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During the first quarter of fiscal 2011, we entered into a license agreement with a competitor whereby we
licensed rights to certain of our patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010. As part of our strategy for fiscal 2011
and beyond, we intend to seek monetization opportunities for our intellectual property. This could include licensing our patents as well as seeking damages for past infringements. However, there can be no guarantee that our patent licensing or
enforcement efforts will be successful. Further, effectively policing and enforcing our intellectual property is time consuming and costly.

Summary of Operating Results

Three and Six Months Ended December 31, 2010 and 2009

Revenues

We generate four different types of revenues: license revenues are
primarily associated with the licensing of our software products to communication service providers; maintenance and support revenues are derived from providing support services to communication service providers; services revenues are primarily a
result of providing deployment and integration consulting services to communication service providers; and patents revenues are derived from licensing our intellectual property. Service revenues may include a limited amount of packaged solution
elements which may be comprised of our software licenses, professional services, third-party software and hardware.

The majority of our
revenues have been from a limited number of customers and our sales are concentrated in a single industry segment. During the periods noted below we had one significant customer, as shown in the following table:



|              |  |                                                  |    |   |                                                |  |    |      |  |  |      |   |  |  |    |  
|------------- |  | ------------------------------------------------ | -- | - | ---------------------------------------------- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|              |  | % of Total RevenueThree Months EndedDecember 31, |    |   | % of Total RevenueSix Months EndedDecember 31, | 
|              |  | 2010                                             |    |   | 2009                                           |  |    | 2010 |  |  | 2009 |  
|Customer:     |  |                                                  |    |   |                                                |  |    |      |  |  |      |   |  |  |    |  
|Sprint Nextel |  |                                                  | 27 | % |                                                |  | 36 | %    |  |  | 24   | % |  |  | 38 | %

We derived a significant portion of our
revenues from sales to U.S. based customers during the three and six months ended December 31, 2010 and 2009, which itself primarily consists of sales to Sprint Nextel as reflected immediately above. Although we intend to broaden our markets,
there can be no assurance that this objective will be achieved.



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##### Table of Contents

The following table presents key revenue information (dollars in thousands):



|                        |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|----------------------- |  | ------------------------------ | ------ | - | ------- | - | ------ | ---------------------------- |  |  | ------- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | --- | -
|                        |  | Three Months EndedDecember 31, |        |   | Percent |   |        | Six Months EndedDecember 31, |  |  | Percent |  
|                        |  | 2010                           |        |   | 2009    |   |        | Change                       |  |  | 2010    |   |  | 2009 |        |   | Change |  
|Revenues:               |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|License                 |  | $                              | 10,072 |   |         | $ | 13,283 |                              |  |  | -24     | % |  | $    | 22,404 |   |        | $ | 23,708 |   |  |  | -6  | %
|Maintenance and support |  |                                | 13,913 |   |         |   | 16,168 |                              |  |  | -14     | % |  |      | 27,906 |   |        |   | 31,966 |   |  |  | -13 | %
|Services                |  |                                | 15,925 |   |         |   | 20,291 |                              |  |  | -22     | % |  |      | 27,128 |   |        |   | 43,910 |   |  |  | -38 | %
|Patents                 |  |                                | 1      |   |         |   |       |                              |  |  | 100     | % |  |      | 4,001  |   |        |   |       |   |  |  |     |  
|                        |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Total Revenues          |  | $                              | 39,911 |   |         | $ | 49,742 |                              |  |  | -20     | % |  | $    | 81,439 |   |        | $ | 99,584 |   |  |  | -18 | %
|                        |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Percent of revenues:    |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|License                 |  |                                | 25     | % |         |   | 27     | %                            |  |  |         |   |  |      | 28     | % |        |   | 24     | % |  |  |     |  
|Maintenance and support |  |                                | 35     | % |         |   | 33     | %                            |  |  |         |   |  |      | 34     | % |        |   | 32     | % |  |  |     |  
|Services                |  |                                | 40     | % |         |   | 40     | %                            |  |  |         |   |  |      | 33     | % |        |   | 44     | % |  |  |     |  
|Patents                 |  |                                | 0      | % |         |   |       |                              |  |  |         |   |  |      | 5      | % |        |   |       |   |  |  |     |  
|                        |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Total Revenues          |  |                                | 100    | % |         |   | 100    | %                            |  |  |         |   |  |      | 100    | % |        |   | 100    | % |  |  |     |  
|                        |  |                                |        |   |         |   |        |                              |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  

License Revenues

License revenues decreased by 24% during the three months ended December 31, 2010 as compared with the corresponding period of the prior year. The decrease in license revenues is primarily a result
of reduced license bookings during the three months ended December 31, 2010.

License revenues decreased by 6% during the six months
ended December 31, 2010 as compared with the corresponding period of the prior year. The decrease in license revenue during this period was experienced during the second fiscal quarter, and was driven by the reduced license bookings during the
three months ended December 31, 2010.

Maintenance and Support Revenues

Maintenance and support revenues decreased by 14% and 13%, respectively, during the three and six months ended December 31, 2010, as compared with
the corresponding periods of the prior year. These decreases were primarily a result of non-renewals in some cases, as a large customer upgraded to our new platform technology and therefore reduced its maintenance requirements.

Services Revenues

Services revenue decreased by 22% and 38%, respectively, for the three and six months ended December 31, 2010, as compared with the corresponding
periods of the prior year. These decreases were primarily due to the completion of various projects since the prior year periods.

Patents Revenues

During the first quarter of fiscal 2011, we entered into a license
agreement with a competitor whereby we licensed rights to certain of our patents for a fee of $4.0 million plus future royalties from domestic sales of products and related services covered under the patent license after September 22, 2010.
Patent revenues during the second quarter of fiscal 2011 relate to royalties reported during the quarter under this agreement. There were no new license agreements entered into during the second quarter of fiscal 2011. We intend to continue to seek
monetization opportunities for our intellectual property; however, there can be no guarantee that our efforts will be successful.



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##### Table of Contents

Cost of Revenues

The following table presents cost of revenues in dollars, as well as gross margin, by revenue type (dollars in thousands):



|                        |  |                    |        |  |         |   |        |                  |  |  |         |   |  |      |        |  |        |   |        |  |  |  |     |  
|----------------------- |  | ------------------ | ------ |  | ------- | - | ------ | ---------------- |  |  | ------- | - |  | ---- | ------ |  | ------ | - | ------ |  |  |  | --- | -
|                        |  | Three Months Ended |        |  |         |   |        | Six Months Ended |  |  |         |  
|                        |  | December 31,       |        |  | Percent |   |        | December 31,     |  |  | Percent |  
|                        |  | 2010               |        |  | 2009    |   |        | Change           |  |  | 2010    |   |  | 2009 |        |  | Change |  
|Cost of revenues:       |  |                    |        |  |         |   |        |                  |  |  |         |   |  |      |        |  |        |   |        |  |  |  |     |  
|License                 |  | $                  | 481    |  |         | $ | 665    |                  |  |  | -28     | % |  | $    | 920    |  |        | $ | 1,304  |  |  |  | -29 | %
|Maintenance and support |  |                    | 3,981  |  |         |   | 4,668  |                  |  |  | -15     | % |  |      | 8,133  |  |        |   | 8,995  |  |  |  | -10 | %
|Services                |  |                    | 11,594 |  |         |   | 15,075 |                  |  |  | -23     | % |  |      | 20,481 |  |        |   | 32,848 |  |  |  | -38 | %
|                        |  |                    |        |  |         |   |        |                  |  |  |         |   |  |      |        |  |        |   |        |  |  |  |     |  
|Total Cost of Revenues  |  | $                  | 16,056 |  |         | $ | 20,408 |                  |  |  | -21     | % |  | $    | 29,534 |  |        | $ | 43,147 |  |  |  | -32 | %
|                        |  |                    |        |  |         |   |        |                  |  |  |         |   |  |      |        |  |        |   |        |  |  |  |     |  



|                                           |  |                                |     |   |                              |  |     |      |  |  |      |   |  |  |     |  
|------------------------------------------ |  | ------------------------------ | --- | - | ---------------------------- |  | --- | ---- |  |  | ---- | - |  |  | --- | -
|                                           |  | Three Months EndedDecember 31, |     |   | Six Months EndedDecember 31, | 
|                                           |  | 2010                           |     |   | 2009                         |  |     | 2010 |  |  | 2009 |  
|Gross margin per related revenue category: |  |                                |     |   |                              |  |     |      |  |  |      |   |  |  |     |  
|License                                    |  |                                | 95  | % |                              |  | 95  | %    |  |  | 96   | % |  |  | 94  | %
|Maintenance and support                    |  |                                | 71  | % |                              |  | 71  | %    |  |  | 71   | % |  |  | 72  | %
|Services                                   |  |                                | 27  | % |                              |  | 26  | %    |  |  | 25   | % |  |  | 25  | %
|Patents                                    |  |                                | 100 | % |                              |  | n/a |      |  |  | 100  | % |  |  | n/a |  
|Total Gross Margin                         |  |                                | 60  | % |                              |  | 59  | %    |  |  | 64   | % |  |  | 57  | %

Cost of License
Revenues

Cost of license revenues consists primarily of third-party license fees and amortization of developed technology and customer
contract intangible assets related to our acquisitions.

Costs of license revenues decreased by 28% during the three months ended
December 31, 2010, compared with the corresponding period of the prior year. The decrease in cost of license revenues primarily results from the 24% decrease in license revenues during the same period.

Costs of license revenues decreased by 29% during the six months ended December 31, 2010, compared with the corresponding period of the prior year.
This decline is primarily related to the corresponding 6% decrease in license revenue during the same period, as well as a reduction in the amount of third-party software products sold during the current quarters period.

Cost of Maintenance and Support Revenues

Cost of maintenance and support revenues consists of compensation and related overhead costs for personnel engaged in support services to communication service providers.



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Cost of maintenance and support decreased by 15% and 10%, respectively, during the three and six months
ended December 31, 2010, as compared with the corresponding periods of the prior year. The decrease in cost of maintenance and support revenues is primarily related to employee resources being temporarily transferred to the services
organization to assist in providing installation services for customers.

Cost of Services Revenues

Cost of services revenues consist of compensation and independent consultant costs for personnel engaged in performing professional services, hardware
purchased for resale, and related overhead.

Cost of services decreased by 23% and 38%, respectively, during the three and six months ended
December 31, 2010, as compared with the corresponding periods of the prior year. These decreases are in-line with the decreases in services revenue of 22% and 38%, respectively, during the same periods.

Cost of Patents Revenues

Openwave has invested in and patented certain intellectual property for the mobile internet industry. The administrative cost of filing these patents has
not been material. The cost of creating the intellectual property has been reflected in research and development costs over the years as incurred, with the primary purpose of developing intellectual property for sale in the form of enterprise
software. Additionally, we recently entered into a significant contract to license the use of our patents to one of our competitors in the first quarter of fiscal 2011 as described above. Contract negotiation costs on all contracts are primarily
incurred by our legal department and are reflected in general and administrative costs as incurred. As such, the gross margin on patents is 100% as any direct or indirect associated costs have been expensed as incurred in operating expenses.

Operating Expenses

The following table represents operating expenses for the three and six months ended December 31, 2010 and 2009, respectively (dollars in thousands):



|                                      |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ---------------- |  |  | ------- | - |  | ---- | ------ | - | ------ | - | ------ | - |  |  | --- | -
|                                      |  | Three Months Ended |        |   |         |   |        | Six Months Ended |  |  |         |  
|                                      |  | December 31,       |        |   | Percent |   |        | December 31,     |  |  | Percent |  
|                                      |  | 2010               |        |   | 2009    |   |        | Change           |  |  | 2010    |   |  | 2009 |        |   | Change |  
|Operating expenses:                   |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Research and development              |  | $                  | 10,439 |   |         | $ | 9,667  |                  |  |  | 8       | % |  | $    | 21,869 |   |        | $ | 19,531 |   |  |  | 12  | %
|Sales and marketing                   |  |                    | 11,357 |   |         |   | 11,052 |                  |  |  | 3       | % |  |      | 22,178 |   |        |   | 21,763 |   |  |  | 2   | %
|General and administrative            |  |                    | 5,457  |   |         |   | 6,710  |                  |  |  | -19     | % |  |      | 12,069 |   |        |   | 14,635 |   |  |  | -18 | %
|Restructuring and other related costs |  |                    | 856    |   |         |   | 1,353  |                  |  |  | -37     | % |  |      | 1,564  |   |        |   | 1,775  |   |  |  | -12 | %
|                                      |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Total Operating Expenses              |  | $                  | 28,109 |   |         | $ | 28,782 |                  |  |  | -2      | % |  | $    | 57,680 |   |        | $ | 57,704 |   |  |  | 0   | %
|                                      |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|                                      |  |                    |        |   |         |  
|Percent of Revenues:                  |  |                    |        |   |         |   |        |                  |  |  |         |   |  |      |        |   |        |   |        |   |  |  |     |  
|Research and development              |  |                    | 26     | % |         |   | 19     | %                |  |  |         |   |  |      | 27     | % |        |   | 20     | % |  |  |     |  
|Sales and marketing                   |  |                    | 28     | % |         |   | 22     | %                |  |  |         |   |  |      | 27     | % |        |   | 22     | % |  |  |     |  
|General and administrative            |  |                    | 14     | % |         |   | 13     | %                |  |  |         |   |  |      | 15     | % |        |   | 15     | % |  |  |     |  

Research and Development Expenses

Research and development expenses consist principally of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer
equipment used in software development. We believe that investments in research and development, including recruiting and hiring of software developers, are critical to remain competitive in the marketplace and directly relate to continued
development of new and enhanced products.



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During the three months ended December 31, 2010, research and development costs increased 8% as
compared with the corresponding period in the prior year. This increase is primarily attributable to an increase of approximately $1.4 million in contingent worker and consulting expense, as we increased spending on developing and enhancing
products. This increase was partially offset by a decline in labor costs of $0.5 million primarily related to lower bonus expense in connection with not meeting the financial target portion of the companys incentive plan during the first half
of fiscal 2011, and also as a result of the average headcount decreasing by 5% when comparing the current period to the prior years period.

During the six months ended December 31, 2010, research and development costs increased 12% as compared with the corresponding period in the prior year. This increase is primarily attributable to an
increase of approximately $2.5 million in contingent worker and consulting expense, as we increased spending on developing and enhancing products. This increase was partially offset by a decline in labor costs of $0.2 million primarily related to
lower bonus expense in connection with not meeting the financial target portion of the companys incentive plan during the first half of fiscal 2011 and also as a result of the average headcount decreasing by 5%when comparing the current period
to the prior years period.

Sales and Marketing Expenses

Sales and marketing expenses include salary and benefit expenses, sales commissions, travel expenses, and related facility costs for our sales and marketing personnel, and amortization of customer
relationship intangibles. Sales and marketing expenses also include the costs of trade shows, public relations, promotional materials, redeployed professional service employees and other market development programs.

During the three months ended December 31, 2010, sales and marketing costs increased by 3% as compared with the corresponding period of the prior
year. This increase is primarily due to an increase of $0.2 million in labor costs and stock-based compensation expense as a result of an increase in headcount from the prior years period related to our intended expansion of our customer base
into new regions.

During the six months ended December 31, 2010, sales and marketing costs increased by 2% as compared with the
corresponding period of the prior year. This increase is primarily due to an increase of $0.5 million in labor costs as a result of an increase in headcount from the prior years period related to our intended expansion of our customer base
into new regions.

General and Administrative Expenses

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and facility costs for our finance, human resources, legal, information services and executive
personnel. General and administrative expenses also include outside legal and accounting fees, provision for doubtful accounts, and expenses associated with computer equipment and software used in administration of the business.

During the three months ended December 31, 2010, general and administrative costs decreased 19% compared with the corresponding period in the prior
year. This decrease is primarily attributed to a decline of $0.8 million related to lower bonus expense in connection with not meeting the financial target portion of the companys incentive plan during the first half of fiscal 2011 and $0.8
million related to lower audit fees and legal costs. These decreases were partially offset by an increase of $0.3 million in consulting costs and $0.1 million in board of directors costs.



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During the six months ended December 31, 2010, general and administrative costs decreased 18% compared
with the corresponding period in the prior year. This decrease is primarily attributed to a decline of $1.2 million in labor and associated costs primarily related to lower bonus expense in connection with not meeting the financial target portion of
the companys incentive plan during the first half of fiscal 2011 and also as a result of average headcount declining from the prior years period, and a $1.3 million decline in facilities related costs associated with certain fixed assets
having been impaired in the prior year and thus resulting in lower depreciation expense.

Restructuring and Other Related
Costs

Restructuring and other related costs for the three months ended December 31, 2010, decreased by 37% over the same period in
the prior year. This decrease is primarily attributed to the fact that the FY2010 Restructuring was implemented in the first quarter of fiscal 2010. This implementation resulted in new charges of approximately $1.0 million related to labor costs and
accelerated depreciation, with only $0.6 million in new charges in the current quarter related to the revision of the estimated sublease terms associated with two facilities that were exited under a restructuring plan implemented in fiscal year 2009
and the third quarter of fiscal 2010.

Restructuring and other related costs for the six months ended December 31, 2010, decreased by 12%
over the same period in the prior year. This decrease is primarily attributed to a decline in facilities related accretion of $0.2 million.

Refer to Note 9 in the notes to the condensed consolidated financial statements for more information.

Amortization of Intangible Assets and Goodwill Impairment

The following table presents the amortization of intangible assets (in thousands):



|                                        |  |                    |     |  |                  |   |     |      |  |   |      |  |  |   |     | 
|--------------------------------------- |  | ------------------ | --- |  | ---------------- | - | --- | ---- |  | - | ---- |  |  | - | --- | 
|                                        |  | Three Months Ended |     |  | Six Months Ended |  
|                                        |  | December 31,       |     |  | December 31,     |  
|                                        |  | 2010               |     |  | 2009             |   |     | 2010 |  |   | 2009 | 
|Developed and core technology           |  | $                  | 403 |  |                  | $ | 409 |      |  | $ | 812  |  |  | $ | 818 | 
|Customer contracts - support            |  |                    | 6   |  |                  |   | 11  |      |  |   | 17   |  |  |   | 22  | 
|                                        |  |                    |     |  |                  |   |     |      |  |   |      |  |  |   |     | 
|Total amortization of intangible assets |  |                    | 409 |  |                  |   | 420 |      |  |   | 829  |  |  |   | 840 | 
|                                        |  |                    |     |  |                  |   |     |      |  |   |      |  |  |   |     | 

Aside from acquired customer support contracts became fully amortized in the second quarter of fiscal 2011, amortization in
the three and six months ended December 31, 2010, was consistent with the prior years periods.

Amortization of developed and core
technology and customer contracts for licenses is included in cost of license revenue in our condensed consolidated statements of operations. These assets are being amortized over an average useful life of four years.

Amortization of acquired customer support contracts is included in Cost of revenuesMaintenance and support. These assets were amortized over an
approximate useful life of three years.



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Interest Income

Interest income was approximately $0.1 million and $0.3 million, respectively, for the three and six months ended December 31, 2010, as compared with $0.2 million and $0.5 million for the
corresponding periods of the prior year. The decrease in interest income is primarily attributed to lower interest rates.

Interest Expense

Interest expense was approximately $0.1 million and $0.2 million, respectively, for the three and six months ended December 31, 2010, relatively
unchanged from the corresponding periods of the prior year. The majority of our interest expense relates to the line of credit facility entered into during the third quarter of fiscal 2009.

Other Income (Expense), net

Other income (expense), net was approximately $0.2 million and $0.1 million for the three and six months ended December 31, 2010, respectively, as compared with $(0.4) million and $(1.7) million for
the corresponding periods of the prior year, respectively. The income for the three and six months ended December 31, 2010, primarily relates to foreign exchange gains on foreign denominated assets and liabilities. Other income (expense), net
for the three months ended December 31, 2009 includes other-than-temporary impairments of $0.2 million recorded on some investments and a $0.4 million gross realized loss on the sale of auction rate securities (ARS), with no such
comparable charges in the current years period. Other income (expense), net for the six months ended December 31, 2009 includes other-than-temporary impairments and realized loss on the sale of ARS of $2.1 million, with no such comparable
charges in the current years period.

Income Taxes

Income tax expense consisted of foreign withholding tax, foreign corporate tax and foreign deferred tax. Both foreign withholding tax and foreign corporate tax fluctuate quarterly based on the product and
geographic mix of our revenue, with a resulting fluctuation in our quarterly effective tax rate.

The increase in income tax expense for the
three and six months ended December 31, 2010, compared to the three and six months ended December 31, 2009, is the result of the release of larger unrecognized tax benefits due to the lapse of statute of limitations related to foreign
withholding taxes during the three and six months ended December 31, 2009.

In light of our history of operating losses we continue to
maintain a full valuation allowance for our U.S. federal and state deferred tax assets. We intend to maintain this valuation allowance until there is sufficient evidence to conclude that it is more likely than not that the federal and state deferred
tax assets will be realized. As of December 31, 2010, we have foreign deferred tax assets recorded of approximately $2.8 million in selected countries based upon our conclusion that it is more likely than not that the foreign subsidiaries in
the respective countries will earn future taxable profits enabling the realization of their respective deferred tax assets. As of December 31, 2010, we have approximately $0.1 million of deferred tax liabilities recorded with respect to
acquisitions for which the amortization expense of acquired intangibles is not deductible for tax purposes.

Discontinued
Operations

During fiscal 2008, we sold our Client operations to Purple Labs, a private company based in Chambéry, France. During
the first quarter of fiscal 2011, $2.0 million of the escrowed funds associated with the sale was distributed to Myriad AG (formerly Purple Labs) and the remaining $2.2 million was released to us, and was recorded as an additional $2.2 million gain
on sale of discontinued operation in the condensed consolidated statement of operations.



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On December 31, 2007, we sold Musiwave to Microsoft Corporation (Microsoft). During the
first quarter of fiscal 2010, the escrowed funds associated with the sale were distributed, resulting in a gain on sale of discontinued operations of $4.5 million.

Operating Lease Obligations and Contractual Obligations

There has been no material change
to our contractual obligations during the first three months of fiscal year 2011. As such, see our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 for a description of our facility leases and Note 9 in the notes to the
condensed consolidated financial statements. We currently have subleased a portion of our restructured facilities which will generate contractual sublease income in aggregate of approximately $17.1 million, resulting in a net future obligation on
these properties of approximately $35.5 million through our fiscal year 2015. The decrease in our liability for restructured facilities since the fiscal year ended June 30, 2010, relates primarily to payments made in the normal course of
business.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources that are material to investors.



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Liquidity and Capital Resources

Working Capital and Cash Flows

The following table presents selected financial information and statistics as of and for the six months ended December 31, 2010 and June 30, 2010 (dollars in thousands):



|                                |  |                   |         |  |               |   |         |               |  |  |     |  
|------------------------------- |  | ----------------- | ------- |  | ------------- | - | ------- | ------------- |  |  | --- | -
|                                |  | December 
31,2010 |         |  | June 
30,2010 |   |         | PercentChange | 
|                                |  |                  
|Working capital                 |  | $                 | 70,703  |  |               | $ | 79,822  |               |  |  | -11 | %
|                                |  |                   |        
|Cash and cash investments:      |  |                   |         |  |               |   |         |               |  |  |     |  
|Cash and cash equivalents       |  | $                 | 55,541  |  |               | $ | 60,935  |               |  |  | -9  | %
|Short-term investments          |  |                   | 43,938  |  |               |   | 45,211  |               |  |  | -3  | %
|Long-term investments           |  |                   | 13,735  |  |               |   | 12,865  |               |  |  | 7   | %
|Restricted cash and investments |  |                   | 141     |  |               |   | 357     |               |  |  | -61 | %
|                                |  |                   |         |  |               |   |         |               |  |  |     |  
|Total cash and cash investments |  | $                 | 113,355 |  |               | $ | 119,368 |               |  |  | -5  | %
|                                |  |                   |         |  |               |   |         |               |  |  |     |  



|                                      |  |                               |        |   |      |   |         |  
|------------------------------------- |  | ----------------------------- | ------ | - | ---- | - | ------- | -
|                                      |  | Six Months Ended
December 31, |       
|                                      |  | 2010                          |        |   | 2009 |  
|Cash used for operating activities    |  | $                             | (5,886 | ) |      | $ | (2,523  | )
|Cash used for investing activities    |  | $                             | (330   | ) |      | $ | (17,424 | )
|Cash provided by financing activities |  | $                             | 822    |   |      | $ | 250     |  

We have obtained a majority of our
cash and investments through public offerings of common stock, including a common stock offering in December 2005 which raised $277.8 million in net proceeds. In fiscal 2008, we sold Musiwave and our Client operations, resulting in $56.0 million of
proceeds in fiscal 2008, $11.7 million in fiscal 2009, $4.5 million in fiscal 2010 and $2.2 million in fiscal 2011. We also entered into a $40.0 million revolving credit facility on January 23, 2009, which we have amended several times, which
has a maturity date of January 23, 2012.

As of December 31, 2010 and June 30, 2010, we had letters of credit outstanding
against the revolving credit facility totaling $16.7 million and $17.9 million, respectively, reducing the available borrowings on the revolving credit facility. The revolving credit facility requires a monthly borrowing base calculation to
determine the amount of the revolving credit facility available for us to borrow (Borrowing Base). The Borrowing Base calculation is $30.0 million plus 75% of accounts receivables defined as eligible in the credit agreement. As
of December 31, 2010, the Borrowing Base was $34.6 million and the total available for us to borrow on the revolving credit facility was $17.9 million, which is the difference between the Borrowing Base calculation of $34.6 million and the
amount of outstanding letters of credit amount of $16.7 million. As of June 30, 2010, the Borrowing Base was $35.4 million and the total available for us to borrow on the revolving credit facility was $17.5 million, which is the difference
between the Borrowing Base calculation of $35.4 million and the amount of outstanding letters of credit amount of $17.9 million. The revolving credit line is secured by a blanket lien on all of our assets and contains certain financial and reporting
covenants customary to these types of credit facilities agreements which we are required to satisfy as a condition of the agreement. In particular, the revolving credit facility requires that we meet certain minimum four quarter trailing EBITDA
amounts, as well as meet a minimum monthly liquidity ratio. In addition, the revolving credit facility requires us to provide to the bank annual financial projections, promptly report any material legal actions, and timely pay material taxes and
file all required tax returns and reports. Further, without the banks consent, we cannot take certain material actions, such as change any material line of business, sell our business, acquire other entities, incur liens, make capital
expenditures beyond a certain threshold, or engage in transactions with affiliates. As of December 31, 2010, we were not in compliance with the required minimum four quarter EBITDA covenant and subsequently received a waiver from Silicon Valley
Bank for the EBITDA covenant requirement as of December 31, 2010. There can be no guarantee that Silicon Valley Bank will issue another waiver in the future, if needed.





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While we believe that our current working capital and anticipated cash flows from operations, together with
amounts available to us under our credit facility, will be adequate to meet our cash needs for daily operations and capital expenditures for at least the next 12 months, we may elect to raise additional capital through the sale of additional equity
or debt securities, or sell certain assets. If additional funds are raised through the issuance of additional debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of any
debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders, and additional financing may not be available in amounts or on terms acceptable
to us.

If additional financing is necessary and we are unable to obtain the additional financing, we may be required to reduce the scope of
our planned product development and marketing efforts, which could harm our business, financial condition and operating results. In the meantime, we will continue to manage our cash and investment portfolio in a manner designed to facilitate
adequate cash and cash equivalents to fund our operations as well as future acquisitions, if any.

Working capital

Our working capital, defined as current assets less current liabilities, decreased by approximately $9.1 million, or 11%, from
June 30, 2010 to December 31, 2010. The decrease in working capital balances is primarily attributed to the $5.4 million decrease in cash primarily as a result of cash used in operations, including an $8.5 million decrease in accounts
receivable, net, due to decreased billings. Partially offsetting these decreases in working capital was a $2.4 million decrease in accounts payable which is a result of the timing of hardware purchases on behalf of customers and payments for
contingent worker services and a $2.3 million decrease in deferred revenue related to a decline in billings.

Cash used for
operating activities

Cash used for operating activities was $5.9 million during the six months ended December 31, 2010. This use of
cash is primarily a result of the $5.8 million operating loss from continuing operations.

Cash used for investing
activities

Net cash used for investing activities during the six months ended December 31, 2010 was $0.3 million, which primarily was
due to the purchase of property and equipment of $2.6 million, partially offset by the $2.2 million payment received from the release of escrowed funds related to the sale of the Client operations.

Cash flows provided by financing activities

Net cash provided by financing activities during the six months ended December 31, 2010 was $0.8 million, resulting from the exercise of stock options during the period.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk



| | (a) | Foreign Currency Risk
| | --- | ---------------------

We operate
internationally and are exposed to potentially adverse movements in foreign currency rate changes. We have entered into foreign exchange derivative instruments to reduce our exposure to foreign currency rate changes on receivables, payables and
intercompany balances denominated in a nonfunctional currency. The objective of these derivatives is to neutralize the impact of foreign currency exchange rate movements on our operating results. These derivatives may require us to exchange
currencies at rates agreed upon at the inception of the contracts. These contracts reduce the exposure to fluctuations in exchange rate movements because the gains and losses associated with foreign currency balances and transactions are generally
offset with the gains and losses of the foreign exchange forward contracts. We do not enter into foreign exchange transactions for trading or speculative purposes, nor do we hedge foreign currency exposures in a manner that entirely offsets the
effects of movement in exchange rates. We do not designate our foreign exchange forward contracts as accounting hedges and, accordingly, we adjust these instruments to fair value through earnings in the period of change in their fair value. Net
foreign exchange transaction losses included in Other income (expense), net in the accompanying condensed consolidated statements of operations totaled $0.2 million and $0.1 million for the three and six months ended December 31, 2010,
respectively. As of December 31, 2010, we have the following forward contracts (notional amounts in thousands):



|         |  |                |         |  |                        |  |       |                 |  |  |           | 
|-------- |  | -------------- | ------- |  | ---------------------- |  | ----- | --------------- |  |  | --------- | 
|Currency |  | NotionalAmount |         |  | ForeignCurrencyper USD |  |       | Date ofMaturity | 
|AUD      |  |                | 600     |  |                        |  | 0.98  |                 |  |  | 1/31/2011 | 
|CAD      |  |                | 2,200   |  |                        |  | 1.00  |                 |  |  | 1/31/2011 | 
|EUR      |  |                | 1,400   |  |                        |  | 0.76  |                 |  |  | 1/31/2011 | 
|JPY      |  |                | 210,000 |  |                        |  | 83.30 |                 |  |  | 1/31/2011 | 

As of December 31, 2010, the
nominal value multiplied by the USD exchange rate of these forward contracts was $7.2 million. Our mark-to-market net unrealized loss on these contracts as of December 31, 2010 was $0.1 million.

In comparison, as of June 30, 2010, we had the following forward contracts (notional amounts in thousands):



|         |  |                |         |  |                        |  |       |                 |  |  |           | 
|-------- |  | -------------- | ------- |  | ---------------------- |  | ----- | --------------- |  |  | --------- | 
|Currency |  | NotionalAmount |         |  | ForeignCurrencyper USD |  |       | Date ofMaturity | 
|AUD      |  |                | 3,300   |  |                        |  | 1.15  |                 |  |  | 7/30/2010 | 
|CAD      |  |                | 1,200   |  |                        |  | 1.04  |                 |  |  | 7/30/2010 | 
|EUR      |  |                | 1,300   |  |                        |  | 0.81  |                 |  |  | 7/30/2010 | 
|JPY      |  |                | 180,000 |  |                        |  | 89.15 |                 |  |  | 7/30/2010 | 

As of June 30, 2010, the nominal
value multiplied by the USD exchange rate of these forward contracts was $7.6 million. Our mark-to-market net unrealized gain on these contracts as of June 30, 2010 was $0.1 million.



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| | (b) | Interest Rate Risk
| | --- | ------------------

As of
December 31, 2010, we had cash and cash equivalents, short-term and long-term investments, and restricted cash and investments of $113.4 million compared to $119.4 million at June 30, 2010. Our exposure to market risks for changes in
interest rates relates primarily to money market accounts, certificates of deposit, corporate bonds, government securities, and auction rate securities. We place our investments with high credit quality issuers that have a rating by Moodys of
A2 or higher and Standard & Poors of A or higher, and, by policy, limit the amount of the credit exposure to any one issuer. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting
market and credit risk. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents; all investments with maturities of three months or greater are classified as
available-for-sale and considered to be short-term investments; all investments with maturities of greater than one year are classified as available-for-sale and considered to be long-term investments.

The following is a chart of the principal amounts of short-term investments and long-term investments by expected maturity at December 31, 2010 (in
thousands):



|                               |  |                                                |        |     |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 
|------------------------------ |  | ---------------------------------------------- | ------ | --- | ---------- | - | ----- | ---------- |  | - | ---------------------- |  |  | ---------------------- | ------ |  |  | - | ------ | 
|                               |  | Expected maturity for the year ending June 30, |        |     | Cost Value |   |       | Fair Value | 
|                               |  | 2011                                           |        |     | 2012       |   |       | Thereafter |  |   | December 31,2010 Total |  |  | December 31,2010 Total |       
|U.S. Government Agencies       |  | $                                              | 14,374 |     |            | $ | 2,841 |            |  | $ | 299                    |  |  | $                      | 17,514 |  |  | $ | 17,521 | 
|Commercial Paper               |  |                                                | 10,195 |     |            |   | 998   |            |  |   |                       |  |  |                        | 11,193 |  |  |   | 11,194 | 
|Corporate Bonds                |  |                                                | 15,105 |     |            |   | 6,068 |            |  |   | 2,301                  |  |  |                        | 23,474 |  |  |   | 23,608 | 
|Auction Rate Securities        |  |                                                |       |     |            |   |      |            |  |   | 11,069                 |  |  |                        | 11,069 |  |  |   | 9,279  | 
|                               |  |                                                |        |     |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 
|                               |  | $                                              | 39,674 |     |            | $ | 9,907 |            |  | $ | 13,669                 |  |  | $                      | 63,250 |  |  | $ | 61,602 | 
|                               |  |                                                |        |     |            |   |       |            |  |   |                        |  |  |                        |        |  |  |   |        | 
|Weighted-average interest rate |  |                                                |        | 0.9 | %          |   |       |            |  |   |                        |  |  |                        |        |  | 

Additionally, we had $0.1 million of restricted investments that were included within long-term restricted cash
and investments on the condensed consolidated balance sheet as of December 31, 2010. The restricted investment comprised a certificate of deposit to collateralize letters of credit for facility leases. The weighted average interest rate on our
restricted investments was 0.3% at December 31, 2010. There have been no significant changes in risk exposure since December 31, 2010.

In comparison, the following is a table of the principal amounts of short-term investments and long-term investments by expected maturity at June 30, 2010 (in thousands):



|                               |  |                                                |        |     |            |   |       |            |  |   |                    |  |  |                    |        |  |  |   |        | 
|------------------------------ |  | ---------------------------------------------- | ------ | --- | ---------- | - | ----- | ---------- |  | - | ------------------ |  |  | ------------------ | ------ |  |  | - | ------ | 
|                               |  | Expected maturity for the year ending June 30, |        |     | Cost Value |   |       | Fair Value | 
|                               |  | 2011                                           |        |     | 2012       |   |       | Thereafter |  |   | June 30,2010 Total |  |  | June 30,2010 Total |       
|U.S. Government Agencies       |  | $                                              | 16,739 |     |            | $ | 1,355 |            |  | $ |                   |  |  | $                  | 18,094 |  |  | $ | 18,106 | 
|Certificates of Deposit        |  |                                                | 1,930  |     |            |   |      |            |  |   |                   |  |  |                    | 1,930  |  |  |   | 1,930  | 
|Commercial Paper               |  |                                                | 8,094  |     |            |   |      |            |  |   |                   |  |  |                    | 8,094  |  |  |   | 8,094  | 
|Corporate Bonds                |  |                                                | 20,482 |     |            |   | 1,962 |            |  |   | 169                |  |  |                    | 22,613 |  |  |   | 22,647 | 
|Auction Rate Securities        |  |                                                |       |     |            |   |      |            |  |   | 11,069             |  |  |                    | 11,069 |  |  |   | 9,279  | 
|                               |  |                                                |        |     |            |   |       |            |  |   |                    |  |  |                    |        |  |  |   |        | 
|Total                          |  | $                                              | 47,245 |     |            | $ | 3,317 |            |  | $ | 11,238             |  |  | $                  | 61,800 |  |  | $ | 60,056 | 
|                               |  |                                                |        |     |            |   |       |            |  |   |                    |  |  |                    |        |  |  |   |        | 
|Weighted-average interest rate |  |                                                |        | 1.0 | %          |   |       |            |  |   |                    |  |  |                    |        |  | 



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Additionally, we had $0.4 million of restricted investments that were included within long term restricted
cash and investments in the consolidated balance sheet as of June 30, 2010. $0.2 million comprised a restricted investment to secure a warranty bond pursuant to a customer contract. Additionally, $0.2 million of the restricted investments
comprised a certificate of deposit to collateralize letters of credit for facility leases. The weighted average interest rate on our restricted investments was 0.3% at June 30, 2010.

As of December 31, 2010, $9.3 million in ARS, recorded in long-term investments on the condensed consolidated balance sheet, were considered illiquid based upon recent auction results, which remained
unchanged from June 30, 2010. These ARS were issued by four different entities and are held by two investment firms on our behalf. Three of these securities are Triple X structured obligations of special purpose reinsurance entities
associated with life insurance companies. One ARS is related to federal education student loan programs. We estimated the fair value of these auction rate securities based on probabilities of potential scenarios: 1) successful auction/early
redemption, 2) failing auctions until maturity or 3) default and the estimated cash flows for each scenario. Other factors were considered, such as the value of the investments held by the issuer and the financial condition and credit ratings of the
issuer, insurers, and parent companies as applicable. We recorded a $1.7 million other-than-temporary loss in the condensed consolidated statements of operations during the six months ended December 31, 2009 related to these securities. As of
December 31, 2010 these instruments were all rated A, A-, and BBB by Standard and Poors and Aaa by Moodys and all of the $12.5 million par value of these illiquid investments are insured against defaults of principal and interest by
third party insurance companies.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of
December 31, 2010. Based on their evaluation as of December 31, 2010, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Quarterly Report was (i) recorded, processed, summarized and reported within the
time periods specified in the SECs rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and
procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Openwave have been detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended December 31, 2010 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



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PART II Other Information

Item 1. Legal Proceedings

See discussion of Litigation in Note 8 to the condensed consolidated financial statements included in Part I, Item 1 of this Report, which disclosure is incorporated by reference here. These matters
were also discussed in Item 3 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Item 1A. Risk Factors

The following risks factors were set forth in Part I, Item 1A, Risk Factors in Openwaves Annual Report on Form 10-K for the fiscal year ended June 30, 2010, which could
materially affect Openwaves business, financial condition or future results. These risks are not the only risks facing Openwave; additional risks and uncertainties may not be currently known to or may be deemed immaterial by management but
could materially adversely affect Openwaves business, financial condition, and/or operating results. These risks have not changed substantively from those set forth in Openwaves Annual Report on Form 10-K for the fiscal year ended
June 30, 2010.

Risks Related to Our Business

We are in a product transition phase and we may not be able to adequately develop, market or sell new products.

Revenues from our legacy products are decreasing, and we are in the process of selling our customers a migration to Openwaves next generation software platforms and tools. The successful customer
migration onto our new platforms is critical to our business, and there is no assurance that we are or will be able to market and or sell new products and services in a timely manner. We also intend to continue to develop new products and
services. New products or services may be delayed, and new products may not be accepted by the market, or may be accepted for a shorter period than anticipated. New product offerings may not properly integrate into existing or anticipated platforms,
or meet existing or anticipated demand and the failure of these offerings to be accepted by the market could have a material adverse effect on our business, operations, financial condition, or reputation. Our sales and operating results may be
adversely affected if we are unable to bring new products to market, if customers delay purchases or if acceptance of the new products is slower than expected or to a smaller degree than expected, if at all.

We rely upon a small number of customers for a significant portion of our revenues, and the failure to retain and expand our relationships with these
customers could adversely affect our business.

Our customer base consists of a limited number of large communications service providers,
which makes us significantly dependent on their plans and the success of their products. Our success, in turn, depends in large part on our continued ability to introduce reliable and robust products that meet the demanding needs of these customers
and their willingness to launch, maintain and market commercial services utilizing our products. Moreover, consolidation among these service providers further limits the existing and potential pool of customers for us. Revenue recognized from
arrangements with Sprint-Nextel accounted for approximately 31% of our total revenues during the fiscal year ended June 30, 2010, and approximately 24% of our total revenues during the six months ended December 31, 2010. By virtue of their
size and the significant portion of our revenue that we derive from this customer, this customer is able to exert significant influence in the negotiation of our commercial arrangements and the conduct of our business with them. If we are unable to
retain and expand our business with key customers on favorable terms, our business and operating results will be adversely affected.



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Consolidation of communication service providers may impair our ability to attract new customers and
negotiate favorable business terms.

The telecommunications industry is rapidly evolving and highly competitive. These factors combined
with recent poor economic conditions, resulted in certain communications services providers having poor operating results. As a result, some of these communications service providers have consolidated or are working to consolidate or otherwise cease
operations. If consolidation continues to occur, we will have a smaller number of current customers as well as a smaller number of potential customers in which to sell our products and services. Further, our ability to negotiate favorable terms with
the communications service providers could be impaired, which could increase our expenses and harm our operating results.

We have a
history of losses and we may not be able to achieve or maintain consistent profitability.

We have a history of losses and may not be able
to maintain consistent profitability. Except for fiscal 2006, we have incurred annual net losses since our inception. As of December 31, 2010, we had an accumulated deficit of approximately $3.1 billion, which includes approximately $2.1
billion of goodwill amortization and impairment. We expect to continue to spend significant amounts to develop, enhance or acquire products, services and technologies and to enhance sales and operational capabilities. Our prospects must be
considered in light of the risks, expenses, delays and difficulties frequently encountered by companies engaged in rapidly evolving technology markets like ours.

Our industry changes rapidly as a result of technological and product developments, which may quickly render our products and services less desirable or even obsolete. If we are unable or unsuccessful
in supplementing our product offerings, our revenue and operating results may be materially adversely affected.

The industry in which we
operate is subject to rapid technological change. The introduction of new technologies in the market, including the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue to
have a profound effect on competitive conditions in our market. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes or evolving industry standards on a timely basis.

More generally, while in the past we have primarily provided specific component sales, in the future we intend to provide more integrated and
comprehensive software solutions for our customers. We also intend to develop and license new products and to enter into new product markets. We may not be able to develop and license new products in accordance with our expectations, or at all, our
new products may not be adopted by communication service providers, or we may be unable to succeed in new product markets which, in any case, would have a material adverse affect on our business and operating results.

Because of the rapid technological changes of our industry, our historic product, service, and enhancement offerings may have a shorter life than
anticipated. Revenue from such products may decline faster than anticipated, and if our new products, services and enhancements are not accepted by our customers or the market as anticipated, if at all, our business and operating results may be
materially and adversely affected.

Our customers face implementation and support challenges in introducing Internet-based services, which
may slow their rate of adoption or implementation of the services our products enable.

Historically, communications service providers
have been relatively slow to implement new, complex services. In addition, communications service providers have encountered greater customer demands to



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support Internet-based services than they have in the past. We have limited or no control over the pace at which communications service providers implement these new Internet-based services. For
instance, the Federal Communications Commission, or FCC, proposes to adopt so-called net neutrality rules that it describes as intended to preserve the openness of the Internet. The proposed rules, depending on whether or how they are
structured, could limit the ways that a broadband Internet access service provider could manage its network and the services it could provide over the network. New rules, if adopted, could cause a decrease in data traffic, or could cause some of our
domestic customers to reduce their perception of the value of some of our mediation offerings, either of which could lessen the demand for our products and services. The failure of communications service providers to introduce and support
Internet-based services utilizing our products in a timely and effective manner could have a material adverse effect on our business and operating results.

Our business depends on continued investment and improvement in communication networks by our customers.

Many of our customers and other communication service providers continue to make major investments in next generation networks that are intended to support more complex applications and to provide end
users with a more satisfying user experience. If communication service providers delay their deployment of networks or fail to roll out such networks successfully, or determine to continue to increase network capacity and support more complex
applications by investment in additional hardware infrastructure rather than software solutions such as ours that optimize the use of existing hardware infrastructure, there could be less demand for our products and services than we expect, which
could adversely affect our business and operating results.

In addition, the communications industry has experienced significant fluctuations
in capital expenditures and we have recently experienced significant revenue declines from historical peaks. If capital spending and technology purchasing by communication service providers does not continue to include investments in infrastructure
software, our revenue would likely decline substantially.

Our market is highly competitive and our inability to compete successfully could
adversely affect our operating results.

The market for our products and services is highly competitive. Many of our existing and
potential competitors have substantially greater financial, technical, marketing and distribution resources than we have. Their resources have enabled them to aggressively price, finance and bundle their product offerings to attempt to gain market
adoption or to increase market share. If our competitors consolidate, then they will be even larger, and may be able to compete more effectively against us than they currently do. If our competitors offer deep discounts on certain products in an
effort to gain market share or to sell other products or services, we may then need to lower prices of our products and services, change our pricing models, or offer other favorable terms in order to compete successfully, which would likely reduce
our margins and adversely affect operating results.

Although our efforts, on occasion, have been complicated by the marketing efforts of our
competitors, we expect that we will continue to compete primarily on the basis of quality, breadth of product and service offerings, functionality, price, strength of customer relationships and time to market.

Our sales cycles are long, subjecting us to the loss or deferral of anticipated orders and related revenue.

Our sales cycle is generally long, often in excess of six months, and unpredictable due to the lengthy evaluation and customer approval process for our
products, including internal reviews and capital



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expenditure approvals. Moreover, the evolving nature of the market for data services via mobile devices may lead prospective customers to postpone their purchasing decisions pending resolution of
standards or adoption of technology by others. Accordingly, we may not close sales as anticipated during a given quarter which may lead to a shortfall in revenue or bookings anticipated by us or securities analysts or investors.

Our business is subject to the risks of international operations since we depend on international sales, and any decrease in international sales would
adversely affect our operating results.

International sales accounted for approximately 54%, 51% and 46% of our total revenues for the
six months ended December 31, 2010 and fiscal years ended June 30, 2010 and 2009, respectively. We currently maintain offices outside of the United States and have sales, engineering and professional services personnel in several
countries. Approximately one-half of our employees are located internationally, with 19% of our employees based in our facilities in Belfast, Northern Ireland. We have limited experience operating in foreign jurisdictions and are expanding our
international operations into areas in which we have little or no operating history. Our ability to manage a global organization is difficult, time consuming and expensive and is subject to a number of risks including, but not limited to:



| |  |  | Localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lack of familiarity with and unexpected changes in foreign regulatory requirements;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Longer accounts receivables payment cycles and difficulties in collecting accounts receivables;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | Difficulties in managing and staffing international operations;
| | - |  | ---------------------------------------------------------------



| |  |  | Currency exchange rate fluctuations and our ability to manage these fluctuations under our foreign exchange hedging policy;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Potentially adverse tax consequences, including the complexities of foreign value added tax systems and restrictions on the repatriation of earnings;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Dependence on certain third parties, including channel partners with whom we have limited experience;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | Import and export requirements that may prevent us from shipping products or providing services to a particular market and may increase our operating
costs;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Political, social and economic instability abroad, terrorist attacks and security concerns in general; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | Reduced or varied protection for intellectual property rights in some countries.
| | - |  | --------------------------------------------------------------------------------

Operating in international markets requires significant management attention and financial resources. The investment and additional resources required to
establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.

Changes in foreign
currency exchange rates could negatively affect our operating results.

Our primary exposure to movements in foreign currency exchange
rates relate to non-U.S. dollar denominated sales in Europe, Japan, Australia, Canada, and certain parts of Asia, as well as non-U.S. dollar denominated operating expenses incurred throughout the world. Weakening of foreign currencies relative to
the U.S. dollar will adversely affect the U.S. dollar value of our foreign currency-denominated sales and earnings, and generally will lead us to raise international pricing, potentially reducing demand for our products. In some circumstances, due
to competition or other reasons, we may decide not to raise local prices to the full extent of the dollars strengthening, or at all, which would adversely affect the U.S.



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dollar value of our foreign currency denominated sales and earnings. Conversely, a strengthening of foreign currencies, while generally beneficial to our foreign currency-denominated sales and
earnings, could cause us to reduce international pricing, thereby limiting the benefit; as strengthening of foreign currencies may also increase our cost of product components denominated in those currencies.

We have used derivative instruments, such as foreign exchange forward and option positions, to hedge certain exposures to fluctuations in foreign
currency exchange rates. The use of such hedging activities may not offset any or more than a portion of the adverse financial effects of unfavorable movements in foreign exchange rates over the limited time the hedges are in place. Margins on sales
of our products in foreign countries, and on sales of products that include components obtained from foreign suppliers, could be materially adversely affected by foreign currency exchange rate fluctuations. Accordingly, changes in foreign currency
exchange rates relative to the U.S. Dollar could negatively affect our operating results.

Our customer contracts lack uniformity and
often are particularly complex, which subjects us to business and other risks.

Our customers are typically large communications service
providers. Their substantial purchasing power and negotiating leverage limits our ability to negotiate uniform business terms. As a result, we typically negotiate contracts on a customer-by-customer basis and sometimes determine to accept contract
terms not favorable to us in order to close a transaction, including indemnity, limitation of liability, refund, penalty or other terms that expose us to significant risk. We may need to provide indemnification relating to third party components
that we provide, and we may or may not have sufficient indemnification provisions from the third parties to fully cover for this risk. The lack of uniformity and the complexity of the terms of these contracts may also create difficulties with
respect to ensuring timely and accurate accounting and billing under these contracts. If we are unable to effectively negotiate, enforce and accurately or timely account and bill for contracts with our customers, our business and operating results
may be adversely affected.

We rely on estimates to determine arrangement fee revenue recognition for a particular reporting period. If our
estimates change, or our customers do not accept deliverables, future expected revenues could adversely change.

We apply the
percentage-of-completion method as a primary accounting method to account for revenue from arrangements subject to contract accounting. Applying the percentage-of-completion method requires that we estimate progress on our professional service
revenues for a particular period. If, in a particular period, our estimates to project completion change or we estimate project overruns, revenue recognition for such projects in the period may be less than expected or even negative, which could
cause us to fail to realize anticipated operating results in a given period. Additionally, a portion of the payments under some of our professional services arrangements are based on customer acceptance of deliverables. If a customer fails to accept
the applicable deliverable, we may not be able to recognize the related revenue or receive payment for work that we have already completed, which could adversely affect our business and operating results.

Demand for our technology depends in part on operators maintaining a central role in the mobile value chain, and not being circumvented by emerging
players who offer services directly to subscribers.

Our products and services are currently sold almost exclusively for use by mobile and
broadband operators. As the industry moves to more open standards, services and applications have emerged from



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content providers that bypass the mobile and broadband operator and are sold directly to consumers. The threat of operators being disintermediated could have a negative impact to our
business, if Openwave does not diversify its customer base beyond the operator community and if the consumer uptake of these new services dilutes operators customer relationship. For Openwave, the loss of operator control over the
subscriber experience could threaten our ability to intermediate and add value, and ultimately, lessen demand for our products and services.

We may not be successful in forming or maintaining strategic alliances with other companies, which could adversely affect our product offerings and
sales.

Our business strategy depends in part on forming or maintaining strategic alliances with other companies. We may not be able to
form the alliances that are necessary to ensure that our products are compatible with third-party products, to enable us to license our software into potential new customers and into potential new markets, and to enable us to continue to enter into
new license agreements with our existing customers. We may be unable to maintain existing relationships with other companies, to identify the best alliances for our business or enter into new alliances with other companies on acceptable terms, or at
all. If we cannot form and maintain significant strategic alliances with other companies as our target markets and technology evolves, our sales opportunities could deteriorate, which could have a material adverse effect on our business and
operating results.

If our channel partners are unable to successfully market and sell our services to their customers, then our revenues
and business may be adversely affected.

Historically, we have sold our products and services directly through our sales force. In the
future, in addition to our direct sales efforts, we intend to sell our products and services indirectly through our channel partners which will enable us to bring our technologies to emerging markets. Our business will depend on the efforts and the
success of these channel partners in marketing and selling our products and services in emerging markets and markets in which we have a limited presence. If our channel partners fail to market and sell our services effectively, our ability to
grow our revenue could be reduced and our business may be harmed.

Our software products may contain defects or errors, which could result
in rejection of our products, delays in shipment of our products, failure to meet specific milestones, damage to our reputation, product liability and lost revenues.

The software we develop and the associated professional services we offer are complex and must meet stringent technical requirements of our customers. We must develop our products quickly to keep pace
with the rapidly changing Internet software and telecommunications markets. Our software products and services may contain undetected errors or defects, especially when first introduced or when new versions are released. We have, in the past,
experienced delays in releasing some versions of our products until software problems were corrected. In addition, some of our customer contracts provide for penalties if we fail to meet specific milestones as well as a period during which our
products and services are subject to acceptance testing. Failure to achieve acceptance could result in a delay in, or inability to, receive payment. Our products may not be free from errors or defects after commercial shipments have begun, which
could result in the rejection of our products and damage to our reputation, as well as lost revenues, diverted development resources and increased service and warranty costs, any of which could harm our business.



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Our efforts to monetize our patents may not be successful and our technology could be misappropriated,
which may lead to expensive and time-consuming litigation.

Our ability to compete and continue to provide technological innovation is
substantially dependent upon internally-developed technology. We rely on a combination of patent, copyright and trade secret laws to protect our intellectual property or proprietary rights in such technology, although we believe that other factors
such as the technological and creative skills of our personnel, new product developments, frequent product and feature enhancements and reliable product support and maintenance are just as essential to maintaining a technology leadership position.
We also rely on trademark law to protect the value of our corporate brand and reputation. In addition, we have recently placed increased emphasis on monetizing our patents by pursuing patent licensing agreements. These efforts may not result in
additional revenues, and may also result in counter-claims being raised by third parties.

Despite our efforts to license and protect our
intellectual property and proprietary rights, unauthorized parties may copy or otherwise obtain and use our products, technology or trademarks. Effectively policing and enforcing our intellectual property is time consuming and costly, and the steps
taken by us may not prevent infringement of our intellectual property or proprietary rights in our products, technology and trademarks, particularly in foreign countries where in many instances the local laws or legal systems do not offer the same
level of protection as in the United States.

Our products may infringe the intellectual property rights of others, subjecting us to claims
for infringement, payment of license royalties or other damages.

Our products or solutions, including third party elements, may be
alleged to infringe the intellectual property rights of others, subjecting us to claims for infringement, payment of license royalties or other remedies. As the number of our products, solutions, and services increases and their features and content
continue to expand, we may increasingly become subject to infringement and other intellectual property claims by third parties. From time to time, we and our customers have received and may receive in the future, offers to license or claims alleging
infringement of intellectual property rights, or may become aware of certain third party patents that may relate to our products. For example, a number of parties have asserted to standards bodies such as OMA that they own intellectual property
rights which may be essential for the implementation of specifications developed by those standards bodies. A number of our products are designed to conform to OMA specifications or those of other standards bodies, and have been, and may in the
future be, subject to offers to license or claims of infringement on that basis by individuals, intellectual property licensing entities and other companies, including companies in the telecommunications field with greater financial resources and
larger intellectual property portfolios than our own.

Additionally, our customer agreements require that we indemnify our customers for
infringement of our intellectual property embedded in their products. In the past we have elected, and in the future we may elect, to take a license or otherwise settle claims of infringement at the request of our customers or otherwise. Any
litigation regarding patents or other intellectual property could be costly and time consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved, and the number of parties
holding intellectual property within the wireless industry, increase the risks associated with intellectual property litigation. Moreover, patent litigation has increased due to the increased number of cases asserted by intellectual property
licensing entities as well as increasing competition and overlap of product functionality in our markets. Royalty or licensing arrangements, if required, may not be available on terms acceptable to us, if at all. Any infringement claim successfully
asserted against us or against a customer for which we have an obligation to defend could result in costly litigation as well as the payment of substantial damages or an injunction.



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We may be unable to effectively manage future growth, if any, that we may achieve.

As a result of our efforts to control costs through restructurings and otherwise, our ability to effectively manage and control any future growth may be
limited. To manage any growth, our management must continue to improve our operational, information and financial systems, procedures and controls and expand, train, retain and manage our employees. If our systems, procedures and controls are
inadequate to support our operations, any expansion could decrease or stop, and investors may lose confidence in our operations or financial results. If we are unable to manage growth effectively, our business and operating results could be
adversely affected, and any failure to develop and maintain adequate internal controls could cause the trading price of our shares to decline substantially.

We may pursue acquisitions or investments in complementary technologies and businesses, which could harm our operating results and may disrupt our business.

In the future, we may pursue acquisitions of, or investments in, complementary technologies and businesses. Acquisitions present a number of potential
risks and challenges that could, if not met, disrupt our business operations, increase our operating costs and reduce the value to us of the acquired company. If we make acquisitions, we may not be able to integrate the acquired businesses, products
or technologies into our existing business and products. Furthermore, potential acquisitions and investments, whether or not consummated, may divert our managements attention and require considerable cash outlays at the expense of our existing
operations. In addition, to complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could adversely affect our profitability.

Foreign acquisitions involve special risks, including those related to integration of operations across different cultures, languages, and
legal systems, currency risks, and the particular economic, political, and regulatory risks associated with specific countries. In addition, we may incur significant transaction fees and expenses, including expenses for transactions that may not be
consummated. In any event, as a result of future acquisitions, we might need to issue additional equity securities, spend our cash, or incur debt or assume significant liabilities, any of which could adversely affect our business and results of
operations.

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

A fundamental requirement for online communications is the secure transmission of confidential
information over the Internet. Third-parties may attempt to breach the security provided by our products, or the security of our customers internal systems. If they are successful, they could obtain confidential information about our
customers end users, including their passwords, financial account information, credit card numbers or other personal information. Our customers or their end users may file suits against us for any breach in security, which could result in
costly litigation or harm our reputation. The perception of security risks, whether or not valid, could inhibit market acceptance of our products. Despite our implementation of security measures, our software is vulnerable to computer viruses,
electronic break-ins, intentional overloading of servers and other sabotage, and similar disruptions, which could lead to interruptions, delays, or loss of data. The occurrence or perception of security breaches could harm our business, financial
condition and operating results.

Natural or manmade disasters, business interruptions and health epidemics could delay our ability to
receive or ship our products, or otherwise disrupt our business.

Our worldwide operations could be subject to earthquakes, power
shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, health epidemics and other natural or manmade disasters or business interruptions. The occurrence of any of these
business disruptions could seriously harm our revenue and financial condition and increase our costs



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and expenses. Our corporate headquarters, and a portion of our research and development activities, are located in Redwood City, California near major earthquake faults. The destruction of our
facilities could harm our business. Although we have established a comprehensive disaster recovery plan, our back-up operations may be inadequate and our business interruption insurance may not be enough to compensate us for any losses that may
occur. A significant business interruption could result in losses or damages and harm our business.

Our business in countries with a
history of corruption and transactions with foreign governments, including with government owned or controlled wireless carriers, increases the risks associated with our international activities.

As we operate and sell internationally, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, and other laws that prohibit improper
payments or offers of payments to foreign governments and their officials and political parties by the United States and other business entities for the purpose of obtaining or retaining business. We have operations, deal with carriers and make
sales in countries known to experience corruption, particularly certain emerging countries in East Asia, Eastern Europe and Latin America, and further international expansion may involve more of these countries. Our activities in these countries
create the risk of unauthorized payments or offers of payments by one of our employees, consultants, sales agents or distributors that could be in violation of various laws including the FCPA, even though these parties are not always subject to our
control. We have attempted to implement safeguards to prevent these practices by our employees, consultants, sales agents and resellers. However, our existing safeguards and any future improvements may prove to be less than effective, and our
employees, consultants, sales agents or distributors may engage in conduct for which we may be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and we may be subject to other liabilities, which could
negatively affect our business, operating results and financial condition.

Compliance with laws, rules and regulations relating to
corporate governance and public disclosure may result in additional expenses.

Federal securities laws, rules and regulations, as well as
NASDAQ rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee
members and impose civil and criminal penalties for companies and their Chief Executive Officers, Chief Financial Officers and directors for securities law violations. These laws, rules and regulations and the interpretation of these requirements
are evolving, and we are making investments to evaluate current practices and to continue to achieve compliance. As a result, our compliance programs have increased and will continue to increase general and administrative expenses and have diverted
and will continue to divert managements time and attention from revenue-generating activities. Further, in July 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) which
includes various provisions requiring the Securities and Exchange Commission to adopt new rules and regulations with respect to enhanced investor protection, corporate governance and executive compensation. We expect the Dodd-Frank Act and the rules
and regulations promulgated there under to increase our legal and financial compliance costs and to make some activities more time consuming and costly.

We face litigation risks that could have a material adverse effect on our company.

We may
be the subject of private or government actions. For example, in the past we have been the subject of several shareholder derivative lawsuits relating to our past option grants and practices.



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Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits may result in
significant expense and a diversion of managements time and attention from the operation of our business, which could impede our ability to achieve our business objectives and an unfavorable outcome may have a material adverse effect on our
business, financial condition and results of operations. Additionally, any amount that we may be required to pay to satisfy a judgment or settlement of litigation may not be covered by insurance. Under our charter and the indemnification agreements
that we have entered into with our officers and directors, we are required to indemnify, and advance expenses to them in connection with their participation in proceedings arising out of their service to us. There can be no assurance that any of
these payments will not be material.

Our investments in marketable securities are subject to market risks which may cause losses and
affect the liquidity of these investments.

At June 30, 2010, and December 31, 2010, we held auction-rate securities with a fair
market value of approximately $9.3 million and a par value of $12.5 million. Between September 30, 2008 and December 31, 2009, we determined that the declines in the fair value of these investments were other-than-temporary and
recorded impairment charges equal to $1.4 million, based on our estimate of fair value in our consolidated statement of operations for the corresponding quarters. If the global credit market continues to deteriorate and broker-dealers do not renew
their support of auctions for auction-rate securities, our investment portfolio may continue to be impacted, and we could determine that some of these investments are further impaired. In addition, if we were to liquidate our position in these
securities, the amount realized could be materially different than the estimated fair value amounts at which we are carrying these investments which could have a material adverse affect on our financial condition.

Adverse changes in general economic or political conditions could adversely affect our operating results.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical and economic conditions, conditions in the
financial services markets, the overall demand for our products and services and general political and economic developments. A weakening of the global economy, or economic conditions in the United States or other key markets, could cause delays in
and decreases in demand for our products. For example, there is increasing uncertainty about the direction and relative strength of the United States economy because of the various challenges that are currently affecting it. If the challenging
economic conditions in the United States and other key countries persist or worsen, other customers may delay or reduce spending. This could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new
technologies and increased price competition. Any of these events would likely harm our business, results of operations and financial condition.

Our revolving credit facility with Silicon Valley Bank contains certain restrictive covenants that limit our discretion in the operation of our business, which could have a materially adverse effect on
our business, financial condition and results of operations.

In January 2009, we entered into a $40.0 million secured revolving credit
facility with Silicon Valley Bank, as subsequently amended, which contains numerous restrictive covenants that require us to comply with and maintain certain financial tests and ratios, thereby restricting our ability to:



| |  |  | Incur debt;
| | - |  | -----------



| |  |  | Incur liens;
| | - |  | ------------



| |  |  | Redeem or prepay subordinated debt;
| | - |  | -----------------------------------



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| |  |  | Make acquisitions of businesses or entities to sell certain assets;
| | - |  | -------------------------------------------------------------------



| |  |  | Make investments, including loans, guarantees and advances;
| | - |  | -----------------------------------------------------------



| |  |  | Make capital expenditures beyond a certain threshold;
| | - |  | -----------------------------------------------------



| |  |  | Engage in transactions with affiliates;
| | - |  | ---------------------------------------



| |  |  | Pay dividends or limit the amount of stock repurchases; and
| | - |  | -----------------------------------------------------------



| |  |  | Enter into certain restrictive agreements
| | - |  | -----------------------------------------

Our ability to comply with covenants contained in our credit agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions.

Our current credit agreement is secured by a pledge of all of our assets. If we were to default under our current credit agreement and were unable to
obtain a waiver or an amendment for such a default, the lenders would have a right to foreclose on our assets in order to satisfy our obligations under the current credit agreement and could require us to put up cash collateral for any outstanding
letter of credit balances. Any such action on the part of the lenders against us could have a materially adverse impact on our business, financial condition and results of operations.

We depend on recruiting and retaining key management and technical personnel with telecommunications and Internet software experience who are integral in developing, marketing and selling our products.

Because of the technical nature of our products and the dynamic market in which we compete, our performance depends on attracting and
retaining key management and other employees. In particular, our future success depends in part on the continued service of many of our current employees, including key executives and key engineers and other technical employees. Competition for
qualified personnel in the telecommunications, Internet software and Internet messaging industries is significant, especially in the San Francisco Bay Area in which we are located. We believe that there are only a limited number of persons with the
requisite skills to serve in many of our key positions, and it is generally difficult to hire and retain these persons. Furthermore, it may become more difficult to hire and retain key persons as a result of our past restructurings, any future
restructurings, and our past stock performance. Competitors and others have in the past, and, may in the future, attempt to recruit our employees. In the event of turnover within key positions, integration of new employees will require additional
time and resources, which could adversely affect our business plan. If we are unable to attract or retain qualified personnel, our business could be adversely affected.

Risks Related to Owning Our Common Stock

Our quarterly operating results may fluctuate
significantly as a result of factors outside of our control, which could cause the market price of our common stock to decline.

We expect
our revenues and operating results to vary from quarter to quarter. As a consequence, our operating results in any single quarter may not meet the expectations of securities analysts and investors, which could cause the price of our common stock to
decline. Our revenue, particularly our licensing revenue, is difficult to forecast and is likely to fluctuate from quarter to quarter.

Factors that may lead to significant fluctuation in our operating results include, but are not limited to:



| |  |  | delays in or cancellation of orders from key customers;
| | - |  | -------------------------------------------------------



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| |  |  | the introduction of new products or services or changes in pricing policies by us or our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | delays in development, launch, market acceptance or implementation by our customers of our products and services;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | changes in demand and purchasing patterns of our customers for our products;
| | - |  | ----------------------------------------------------------------------------



| |  |  | changes in our revenue mix among license, maintenance and support and professional services;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | restructuring or impairment charges we may take;
| | - |  | ------------------------------------------------



| |  |  | revenue recognition and other accounting policies;
| | - |  | --------------------------------------------------



| |  |  | potential slowdowns or quality deficiencies in the introduction of new telecommunication networks, technologies or handsets for which our solutions are
designed;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | development of new relationships and penetration of new markets and maintenance and enhancement of existing relationships with customers and strategic
partners;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | deferral of customer contracts in anticipation of product or service enhancements;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | timing of new governmental, statutory and industry association requirements;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the relative mix of our North America and international engagements which typically carry lower margins;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | fluctuations in currency exchange rates; and
| | - |  | --------------------------------------------



| |  |  | industry and economic conditions, including competitive pressures.
| | - |  | ------------------------------------------------------------------

Our customers often defer execution of our agreements until the last week of the quarter if they elect to purchase our products. Approximately 75%-80% of our quarterly bookings typically occur in the last
month of a quarter and the pattern for revenue generation during that month is normally not linear. Accordingly, we may not recognize revenue as anticipated during a given quarter when customers defer orders, delay the timing of our implementation
services or ultimately elect not to purchase our products. Therefore, we could be in a position where we do not achieve our financial targets for a quarter and not determine this until very late in the quarter or after the quarter is over. As a
result, our visibility into our revenue to be recognized for future periods is limited.

In addition, our operating results could be impacted
by the amount and timing of operating costs and capital expenditures relating to our business and our ability to accurately estimate and control costs. Most of our expenses, such as compensation for current employees and lease payments for
facilities and equipment, are largely fixed. In addition, our expense levels are based, in part, on our expectations regarding future revenues. As a result, any shortfall in revenues relative to our expectations could cause significant changes in
our operating results from period to period. In this regard, our bookings may not be indicative of revenue that will be recognized in current or subsequent periods. Due to the foregoing factors, we believe period-to-period comparisons of our
historical operating results may be of limited use. In any event, we may be unable to meet our internal projections or the projections of securities analysts and investors. If we are unable to do so, we expect that, as in the past, the trading price
of our stock may fall dramatically.



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In addition, we have in the past and may continue to experience periodic variations in sales to our
strategic customers and international markets. These periodic variations occur throughout the year and may lead to fluctuations in our quarterly operating results depending on the impact of any given market during that quarter and could lead to
volatility in our stock price.

Provisions of our corporate documents and Delaware law may discourage an acquisition of our business, which
could affect our stock price.

Our charter and bylaws may inhibit changes of control that are not approved by our Board of Directors. In
particular, our certificate of incorporation includes provisions for a classified Board of Directors, authorizes the Board of Directors to issue preferred stock without stockholder approval, prohibit cumulative voting in director elections and
prohibit stockholders from taking action by written consent. Further, our bylaws include provisions that prohibit stockholders from calling special meetings and require advance notice for stockholder proposals or nomination of directors. We are also
subject to Section 203 of the Delaware General Corporation Law, which generally prevents a person who becomes the owner of 15 percent or more of the corporations outstanding voting stock from engaging in specified business combinations
for three years unless specified conditions are satisfied. These provisions could have the effect of delaying or preventing changes in control or management.

Our stock price has been and is likely to continue to be volatile and you may not be able to resell shares of our common stock at or above the price you paid, if at all.

The trading price of our common stock has experienced wide fluctuations due to the factors discussed in this risk factors section and elsewhere in this
Annual Report. In addition, the stock market in general has, and the NASDAQ Global Market and technology companies in particular have, experienced extreme price and volume fluctuations. These trading prices and valuations may not be sustainable.
These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a
companys securities, securities class action litigation has often been instituted against companies that experienced such volatility. This litigation, if instituted against us, regardless of its outcome, could result in substantial costs and a
diversion of our managements attention and resources.

Item 6. Exhibits

See the Index to Exhibits which follows the signature page of this Quarterly Report on Form 10-Q, which is incorporated here by reference.



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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.

Date: February 8, 2011



OPENWAVE SYSTEMS INC.By:

/s/ Anne BrennanAnne BrennanChief Financial Officer(Principal Financial and Chief Accounting OfficerAnd Duly Authorized Officer)




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INDEX TO EXHIBITS



|              |  |                                                                                                                                                                                                                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                  
|              | 
|3.1           |  | Restated Certificate of Incorporation of Openwave Systems Inc. (the Company), (incorporated by reference to Exhibit 3.1 to the Companys Annual Report on Form
10-K filed with the Securities and Exchange Commission on September 7, 2010 (Commission No. 001-16703)).                    
|              | 
|3.2           |  | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report
on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2003 (Commission No. 001-16703)).
|              | 
|3.3           |  | Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 30, 2010 (Commission No. 001-16703)).                                                             
|              | 
|4.1           |  | Form of the Companys Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Companys Annual Report on Form 10-K filed August 28,
2003).                                                                                                                                 
|              | 
|10.1          |  | Limited Waiver to Loan and Security Agreement dated February 1, 2011.                                                                                                                                                                                                                        
|              | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                      
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                         
|              | 
|32.1          |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                           



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