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BALANCE SHEET ACCOUNTS

6 Months Ended

Oct. 31, 2011

3. BALANCE SHEET ACCOUNTS

Inventories

Inventories comprised (in thousands):

	October 31, 2011		April 30, 2011

Raw materials	$	45	$	37
Finished goods	4,592		4,652

Total	$	4,637	$	4,689

Stock-based compensation included in inventories was not material at October 31, 2011 and April 30, 2011, respectively.

Investments

The following table summarizes the Company’s investments as of October 31, 2011 (in thousands):

			Gross		Gross
			Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
Certificates of deposit	$	3,360	$	—	$	—		$	3,360
Asset backed preferred equity securities	9,975		—		(9,875		)	100
Total	$	13,355	$	—	$	(9,875	)	$	3,460

The following table summarizes the Company’s investments as of April 30, 2011 (in thousands):

	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	3,360	$	—	$	—		$	3,360
Asset backed preferred equity securities	9,975		—		(9,875		)	100
Total	$	13,335	$	—	$	(9,875	)	$	3,460

As of April 30, 2011 and October 31, 2011, all of the Company’s short-term investments were held in certificates of deposit and long-term investments were held in asset backed preferred equity securities. The long-term investments are tied to auction rate securities that failed to settle at auction beginning in fiscal 2008, for which there appears to be no near-term market. Although these securities would normally be classified as short-term, as they typically settle every 28 days, they have been reclassified to long-term pending them settling at auction. As of October 31, 2011 and April 30, 2011, the Company continued to hold asset backed preferred equity securities with a par value of $10.0 million and a carrying value of $0.1 million.

For the three and six months ended October 31, 2011 and 2010, no gains or losses were realized on the sale of short-term and long-term investments. There were no unrealized holding gains or losses included in accumulated other comprehensive loss in the accompanying Condensed Consolidated Balance Sheets as of October 31, 2011 and April 30, 2011.

The Company uses the concept of fair value based on estimated discounted future cash flows to value its asset backed preferred equity securities that included the following significant inputs and considerations, which have been applied on a consistent basis for all periods presented:

· projected interest income and principal payments through the expected holding period;

· the impact of penalty interest provisions on the likelihood and timing of redemption of the underlying security by its issuer;

· a market risk adjusted discount rate, which was based on actual securities traded in the open market that had similar collateral composition to the asset backed preferred equity securities as of October 31, 2011, adjusted for an expected yield premium to compensate for the current lack of liquidity resulting from failing auctions for such securities; and

· in the case of one of the Company’s auction rate securities which was converted into AMBAC preferred shares, default or collateral value risk adjustments were considered for the discount rate, because AMBAC continues to be down graded by rating agencies and is experiencing increasing liquidity issues.

The accounting guidance on fair value accounting clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the guidance on fair value accounting establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its short-term and long-term investments.

When available, the Company uses quoted market prices to determine fair value of certain of its cash and cash equivalents including money market funds and certain certificates of deposit, which are reported under investments, such items are classified in Level 1 of the fair value hierarchy. At October 31, 2011 and April 30, 2011, there were no active markets for the Company’s asset backed preferred equity securities resulting from converted auction rate securities, or comparable securities due to current market conditions. Therefore, until such a market becomes active, the Company is determining their fair value based on expected discounted cash flows. Such items are classified in Level 3 of the fair value hierarchy.

The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of October 31, 2011 (in thousands):

	Fair Value		Level 1		Level 2		Level 3

Assets
Money market funds-recurring	$	19,613	$	19,613	$	—	$	—
Certificates of deposit-recurring	3,600		3,600		—		—
Asset backed preferred equity securities-recurring	100		—		—		100

Total	$	23,313	$	23,313	$		$	100

The following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2011 (in thousands):

	Fair Value		Level 1		Level 2		Level 3

Assets
Money market funds-recurring	$	19,040	$	19,040	$	—	$	—
Certificates of deposit-recurring	3,360		3,360		—		—
Asset backed preferred equity securities-recurring	100		—		—		100

Total	$	22,500	$	22,400	$	—	$	100

The following table presents the changes in the Level 3 fair value category for the six months ended October 31, 2011 (in thousands):

Net Realized/Unrealized

Gains (Losses) included in

Impairment
Loss
Recognized

Unrealized Gain
Recognized in
Other

Purchases, (Sales),
Accretion of
Interest,

Transfers in

October

April 30,

Comprehensive

Issuances and

and/or (out)

31,

2011

Earnings

Income (Loss)

(Settlements)

of Level 3

2011

Assets

Asset backed preferred equity securities

100

—

100

The following table presents the changes in the Level 3 fair value category for the year ended April 30, 2011 (in thousands):

			Net Realized/Unrealized
			Gains (Losses) included in
	May 1,		Impairment Loss Recognized in		Unrealized Gain Recognized in Other Comprehensive		Purchases, (Sales), Accretion of Interest, Issuances and			Transfers in and/or (out)		April 30,
	2010		Earnings		Income (Loss)		(Settlements)			of Level 3		2011

Assets
Asset backed preferred equity securities	$	100	$	—	$	—	$	—		$	—	$	100

Liabilities
Long-term convertible note payable	$	3,277	$	—	$	—	$	(3,277	) (1)	$	—	$	—

(1) Reflects the payment of a $3.5 million non-interest bearing convertible note payable to Simulscribe in conjunction with the Company’s exclusive distribution agreement. The note was recorded at an initial fair value of $3.2 million and approximately $0.2 million of interest had been accreted.

Accrued expenses

Accrued expenses comprised (in thousands):

	October 31, 2011		April 30, 2011
Accrued employee compensation	$	1,120	$	1,109
Accrued warranty	113		139
Accrued restructuring costs	9		42
Other accrued expenses	310		342
Total	$	1,552	$	1,632

Warranty Accrual. The Company provides for future warranty costs upon shipment of its products. The specific terms and conditions of those warranties may vary depending on the product sold, the customer and the country in which it does business. However, the Company’s hardware warranties generally start from the shipment date and continue for a period of two to five years while the software warranty is generally ninety days to one year.

Because the Company’s products are manufactured to a standardized specification and products are internally tested to these specifications prior to shipment, the Company historically has experienced minimal warranty costs. Factors that affect the Company’s warranty liability include the number of installed units, historical experience and management’s judgment regarding anticipated rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities every quarter and makes adjustments to the liability, if necessary.

Changes in the warranty accrual, which is included as a component of “Accrued expenses” on the Condensed Consolidated Balance Sheet, were as follows (in thousands):

	Three months ended						Six months ended
	October 31,						October 31,
	2011			2010			2011			2010

Balance as of the beginning of the fiscal period	$	138		$	254		$	139		$	301
Provision for warranties issued during fiscal period	(14		)	20			—			32
Warranty costs incurred during fiscal period	(11		)	(25		)	(26		)	(34		)
Other adjustments to the liability (including changes in estimates for pre-existing warranties) during fiscal period	—			(53		)	—			(103		)

Balance as of October 31	$	113		$	196		$	113		$	196

Reduction in Force.

In July 2011, the Company initiated a reduction in force that was completed by October 31, 2011, in an ongoing attempt to reduce operating expenses. The affected employees were notified in July 2011. As a result, the Company reduced its headcount by approximately 8%, and realized charges of approximately $130,000 for severance and related charges, $9,000 of which has been reflected as an accrued expense at October 31, 2011, and represents accrued expense for outplacement services available to the affected employees through September 2012. No such charge was recorded in the three or six months ended October 31, 2010.

At April 30, 2011, accrued expense included a balance of $42,000 pertaining to a facility abandonment charge resulting from the reduction in force in November 2009. The related sublease expired fully on July 31, 2011.

Reduction in force costs for the three and six month periods ended October 31, 2011 and 2010 were as follows (in thousands):

	Three months ended					Six months ended
	October 31,					October 31,
$s in thousands	2011			2010		2011		2010
Cost of revenue	$	—		$	—	$	45	$	—
Sales and marketing	(13		)	—		36		—
Research and development	—			—		28		—
General and administrative	21			—		21		—
Total	$	8		$	—	$	130	$	—

The Company’s Voice Quality Enhancement segment incurred $8,000 and $120,000 of reduction in force costs during the three and six months ended October 31, 2011, respectively, and $10,000 was incurred by the Voice Applications segment during the six months ended October 31, 2011.