UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended January 31, 2008

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

For the Transition Period from           to

ArcSight, Inc.

(Exact name of the Registrant as Specified in its Charter)

Delaware		52-2241535
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

5 Results Way
Cupertino, California 95014
(Address of Principal Executive Offices, including Zip Code)

(408) 864-2600
(Registrant’s Telephone Number, including Area Code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 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 þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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. (Check one):

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

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

     Shares of ArcSight, Inc. common stock, $0.00001 par value per share, outstanding as of March 1, 2008: 31,006,346 shares.

 

 

ARCSIGHT, INC.

FORM 10-Q

Quarterly Period Ended January 31, 2008

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			3
Condensed Consolidated Balance Sheets as of January 31, 2008 and April 30, 2007			3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended January 31, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2008 and 2007			5
Notes to Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			42
ITEM 4. CONTROLS AND PROCEDURES			43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			43
ITEM 1A. RISK FACTORS			43
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			59
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			60
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			60
ITEM 5. OTHER INFORMATION			61
ITEM 6. EXHIBITS			61
SIGNATURES			62
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARCSIGHT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts and par value)

		As of				As of
		January 31,				April 30,
		2008				2007
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	21,231			$	16,917
Accounts receivable, net			9,399				15,554
Capitalized software licenses, current			1,998				249
Other prepaid expenses and current assets			2,786				2,207
Total current assets			35,414				34,927
Restricted cash			842				842
Income taxes receivable			738				761
Property and equipment, net			4,915				2,753
Goodwill			5,746				5,746
Acquired intangible assets, net			2,304				2,734
Capitalized software licenses, non-current			589				394
Other long-term assets			3,863				833
Total assets		$	54,411			$	48,990
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	834			$	2,846
Accrued compensation and benefits			6,154				6,678
Obligations for software licenses			2,427				551
Other accrued liabilities			3,590				3,869
Deferred revenues, current			28,678				24,794
Total current liabilities			41,638				38,738
Deferred revenues, non-current			2,734				4,794
Other long-term liabilities			1,709				328
Total liabilities			46,126				43,860
Stockholders’ equity:
Convertible preferred stock, $0.00001 par value per share; aggregate liquidation preference of $26,918 as of January 31, 2008 (unaudited) and April 30, 2007; 21,601,752 shares authorized as of January 31, 2008 (unaudited) and April 30, 2007; 13,041,062 and 13,032,497 shares issued and outstanding as of January 31, 2008 (unaudited) and April 30, 2007, respectively			26,758				26,758
Common stock, $0.00001 par value per share; 32,500,000 shares authorized as of January 31, 2008 (unaudited) and April 30, 2007; 10,990,993 and 10,620,041 issued and outstanding as of January 31, 2008 (unaudited) and April 30, 2007, respectively			—				—
Additional paid-in capital			27,391				23,479
Deferred stock-based compensation			(169	)			(554	)
Accumulated other comprehensive income (loss)			(48	)			13
Accumulated deficit			(45,647	)			(44,566	)
Total stockholders’ equity			8,285				5,130
Total liabilities and stockholders’ equity		$	54,411			$	48,990

See accompanying Notes to Condensed Consolidated Financial Statements.

ARCSIGHT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Revenues:
Products		$	17,698			$	10,209			$	45,573			$	26,883
Maintenance			7,380				4,611				19,627				12,379
Services			2,593				1,914				6,969				5,191
Total revenues			27,671				16,734				72,169				44,453
Cost of revenues:
Products			1,487				625				3,301				1,674
Maintenance (1)			1,456				851				4,083				2,501
Services (1)			1,454				847				3,894				2,731
Total cost of revenues			4,397				2,323				11,278				6,906
Gross profit			23,274				14,411				60,891				37,547
Operating expenses (1):
Research and development			5,063				3,636				14,170				10,569
Sales and marketing			12,760				9,226				37,367				24,689
General and administrative			2,939				2,125				9,927				5,986
Total operating expenses			20,762				14,987				61,464				41,244
Income (loss) from operations			2,512				(576	)			(573	)			(3,697	)
Interest income			158				189				422				449
Other income and expense, net			(60	)			(58	)			(284	)			(134	)
Income (loss) before provision for income taxes			2,610				(445	)			(435	)			(3,382	)
Provision for income taxes			257				97				514				292
Net income (loss)		$	2,353			$	(542	)		$	(949	)		$	(3,674	)
Net income (loss) per common share, basic		$	0.22			$	(0.05	)		$	(0.09	)		$	(0.38	)
Net income (loss) per common share, diluted		$	0.09			$	(0.05	)		$	(0.09	)		$	(0.38	)
Shares used in computing basic net income (loss) per common share			10,829				10,153				10,609				9,571
Shares used in computing diluted net income (loss) per common share			27,458				10,153				10,609				9,571

Cost of maintenance revenues		$	24			$	1			$	62			$	2
Cost of services revenues			23				3				69				7
Research and development			293				136				940				358
Sales and marketing			771				110				1,912				205
General and administrative			171				98				432				270

See accompanying Notes to Condensed Consolidated Financial Statements.

ARCSIGHT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

		Nine Months Ended
		January 31,
		2008				2007
Cash flows from operating activities:
Net loss			($949	)			($3,674	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization			1,364				1,009
Amortization of acquired intangibles			430				346
Gain (loss) on disposal of property and equipment			(7	)			3
Stock-based compensation			3,415				842
Provision for allowance for doubtful accounts			33				50
Changes in operating assets and liabilities:
Accounts receivable			6,122				(1,958	)
Prepaid expenses and other assets			1,024				(265	)
Income taxes receivable			23				114
Accounts payable			(2,012	)			85
Accrued compensation and benefits			(524	)			1,523
Other accrued liabilities			731				269
Deferred revenues			1,824				11,341
Net cash provided by operating activities			11,474				9,685
Cash flows from investing activities:
Acquisition of Enira Technologies, LLC			—				(7,209	)
Purchase of property and equipment			(3,524	)			(1,489	)
Proceeds from sales of property and equipment			13				—
Net cash used in investing activities			(3,511	)			(8,698	)
Cash flows from financing activities:
Initial public offering preparation costs			(3,002	)			—
Proceeds from exercise of stock options, net of repurchases			839				543
Payments of capital lease and software license obligations			(1,425	)			(270	)
Net cash provided by (used in) financing activities			(3,588	)			273
Effect of exchange rate changes on cash			(61	)			16
Net increase in cash and cash equivalents			4,314				1,276
Cash and cash equivalents at beginning of period			16,917				16,443
Cash and cash equivalents at end of period		$	21,231			$	17,719
Supplemental information:
Income taxes paid			276				128
Common stock issued to non-employee for settlement of preferred stock financing costs and for consulting services			—				178
Issuance of restricted stock in connection with acquisition of Enira Technologies, LLC			—				808
Common stock issued for acquisition of Enira Technologies, LLC			—				1,538

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

ARCSIGHT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.  Description of Business

     ArcSight, Inc. (“ArcSight” or the “Company”) is a leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” the Company’s ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which the Company refers to as events, across geographically dispersed and heterogeneous business and technology infrastructures. The Company’s software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. ArcSight also provides complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration. The Company is headquartered in Cupertino, California, and was incorporated on May 3, 2000 under the laws of the state of Delaware.

2.  Significant Accounting Policies

Basis of Presentation and Consolidation

     The condensed consolidated balance sheet as of April 30, 2007 is derived from audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions have been eliminated on consolidation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Prospectus dated February 14, 2008, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended.

     On November 20, 2007, the Board of Directors and the Company’s stockholders approved a 1-for-4 reverse stock split of the Company’s outstanding shares of common stock and convertible preferred stock (the “Reverse Split”). All authorized, reserved, issued and outstanding common stock, convertible preferred stock and per share amounts contained in the condensed financial statements have been retroactively adjusted to reflect the Reverse Split.

     On June 2, 2006, the Company completed the acquisition of substantially all of the assets of Enira Technologies, LLC, a privately-held provider of solutions for responding to network security compromises. The accompanying consolidated financial statements include the combined activity since the date of the acquisition.

Unaudited Interim Financial Information

     The accompanying interim consolidated balance sheet as of January 31, 2008, the consolidated statements of operations for the three and nine months ended January 31, 2008 and 2007 and the consolidated statements of cash flows for the nine months ended January 31, 2008 and 2007 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of January 31, 2008, its results of operations for the three and nine months, and its cash flows for the nine months ended January 31, 2008 and 2007. The results of operations for the three and nine months ended January 31, 2008 are not necessarily indicative of the results to be expected for fiscal 2008 or for any other interim period or for any other future year.

Use of Estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 financial statements as well as the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions, and its beliefs on what could occur in the future, given available information. Estimates are used for, but are not limited to, revenue recognition, determination of fair value of stock awards, valuation of goodwill and intangible assets acquired in business combinations, impairment of goodwill and other intangible assets, amortization of intangible assets, contingencies and litigation, allowances for doubtful accounts, and accrued liabilities. Actual results may differ from those estimates, and such differences may be material to the financial statements.

Cash and Cash Equivalents

     The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. The Company’s cash equivalents consist of money market accounts on deposit with a bank and are stated at cost, which approximates fair value.

Fair Value of Financial Instruments

     The carrying amounts of cash equivalents, restricted cash, trade accounts receivable, accounts payable, other accrued liabilities and derivative financial instruments approximate their respective fair values due to their relative short-term maturities.

Foreign Currency Translation/Transactions

     The functional currency of the Company’s foreign subsidiaries is the local currency. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are recorded as a separate component of accumulated other comprehensive income (loss). Income and expense accounts are translated into U.S. dollars at average rates of exchange prevailing during the periods presented. All assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the exchange rates in effect on the balance sheet dates.

     Net foreign currency transaction gains (losses) of approximately $2,000 and ($49,000) for the three months, and ($0.1 million) and ($0.1 million), for the nine months ended January 31, 2008 and 2007, respectively, were primarily the result of the settlement of inter-company transactions and are included in other expense.

Derivative Financial Instruments

     The majority of the Company’s sales are denominated in United States dollars; however, there are some sales transactions denominated in foreign currencies. In addition, the Company’s foreign subsidiaries pay their expenses in local currency. Therefore, movements in exchange rates could cause net sales and expenses to fluctuate, affecting the Company’s profitability and cash flows. The Company’s general practice is to use foreign currency forward contracts to reduce its exposure to foreign currency exchange rate fluctuations. Unrealized gains and losses associated with these foreign currency contracts are reflected in the Company’s balance sheet and recorded in prepaid expenses and other current assets or accrued expenses and other current liabilities. Changes in fair value and premiums paid for foreign currency contracts are recorded directly in other expense in the consolidated statements of operations. The objective of these contracts is to reduce the impact of foreign currency exchange rate movements on the Company’s operating results. All of the Company’s foreign currency forward contracts mature within 12 months from the balance sheet date. The Company does not use derivatives for speculative or trading purposes, nor does the Company designate its derivative instruments as hedging instruments, as defined by the Financial Accounting Standard Board (“FASB”) under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”).

Concentration of Credit Risk and Business Risk

     Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents and accounts receivable. The Company is exposed to credit risk in the event of default by the financial institution holding its cash and cash equivalents to the extent recorded on its balance sheet. Risks associated with cash equivalents are mitigated by banking with

high-credit quality institutions. To date, the Company has not experienced any significant losses on its cash and cash equivalents. The Company performs periodic evaluations of the relative credit standing of the financial institutions.

     The Company sells its products and maintenance and services to customers and resellers in the Americas, Europe and Asia, with the majority of its sales in United States. The Company monitors its exposure within accounts receivable and records an allowance against doubtful accounts as necessary. The Company performs ongoing credit evaluations of its customers and extends credit in the normal course of business and generally does not require collateral. Historically, the Company has not experienced significant credit losses on its accounts receivable. Management believes that any risk of loss for trade receivables is mitigated by the Company’s ongoing credit evaluations of its customers.

     The majority of ArcSight’s revenues are derived from sales of the ESM product and related products and services, and the Company expects this to continue for the foreseeable future. As a result, although the Company has introduced complementary appliance products in fiscal 2007 for which the Company uses a single source for manufacture and fulfillment of the appliance product, the Company’s revenues and operating results will continue to depend substantially on the demand for the ArcSight ESM product. Demand for ArcSight ESM is affected by a number of factors beyond the Company’s control including, the timing of development and release of new products by the Company and its competitors, technological change, lower-than-expected growth or a contraction in the worldwide market for enterprise security and compliance management solutions and other risks. If the Company is unable to continue to meet customer demands or achieve more widespread market acceptance of ArcSight ESM, its business, operating results, financial condition and growth prospects will be adversely affected.

Revenue Recognition

     The Company derives its revenues from three sources: (1) sales of software licenses and related appliances (“products”); (2) fees for maintenance to provide unspecified upgrades and customer technical support; and (3) fees for services, which includes services performed in connection with time-and-materials based consulting agreements (“maintenance” and “services”).

     For all sales, revenues are subject to the guidance and requirements of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by SOP No. 98-9, “Software Revenue Recognition with Respect to Certain Arrangements” (“SOP 98-9”).

     The Company enters into software license agreements through direct sales to customers and through resellers. The license agreements include post-contract customer support and may include professional services deliverables. Post-contract customer support includes rights to receive unspecified software product updates and upgrades, maintenance releases and patches released during the term of the support period, and Internet and telephone access to technical support personnel and content. Professional services include installation and implementation of the Company’s software and customer training. Professional services are not essential to the functionality of the associated licensed software.

     For all sales, revenues attributable to an element in a customer arrangement are recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable and collectibility is reasonably assured.

     The Company typically uses a binding purchase order in conjunction with either a signed contract or reference on the purchase order to the terms and conditions of the Company’s shrinkwrap or end-user license agreement as evidence of an arrangement. In circumstances where the customer does not issue purchase orders separate from a signed contract, the Company uses the signed contract as evidence of the arrangement. Sales through its significant resellers are evidenced by a master agreement governing the relationship.

     Resellers and systems integrators purchase products for specific end users and do not hold inventory. Resellers and systems integrators perform functions that include delivery to the end customer, installation or integration and post-sales service and support. The agreements with these resellers and systems integrators have terms that are generally consistent with the standard terms and conditions for the sale of the Company’s products and services to end users and do not provide for product rotation or pricing allowances. Revenues on sales to resellers and systems integrators are recognized after delivery to the end user on a sell-through basis, provided all other criteria for revenue recognition have been met.

     At the time of each transaction, the Company assesses whether the fees associated with the transaction are fixed or determinable. If a significant portion of a fee is due after the Company’s normal payment terms, currently up to three months (payment terms beyond

three months are considered to be extended terms), or if as a result of customer acceptance provisions, the price is subject to refund or forfeiture, concession or other adjustment, then the Company considers the fee not to be fixed or determinable. In the limited instances in which these cases occur, revenues are deferred and recognized when payments become due and payable, or the right to refund or forfeiture, concession or adjustment, if any, lapses upon customer acceptance.

     The Company assesses whether collection is reasonably assured based on a number of factors including the creditworthiness of the customer as determined by credit checks and analysis, past transaction history, geographic location and financial viability. The Company generally does not require collateral from customers. If the determination is made at the time of the transaction that collection of the fee is not reasonably assured, then all of the related revenues are deferred until the time that collection becomes reasonably assured, which in some cases requires the collection of cash prior to recognition of the related revenues.

     The Company uses shipping documents, contractual terms and conditions and customer acceptance, when applicable, to verify delivery to the customer. For perpetual software license fees in arrangements that do not include customization, or services that are not considered essential to the functionality of the licenses, delivery is deemed to occur when the product is delivered to the customer. Services and consulting arrangements that are not essential to the functionality of the licensed product are recognized as revenues as these services are provided. Delivery of maintenance agreements is considered to occur on a straight-line basis over the life of the contract, typically 12 months.

     Vendor-specific objective evidence of fair value (“VSOE”) for maintenance and support services is based on separate sales and/or renewals to other customers or upon renewal rates quoted in contracts when the quoted renewal rates are deemed substantive in both rate and term. VSOE for professional services is established based on prices charged to customers when such services are sold separately. For deliverables and multiple element arrangements subject to SOP 97-2, as amended by SOP 98-9, when VSOE exists for all of the undelivered elements of the arrangement, but does not exist for the delivered elements in the arrangement, the Company recognizes revenues under the residual method. Under the residual method, at the outset of the arrangement with a customer, revenues are deferred for the fair value of the undelivered elements. Revenues for the remainder of the arrangement fee attributed to the delivered elements (typically software licenses and appliances) are recognized when all of the applicable criteria in SOP 97-2 have been met. In the event that VSOE for maintenance services does not exist, and this represents the only undelivered element, revenues for the entire arrangement are recognized ratably over the performance period. Revenues from maintenance and support agreements are recognized on a straight-line basis over the life of the contract.

     Many of the Company’s product contracts include implementation and training services. When products are sold together with such services, license fees are recognized upon delivery, provided that (i) the criteria of software revenue recognition have been met, (ii) payment of the license fees is not dependent upon the performance of the services, and (iii) the services do not provide significant customization of the products and are not essential to the functionality of the software that was delivered. The Company does not provide significant customization of its software products. These services are recognized on a time-and-materials basis.

     The cost of providing the Company’s products and maintenance and services consists primarily of direct material costs for products and the fully burdened cost of the Company’s service organization for maintenance and services. Shipping and handling costs incurred for product shipments are recorded in cost of product revenues in the accompanying condensed consolidated statements of operations. If it becomes probable that the amount allocated to an undelivered element will result in a loss on that element of the arrangement, the loss is recognized pursuant to SFAS No. 5, “Accounting for Contingencies” (“SFAS 5”).

     Deferred revenues consist primarily of deferred product revenues, deferred maintenance fees and deferred services fees. Deferred revenues are recorded net of pre-billed services, post-contract customer support obligations for which the term has not commenced and invoices for cash basis customers. Deferred product revenues generally relate to product sales being recognized ratably over the term of the licensing arrangement, and, to a lesser extent, partial shipments when the Company does not have VSOE for the undelivered elements and products that have been delivered but await customer acceptance. Deferred maintenance fees and consulting services generally relate to payments for maintenance and consulting services in advance of the time of delivery of services. These deferred amounts are expected to be recognized as revenues based on the policy outlined above.

Allowance for Doubtful Accounts

     The Company maintains an allowance for doubtful accounts for potential future estimated losses resulting from the inability or unwillingness of certain customers to make all of their required payments. The allowance for doubtful accounts is based on the Company’s assessment of the collectibility of customer accounts. The Company regularly reviews the allowance by considering

factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. This assessment requires significant judgment. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, the Company assesses the impact on amounts recorded for bad debts and, if necessary, records a charge in the period the determination is made. If the financial condition of its customers or any of the other factors the Company uses to analyze creditworthiness were to worsen, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts as of January 31, 2008 and April 30, 2007.

     The following describes activity in the allowance for doubtful accounts for the nine months ended January 31, 2008, and fiscal 2007 (in thousands):

						Addition
		Balance at				Charged to								Balance at
		Beginning				Costs and								End
Period		of Period				Expenses				Deductions(1)				of Period
Fiscal 2007		$	54			$	112			$	(43	)		$	123
Nine months ended January 31, 2008 (unaudited)		$	123			$	33			$	(23	)		$	133

Restricted Cash

     Restricted cash consists of a deposit in a money market account amounting to $0.8 million as of January 31, 2008 and April 30, 2007, that is held to secure a standby letter of credit required in connection with the operating lease for the Company’s headquarters in Cupertino, California.

Capitalized Software Licenses

     Capitalized software licenses represent purchases by the Company of the right to utilize and incorporate as a component of its product, the intellectual property of certain third parties. As a result of these purchases, the Company is contractually obligated to pay minimum royalties on fixed and determinable dates over a two-year period regardless of product sales being generated. In accordance with Accounting Principles Board Opinion No. 21, “Interest on Receivables and Payables,” these purchases have been recorded on the accompanying consolidated balance sheets based on the discounted present value of the Company’s contractual payment obligations. The capitalized software licenses are being amortized ratably over the terms of the agreements of two years and charged to cost of product revenues and cost of maintenance revenues as follows (1) $0.5 million and $42,000 to cost of product revenues for the three months ended January 31, 2008 and 2007, respectively, and $0.1 million to cost of maintenance revenues for the three months ended January 31, 2008, and (2) $1.3 million and $42,000 to cost of product revenues for the nine months ended January 31, 2008 and 2007, respectively, and $0.4 million to cost of maintenance revenues for the nine months ended January 31, 2008. No amortization of capitalized software licenses was included in the cost of maintenance revenues for the three and nine months ended January 31, 2007. For the nine months ended January 31, 2008, payments under these agreements amounted to $1.6 million with related interest expense of $0.2 million. During fiscal 2007, payments under these agreements amounted to $0.3 million with related interest expense of $17,000.

Impairment of Long-Lived Assets

     Long-lived assets, such as property, plant and equipment and acquired intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). Among the factors and circumstances considered by management in determining assessments of recoverability are: (i) a significant decrease in the market price of a long-lived asset; (ii) a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; (v) current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset; and (vi) a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Under SFAS 144, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows

expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset. There have been no indicators of impairment and no impairment losses have been recorded by the Company in any period presented.

Property and Equipment, Net

     Property and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment of one to three years. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the assets.

Business Combinations

     The Company accounts for business combinations in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”), which requires the purchase method of accounting for business combinations. In accordance with SFAS 141, the Company determines the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with SFAS 141, the Company allocates the purchase price of its business combinations to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill.

     The Company must make valuation assumptions that require significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists, distribution agreements and discount rates. The Company estimates fair value based upon assumptions the Company believes to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

Goodwill and Intangible Assets

     Goodwill is not amortized, but rather it is periodically assessed for impairment. The allocation of the acquisition cost to intangible assets and goodwill therefore could have a significant impact on the Company’s future operating results. The allocation process requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Further, when impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of the projected discounted cash flows and, should different conditions prevail, material write-downs of net intangible assets could occur. The Company periodically reviews the estimated remaining useful lives of its acquired intangible assets. A reduction in its estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.

     The Company tests goodwill for impairment annually on the first day of the third quarter or more frequently if events merit. The Company performs this fair-value based test in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Future goodwill impairment tests could result in a charge to earnings.

Software Development Costs

     In accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed,” costs incurred for the development of new software products are expensed as incurred until technological feasibility is established. Development costs are capitalized beginning when a product’s technological feasibility has been established and ending when the product is available for general release to customers. Technological feasibility is reached when the product reaches the beta stage using the working model approach. To date, the period of time between the establishment of a technologically feasible working model and the subsequent general release of the product have been of a relatively short duration of time and have resulted in insignificant amounts of costs qualifying for capitalization for all years presented. Thus, all software development costs have been expensed as incurred in research and development expense.

Research and Development Expenses

     The Company expenses research and development expenses in the period in which these costs are incurred.

Advertising Expenses

     Advertising costs are expensed as incurred. The Company incurred advertising expenses of $57,000 and $0.1 million for the three months, and $0.2 million and $0.3 million for the nine months, ended January 31, 2008 and 2007, respectively.

Income Taxes

     The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for deductible temporary differences, along with net operating loss carry-forwards, if it is more likely than not that the tax benefits will be realized. To the extent a deferred tax asset cannot be recognized under the preceding criteria, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.

Stock-Based Compensation Expense

     Prior to May 1, 2006, the Company accounted for its stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of the Company’s common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted. The Company amortizes deferred stock-based compensation using the multiple option method as prescribed by FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option Award Plans” (“FIN 28”) over the option vesting period using an accelerated amortization schedule, which results in amortization to expense over the grant’s vesting period, which is generally four years.

     Effective May 1, 2006, the Company adopted the provisions of SFAS No. 123(R) (revised 2004), “Share-Based Payment” (“SFAS 123R”), using the prospective transition method. In accordance with SFAS 123R, measurement and recognition of compensation expense for all share-based payment awards made to employees and directors beginning on May 1, 2006 is recognized based on estimated fair values. SFAS 123R requires nonpublic companies that used the minimum value method under SFAS 123 for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, the Company continues to apply APB 25 in future periods to unvested equity awards outstanding at the date of adoption of SFAS 123R that were measured using the intrinsic value method. In addition, the Company continues to amortize those awards granted prior to May 1, 2006 using the multiple option method as prescribed by FIN 28, as described above. In accordance with SFAS 123R, the Company uses the Black-Scholes pricing model to determine the fair value of the stock options on the grant dates for stock awards made on or after May 1, 2006, and the Company amortizes the fair value of share-based payments on a straight-line basis.

Comprehensive Income (Loss)

     The Company reports comprehensive income (loss) in accordance with SFAS No. 130, “Reporting Comprehensive Income.” Comprehensive income (loss) includes certain unrealized gains and losses that are recorded as a component of stockholders’ equity and excluded from the determination of net income. The Company’s accumulated other comprehensive income (loss) consisted solely of cumulative currency translation adjustments resulting from the translation of the financial statements of its foreign subsidiaries. The tax effects on the foreign currency translation adjustments have not been significant.

Accounting Changes

     The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109” (“FIN 48”), on May 1, 2007. As a result of the implementation of FIN 48, the Company recognized a liability for uncertain tax positions and a cumulative effect adjustment to the beginning balance of accumulated deficit on the balance sheet of $0.1 million. As

of January 31, 2008, the liability for uncertain tax positions increased to $0.2 million. As of the date of adoption, the Company also recorded a $1.4 million reduction to deferred tax assets for unrecognized tax benefits, all of which is currently offset by a full valuation allowance that had no effect to the beginning balance of accumulated deficit or the net balance sheet. As of January 31, 2008, the unrecognized tax benefit of $1.4 million increased to $1.8 million, all of which is offset by a full valuation allowance. The Company’s total unrecognized tax benefit as of the May 1, 2007 adoption date and as of January 31, 2008 was $1.5 million and $2.1 million, respectively. In addition, as of January 31, 2008, the Company had $0.2 million of unrealized tax benefits that, if recognized, would affect its effective tax rate for the nine months ended January 31, 2008. In addition, the Company does not expect any material changes to the estimated amount of liability associated with its uncertain tax positions within the next 12 months.

     The Company files income tax returns in the U.S. federal jurisdiction, California and various state and foreign tax jurisdictions in which it has a subsidiary or branch operation. The tax years 2001 to 2006 remain open to examination by U.S. and state tax authorities, and the tax years 2005 and 2006 remain open to examination by the foreign tax authorities.

     The Company’s policy is that it recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of January 31, 2008, the Company had approximately $11,000 of accrued interest or penalties associated with unrecognized tax benefits.

Recent Accounting Pronouncements

     In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends the guidance in SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair-value basis. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS 155 to have a material impact on its consolidated results of operations, financial position or cash flows.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The statement does not require any new fair value measurements. SFAS 157 is effective for all financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact, if any, the adoption of SFAS 157 will have on its consolidated results of operations, financial position and cash flows.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), including an amendment of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which allows an entity to choose to measure certain financial instruments and liabilities at fair value. Subsequent measurements for the financial instruments and liabilities an entity elects to measure at fair value will be recognized in earnings. SFAS 159 also establishes additional disclosure requirements. SFAS 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS 157. The Company is currently evaluating the effect, if any, the adoption of SFAS 159 will have on its consolidated results of operations, financial position and cash flows.

     In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”) which replaces SFAS No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and non-controlling interests in the acquiree and the goodwill acquired, in connection with a business combination. SFAS 141R also establishes disclosure requirements to enable users to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. We will adopt SFAS 141R at the beginning of our 2010 fiscal year, or May 1, 2009.

     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51.  The statement changes how noncontrolling interests in subsidiaries are measured to initially be measured at fair value and classified as a separate component of equity.  SFAS No. 160 establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation.  No gains or losses will be recognized on partial disposals of a subsidiary where control is retained.  In addition, in partial acquisitions, where control is obtained, the acquiring company will recognize and measure at fair value all of the assets and liabilities, including goodwill, as if the entire target company had been

acquired. The statement is to be applied prospectively for fiscal years beginning on or after December 15, 2008.  We will adopt the statement on May 1, 2009, which is the beginning of our 2010 fiscal year.

3.  Net Income (Loss) Per Common Share

     Basic and diluted net income (loss) per common share is computed using the weighted-average number of shares of common stock outstanding during each period. Potentially dilutive securities consisting of convertible preferred stock, stock options, common stock subject to repurchase and warrants were included in the diluted net income per common share computation, but were not included in the diluted net loss per common share computation for any period presented because the inclusion of such shares would have had an anti-dilutive effect.

     The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):

		Three months ended								Nine months ended
		January 31,								January 31,
		2008				2007				2008				2007
Numerator for basic and diluted net income (loss) per share:
Net income (loss)		$	2,353				($542	)			($949	)			($3,674	)
Denominator for basic net income (loss) per share:
Weighted-average shares, net of weighted-average shares subject to repurchase			10,829				10,153				10,609				9,571
Denominator for diluted net income (loss) per share:
Shares used above, basic			10,829				10,153				10,609				9,571
Stock options			2,493				—				—				—
Warrants to purchase common stock and convertible preferred stock			14				—				—				—
Convertible preferred stock (as converted)			13,993				—				—				—
Shares subject to repurchase			129				—				—				—
Denominator for diluted net income (loss) per share:			27,458				10,153				10,609				9,571
Net income (loss) per common share:
Basic		$	0.22			$	(0.05	)		$	(0.09	)		$	(0.38	)
Diluted		$	0.09			$	(0.05	)		$	(0.09	)		$	(0.38	)

     The following table sets forth the weighted-average number of shares subject to potentially dilutive outstanding securities (i.e., convertible preferred stock, common stock options, common stock subject to repurchase and warrants) that were excluded from the computation of diluted net loss per share for the periods presented except for the three months ended January 31, 2008 which had diluted net income per share, because including them would have had an anti-dilutive effect (in thousands):

		Three months ended								Nine months ended
		January 31,								January 31,
		2008				2007				2008				2007
Convertible preferred stock (as converted)			—				13,984				13,989				13,984
Options to purchase common stock			—				2,444				2,619				2,472
Common stock subject to repurchase			—				331				174				420
Warrants to purchase common stock and convertible preferred stock (as converted)			—				22				17				22
Total			—				16,781				16,799				16.898

4.  Acquisition of Enira Technologies, LLC

     On June 2, 2006, the Company completed the acquisition of substantially all of the assets of Enira Technologies, LLC (“Enira”), a privately-held provider of solutions for responding to network security compromises. Enira’s core product, Network Response, was an appliance-based solution that speeds the time to threat remediation by automating the error-prone and time-consuming network discovery and network change/configuration tasks without altering an organization’s existing infrastructure. Through this acquisition, the Company acquired the predecessor products to its TRM and NCM appliance products.

     The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141. Assets acquired and liabilities assumed were recorded at their fair values as of June 2, 2006.

     The total purchase price of $8.7 million was comprised of (in thousands):

Cash consideration for members of Enira		$	7,000
Fair value of common stock issued(1)			1,538
Estimated acquisition-related costs(2)			209
Total consideration		$	8,747

     The total purchase consideration has been allocated to the assets and liabilities acquired, including identifiable intangible assets and assumed contractual obligations and related contingent liabilities, based on their respective fair values at the acquisition date and resulting in excess purchase consideration over the net tangible liabilities and identifiable intangible assets acquired of $5.7 million.

     In connection with the Enira acquisition, 132,879 additional shares of restricted common stock were issued to Enira employees who accepted employment with the Company. These shares are subject to a two-year vesting requirement based on continued employment by these former Enira employees. The fair value of these restricted shares amounted to $0.8 million and was based on a per share value of $6.08. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 95-8, “Accounting for Contingent Consideration Paid to Shareholders of an Acquired Enterprise in a Purchase Business Combination,” the total fair value of these shares is being accounted for as deferred compensation expense and is being amortized on a straight-line basis over the term of the required post-combination services. The related compensation amounts were $0.1 million and $0.1 million for the three months, and $0.3 million and $0.3 million for the nine months ended January 31, 2008 and 2007, respectively.

     The following condensed balance sheet data presents the respective fair values of the assets and liabilities acquired (in thousands):

Accounts receivable		$	67
Inventory			32
Other assets			15
Goodwill			5,746
Intangible assets			3,210
Liabilities			(323	)
Total		$	8,747

     The estimated fair value of identified intangible assets and the useful lives assigned to them at the time of acquisition are as follows (dollars in thousands):

						Estimated Weighted-
						Average
						Useful Lives
		Purchase Price				in Years
Core and developed technologies		$	1,970				5.00
Customer installed-base relationships			80				6.00
Employee non-compete agreements			1,160				5.00
Total		$	3,210				5.02

     The excess of the purchase price over the fair value of the net tangible and identifiable intangible assets was recorded as goodwill, and is deductible for federal tax purposes. The Company has excluded from the purchase price allocation 164,473 shares to be issued upon achievement of specified milestones by April 30, 2007 as the issuance of such shares was considered to be remote at the time of the acquisition. No additional shares will be issued as the specified milestones were not achieved as of April 30, 2007.

     Pro forma financial information presenting the results of continuing operations of the Company and Enira for the nine months ended January 31, 2007, including this acquisition have not been presented as the historical operations of Enira were not material to the Company’s consolidated financial statements. The total amortization expense related to intangible assets was $0.1 million and $0.1 million for the three months, and $0.4 million and $0.3 million for the nine months ended January 31, 2008 and 2007, respectively.

     Acquired intangible assets other than goodwill are amortized over their respective estimated useful lives to match the amortization to the expected benefits to be received.

     The gross carrying amount and net book value of goodwill and intangible assets as of April 30, 2007 and January 31, 2008 are as follows (in thousands):

		As of April 30, 2007
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Intangible assets:
Core and developed technologies		$	1,970			$	(139	)		$	1,831
Customer installed-base relationships			80				(19	)			61
Employee non-compete agreements			1,160				(318	)			842
Total		$	3,210			$	(476	)		$	2,734
Goodwill										$	5,746

		As of January 31, 2008
		Gross Carrying				Accumulated				Net Carrying
		Amount				Amortization				Amount
Intangible assets:
Core and developed technologies		$	1,970			$	(361	)		$	1,609
Customer installed-base relationships			80				(32	)			48
Employee non-compete agreements			1,160				(513	)			647
Total		$	3,210			$	(906	)		$	2,304
Goodwill										$	5,746

     There was no impairment of goodwill or intangible assets for any of the periods presented.

     As of January 31, 2008, future estimated amortization costs per year for the Company’s existing intangible assets other than goodwill are estimated as follows (in thousands):

		Estimated
		Amortization
Fiscal Year Ending April 30;		Expense
Remaining 2008		$	143
2009			842
2010			889
2011			425
2012			5
Total		$	2,304

5.  Balance Sheet Details

     Property and Equipment, Net

     Property and equipment consisted of the following (in thousands):

		As of January 31,				As of April 30,
		2008				2007
Computers and equipment		$	5,869			$	4,898
Furniture and fixtures			1,023				451
Software			725				576
Leasehold improvements			2,009				640
			9,626				6,565
Less: accumulated depreciation and amortization			(4,711	)			(3,812	)
Property and equipment, net		$	4,915			$	2,753

     Depreciation expense was $0.4 million and $0.3 million for the three months, and $1.2 million and $0.7 million for the nine months ended January 31, 2008 and 2007, respectively. Amortization expense was $0.1 million and $0.1 million for the three months, and $0.2 million and $0.3 million for the nine months ended January 31, 2008 and 2007, respectively.

Accrued Compensation and Benefits

     Accrued compensation and benefits consist of the following (in thousands):

		As of January 31,				As of April 30,
		2008				2007
Accrued commissions		$	990			$	2,016
Accrued bonus			2,938				2,572
Accrued payroll taxes			533				591
Accrued vacation			1,647				1,296
Other compensation and benefits			46				203
Total accrued compensation and benefits		$	6,154			$	6,678

     Deferred Revenues

     Deferred revenues consist of the following (in thousands):

		As of January 31,				As of April 30,
		2008				2007
Deferred product revenues		$	8,976			$	10,316
Deferred maintenance revenues			18,677				17,051
Deferred services revenues			3,759				2,221
Total deferred revenues			31,412				29,588
Less deferred revenues, current portion			(28,678	)			(24,794	)
Deferred revenues, non-current		$	2,734			$	4,794

6.  Indemnification and Warranties

     The Company from time to time enters into certain types of contracts that contingently require it to indemnify various parties against claims from third parties. These contracts primarily relate to (i) certain real estate leases under which the Company may be required to indemnify property owners for environmental and other liabilities and other claims arising from the Company’s use of the applicable premises, (ii) the Company’s bylaws, under which it must indemnify directors, and may indemnify officers and employees, for liabilities arising out of their relationship, (iii) contracts under which the Company may be required to indemnify customers or resellers against third-party claims, including claims that a Company product infringes a patent, copyright or other intellectual property right, and (iv) procurement or license agreements under which the Company may be required to indemnify licensors or vendors for certain claims, including claims that may be brought against them arising from the Company’s acts or omissions with respect to the supplied products or technology.

     The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers and has not recorded any related accruals.

     The Company generally provides a warranty for its products and services to its customers and accounts for its warranties under SFAS 5. To date, the Company’s product warranty expense has not been significant. Accordingly, the Company did not provide for a warranty accrual as of January 31, 2008 or April 30, 2007.

7.   Stockholders’ Equity

     The Company is authorized to issue two classes of stock totaling 54,101,752 shares, of which 21,601,752 are designated as preferred stock and 32,500,000 are designated as common stock, each with a par value of $0.00001 per share.

Common Stock Reserved for Issuance

     Number of shares of common stock reserved for future issuance is as follows:

		As of January 31,				As of April 30,
		2008				2007
Options available for future grant under the 2002 Stock Plan			552,106				1,675,840
Options outstanding under the stock option plans			6,525,594				5,772,812
Conversion of convertible preferred stock			13,996,097				13,987,532
Warrants to purchase convertible preferred stock and common stock			10,641				19,206
Total shares reserved			21,084,438				21,455,390

     Stock Plans

     2000 Stock Incentive Plan.  The 2000 Stock Incentive Plan provides for both the award of restricted stock and the grant of options, which includes both incentive and nonstatutory stock options. The Company ceased issuing awards under the 2000 Stock Incentive

Plan upon the implementation of the 2002 Stock Plan, which is described below. Likewise, the Company will not grant any additional awards under its 2000 Stock Incentive Plan following the Company’s initial public offering (“IPO”). These options generally expire ten years from the date of grant and are exercisable at any time after the date of grant. Options granted generally vest over four years. Shares issued upon exercise prior to vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option. The Company is not obligated to but has the right to repurchase the vested shares at the fair market value of the vested shares if the participant’s service is terminated for any reason. The repurchase right terminates with respect to the vested shares upon the first sale of common stock of the Company to the general public pursuant to a Registration Statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended.

     2002 Stock Plan.  In March 2002, the Board of Directors adopted the 2002 Stock Plan, as amended, and the Company’s stockholders approved the 2002 Stock Plan. 4,020,074 shares were originally authorized for issuance under this plan. In addition, 93,940 shares were rolled over from the 2000 Stock Incentive Plan, 18,911 shares were cancelled or repurchased under the 2000 Stock Incentive Plan and the Board of Directors has authorized a net increase of an additional 5,964,807 shares for issuance. The 2002 Stock Plan provides for either the award of stock purchase rights or the grant of options, which includes both incentive and nonstatutory stock options. Options have been granted under the 2002 Stock Plan to employees, directors and service providers at exercise prices not less than 85% of the fair market value of such shares as determined by the Company’s Board of Directors as of the grant date (and not less than 110% of such fair market value for grants to any person who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company as of the grant date). Options granted under the 2002 Stock Plan generally expire ten years from the date of grant and are exercisable either (i) at any time after the date of grant or (ii) as such stock options vest. Options granted generally vest over four years. Shares issued upon exercise prior to vesting are subject to a right of repurchase, which lapses according to the vesting schedule of the original option. All shares issued upon exercise are subject to a right of first refusal, which terminates when the common stock of the Company is readily tradable on an established securities market.

     Stock Plan Activity

     A summary of the option activity under the 2000 Stock Incentive Plan and the 2002 Stock Plan for the nine months ended January 31, 2008, is as follows:

		Outstanding Options
										Weighted-				Weighted-
										Average				Average
		Shares								Exercise				Remaining				Aggregate
		Available				Number of				Price				Contractual				Intrinsic
		for Grant				Shares				Per Share				Term (Years)				Value
																		(in thousands)
Options outstanding as of April 30, 2007			1,675,840				5,772,812			$	3.95				8.31			$	31,003
Options granted			(1,459,926	)			1,459,926				10.00
Options exercised			—				(375,713	)			2.24
Options canceled			331,431				(331,431	)			5.70
Shares repurchased			4,761				—
Options outstanding as of January 31, 2008			552,106				6,525,594				5.31				8.06				30,589
Vested and expected to vest as of January 31, 2008, net of anticipated forfeitures							5,827,355				5.31				8.06				27,316
Vested and exercisable as of January 31, 2008							3,016,868				2.92				7.10				21,352

     The aggregate intrinsic value shown in the table above is equal to the difference between the per share exercise price of the underlying stock options and $10.00, the fair value of the Company’s common stock as of January 31, 2008.

     The following table summarizes additional information regarding outstanding options as of January 31, 2008:

		Options Outstanding
						Weighted-				Options Vested and Exercisable
						Average								Weighted-
						Remaining								Average
		Number				Contractual				Number of				Exercise
Exercise Price		Outstanding				Life (Years)				Shares				Price Per Share
$   0.12			3,923				4.21				3,923			$	0.12
0.16			392,944				4.94				392,944				0.16
0.24			356,523				5.96				356,314				0.24
0.36			45,625				6.31				42,394				0.36
0.40			39,375				3.45				39,375				0.40
0.48			237,187				6.68				195,460				0.48
0.80			813,898				7.01				595,726				0.80
4.00			807,651				7.41				512,700				4.00
6.08			765,176				8.23				347,179				6.08
6.80			1,457,575				8.96				435,264				6.80
9.32			192,750				9.21				16,368				9.32
10.00			1,412,967				9.67				79,221				10.00
			6,525,594				8.06				3,016,868			$	2.92

8.  Stock-Based Compensation

     For the three and nine months ended January 31, 2008 and 2007, respectively, the Company recorded stock-based compensation as described below (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Stock-based compensation under SFAS 123R		$	1,162			$	182			$	3,035			$	352
Stock-based compensation under prospective transition method for option awards granted prior to the adoption of SFAS 123R			19				65				77				221
Amortization of restricted stock awards in connection with the acquisition of Enira Technologies, LLC			101				101				303				269
Total		$	1,282			$	348			$	3,415			$	842

Adoption of SFAS 123R

     On May 1, 2006, the Company adopted SFAS 123R, which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in stock-based payment transactions. SFAS 123R requires the Company to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. SFAS 123R superseded the Company’s previous accounting under APB 25 beginning May 1, 2006.

     The Company adopted SFAS 123R using the prospective transition method, which requires the application of the accounting standard as of May 1, 2006, the first day of fiscal 2007. The consolidated financial statements as of the three and nine months ended January 31, 2008 and 2007, reflect the impact of SFAS 123R. In accordance with the prospective transition method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R.

     Effective with the adoption of SFAS 123R, the fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and assumptions as to volatility of the Company’s stock over the term of the related options, the expected term of the options, the risk-free interest rate and the option forfeiture rate. These assumptions used in the pricing model are

determined by the Company at each grant date. As there has been no public market for the Company’s common stock prior to the IPO, the Company has determined the volatility for options granted in fiscal 2007 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using weighted average measures of this peer group of companies of the implied volatility and the historical volatility for a period equal to the expected life of the option. The expected life of options has been determined considering the expected life of options granted by a group of peer companies and the average vesting and contractual term of the Company’s options. The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. As the Company has not paid and does not anticipate paying cash dividends on outstanding shares of common stock, the expected dividend yield is assumed to be zero. In addition, SFAS 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was the Company’s historical policy under SFAS 123. The Company applied an estimated annual forfeiture rate, based on its historical forfeiture experience during the previous six years, in determining the expense recorded in its consolidated statement of operations.

     SFAS 123R requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash flows. No income tax benefit was realized from stock option exercises during the three or nine months ended January 31, 2008 and 2007. Prior to the adoption of SFAS 123R those benefits would have been reported as operating cash flows had the Company received any tax benefits related to stock option exercises.

     Valuation and Expense Information under SFAS 123R

     The weighted-average fair value calculations for options granted within the period are based on the following weighted average assumptions set forth in the table below and assume no dividends will be paid. Options that were granted in prior periods are based on assumptions prevailing at the date of grant.

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Risk-free interest rate			4.04	%			5.00	%			4.48	%			5.00	%
Weighted average expected volatility			54	%			66	%			56	%			66	%
Weighted average expected life (years)			5.28				5.25				5.26				5.25
Weighted average fair value per share of common stock		$	5.24			$	4.16			$	5.36			$	4.05

     The compensation costs that have been included in our results of operations for these stock-based compensation arrangements for the three and nine months ended January 31, 2008 and 2007, respectively, as a result of the Company’s adoption of SFAS 123R, were as follows (in thousands, except per share amount):

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Cost of maintenance revenues		$	24			$	1			$	62			$	2
Cost of services revenues			23				3				69				7
SFAS 123R expense included in gross profit			47				4				131				9
Operating expenses:
Research and development			293				136				940				358
Sales and marketing			771				110				1,912				205
General and administrative			171				98				432				270
SFAS 123R expense included in operating expenses			1,235				344				3,284				833
SFAS 123R expense included in net income (loss)		$	1,282			$	348			$	3,415			$	842
SFAS 123R expense included in basic net income (loss) per share		$	0.12			$	0.03			$	0.32			$	0.09
SFAS 123R expense included in diluted net income (loss) per share		$	0.05			$	0.03			$	0.32			$	0.09

     Because the amount of stock-based compensation associated with our cost of production is not significant, we did not capitalize any stock-based compensation cost as part of inventory and fixed assets during the three or nine months ended January 31, 2008 and 2007.

     As of January 31, 2008 and April 30, 2007, there were $11.5 million and $7.4 million, respectively, of total unrecognized compensation expenses under SFAS 123R, net of estimated forfeitures, related to stock options that the Company will amortize over the next four fiscal years.

APB 25 Intrinsic Value Charges

     Given the absence of an active market for the Company’s common stock, the Company’s Board of Directors historically determined the fair value of the Company’s common stock in connection with the Company’s grant of stock options and stock awards. The Company’s Board of Directors made such determinations based on the business, financial and venture capital experience of the individual directors along with input from management. In January 2006, the Company engaged Financial Strategies Consulting Group, an unrelated third-party valuation firm as described by AICPA Practice Aid “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” to advise the Board of Directors in determining the fair value of its common stock.

     As a result of management’s reassessment of the fair value of the Company’s common stock at the grant dates of options granted to purchase common stock in fiscal 2004 and 2005, deferred stock compensation has been recorded for the excess of the fair value of the common stock underlying the options at the grant date over the exercise price of the options. These amounts are being amortized on an accelerated basis over the vesting period, generally four years, consistent with the method described in FIN 28. Amortization of the deferred compensation was $19,000 and $65,000 for the three months ended, and $77,000 and $0.2 million, for the nine months ended January 31, 2008 and 2007, respectively. All options granted in and after fiscal 2006 were issued with exercise prices equal to the fair value.

Restricted Stock Awards for Enira Acquisition

     In connection with the acquisition of Enira Technologies, LLC, 132,879 shares of restricted common stock that were subject to two-year vesting were issued. See Note 4 “Acquisition of Enira Technologies, LLC.” During the nine months ended January 31, 2008, 66,441 shares vested.

9.  Segment Information

     The Company operates in one industry segment selling security and compliance management solutions.

     SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis for evaluating financial performance and allocating resources. There are no segment managers who are held accountable for operations below the consolidated financial statement level. Accordingly, the Company has determined that it operates in a single reportable segment.

     The CEO evaluates performance based primarily on revenues in the geographic locations in which the Company operates. Revenues are attributed to geographic locations based on the ship-to location of the Company’s customers. The Company’s assets are primarily located in the United States and not allocated to any specific region. Therefore, geographic information is presented only for total revenues. As of January 31, 2008 and April 30, 2007, long-lived assets, which represent property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization, located outside the Americas were immaterial and less than one percent of the total net assets as of these dates.

     Total revenues by geographical region are based on the ship-to location and are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Total revenues by geography:
United States:
Products		$	9,615			$	6,914			$	29,204			$	19,526
Maintenance			5,515				3,766				15,223				10,062
Services			1,828				1,474				5,056				4,055
Total			16,958				12,154				49,483				33,643
EMEA:
Products			3,111				2,133				7,809				4,157
Maintenance			1,146				543				2,675				1,510
Services			480				204				1,090				620
Total			4,737				2,880				11,574				6,287
Asia Pacific:
Products			770				739				2,182				2,169
Maintenance			288				160				810				475
Services			151				193				407				342
Total			1,209				1,092				3,399				2,986
Other Americas:
Products			4,202				423				6,378				1,031
Maintenance			431				142				919				332
Services			134				43				416				174
Total			4,767				608				7,713				1,537
Total revenues		$	27,671			$	16,734			$	72,169			$	44,453

10.  Subsequent Events

Initial Public Offering

     In February 2008, the Company completed an initial public offering (“IPO”) of common stock in which it sold 6,000,000 shares of common stock and the Company’s selling stockholders sold 861,919 shares of common stock., at an issue price of $9.00 per share. The Company raised a total of $54.0 million in gross proceeds from the IPO, or $46.3 million in net proceeds after deducting underwriting discounts and commissions of $3.8 million and other estimated offering costs of $3.9 million. Upon the closing of the IPO, all shares of convertible preferred stock outstanding automatically converted into 13,996,097  shares of common stock.

2007 Equity Incentive Plan

     On November 20, 2007, the Board of Directors and the Company’s stockholders approved the 2007 Equity Incentive Plan (the “2007 Equity Plan”), which became effective upon the Company’s IPO in February 2008. A total of 4,000,000 shares of the Company’s common stock were initially reserved for future issuance under the 2007 Equity Plan. The number of shares available for grant and issuance under the 2007 Equity Plan will be increased automatically on January 1 of each of 2009 through 2012 by an amount equal to 4% of the Company’s shares outstanding on the immediately preceding December 31, unless the Board of Directors, in its discretion, determines to make a smaller increase.

2007 Employee Stock Purchase Plan

     On November 20, 2007, the Board of Directors and the Company’s stockholders approved the 2007 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the Company’s IPO in February 2008. A total of 1,000,000 shares of the Company’s common stock were initially reserved for future issuance under the ESPP. The number of shares reserved for issuance under the ESPP

will increase automatically on January 1 of each of the first eight years commencing with 2009 by the number of shares equal to 1% of the Company’s shares outstanding on the immediately preceding December 31, unless the Board of Directors, in its discretion, determines to make a smaller increase.

Increase in Authorized Common Stock

     In connection with the IPO and approval of the 2007 Equity Plan and the ESPP on November 20, 2007, the Board of Directors and the Company’s stockholders approved an increase in the authorized number of shares to 47,500,000 shares, and effective promptly following completion of the IPO, an increase to 150,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock (which became effective on February 20, 2008).

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the (1) unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended April 30, 2007 included in the final prospectus for our initial public offering, or IPO, dated as of, and filed with the Securities and Exchange Commission, or the SEC, pursuant to Rule 424(b)(4) on February 14, 2008 (File No. 333-145974). This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Form 10-Q and in our other SEC filings, including our final prospectus dated as of February 14, 2008. We disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

     We are a leading provider of security and compliance management software solutions that intelligently mitigate business risk for enterprises and government agencies. Much like a “mission control center,” our ESM platform delivers a centralized, real-time view of disparate digital alarms, alerts and status messages, which we refer to as events, across geographically dispersed and heterogeneous business and technology infrastructures. Our software correlates massive numbers of events from thousands of security point solutions, network and computing devices and applications, enabling intelligent identification, prioritization and response to external threats, insider threats and compliance and corporate policy violations. We also provide complementary software that delivers pre-packaged analytics and reports tailored to specific security and compliance initiatives, as well as appliances that streamline threat response, event log archiving and network configuration.

Important Factors Affecting Our Operating Results and Financial Condition

     We believe that the market for our products is in the early stages of development. We have identified factors that we expect to play an important role in our future growth and profitability. These factors are:

     Sales of ESM Platform and Appliance Products to New Customers.  The market for security and compliance management software solutions is rapidly expanding, with new purchases often driven by corporate compliance initiatives. We typically engage in a proof of concept with our customers to demonstrate the capabilities of our ESM platform in their specific environment. A new sale usually involves the sale of licenses for one or more ESM Managers, a bundle of connectors, depending on the number and type of devices the customer intends to manage with ArcSight ESM, licenses for our console and web interfaces, installation services, training and an initial maintenance arrangement. In many cases, customers will also purchase one of our complementary software modules which enable them to implement specific sets of off-the-shelf rules for our event correlation engine that address specific security and compliance issues and business risks. In addition, customers may purchase our TRM, Logger and NCM appliances to address their threat response, log archiving and network configuration needs. Our growth depends on our ability to sell our products to new customers.

     Continued Sales to Our Installed Base.  Many customers make an initial purchase from us and then decide whether to use our products with respect to a larger portion of their business and technology infrastructure or buy additional complementary products from us. Thus, a key component of our growth will be our ability to successfully maintain and further develop the relationships with our existing customers.

     Development and Introduction of New Products.  We believe it is important that we continue to develop or acquire new products and services that will help us capitalize on opportunities in the security and compliance management market. Examples of new product introductions to date include our TRM, Logger and NCM appliances and our ArcSight Insider Threat Package and ArcSight

Compliance Insight Package for PCI products in fiscal 2007, as well as enhancements to our ESM platform such as the May 2007 introduction of features such as identity correlation and role-based management.

     Development of an Expanded Channel Network for Our Products.  We currently sell our products primarily through our direct sales force, although we do sell to government purchasers and internationally through resellers and system integrators. We believe further development of our sales channel will assist us in penetrating the mid-market, particularly as we expand our appliance-based offerings. In addition, it is likely that new appliance-based products that we develop will be sold more effectively through resellers and, if we are successful in introducing these new products, we will become more dependent on the development of an effective channel network. Further, motivating our channel partners to promote our products will be a key factor in the success of this strategy.

Sources of Revenues, Cost of Revenues and Operating Expenses

     Our sales transactions typically include the following elements: a software license fee paid for the use of our products in perpetuity or, in limited circumstances, for a specified term; an arrangement for first-year support and maintenance, which includes unspecified software updates and upgrades; and professional services for installation, implementation and training. We derive the majority of our revenues from sales of software products. We introduced complementary appliance products in fiscal 2007. We sell our products and services primarily through our direct sales force. Additionally, we utilize resellers and systems integrators, particularly in sales to government agencies and international customers.

     We recognize revenues pursuant to American Institute of Certified Public Accountants, or AICPA, Statement of Position, or SOP, No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition with Respect to Certain Arrangements, or collectively, SOP 97-2, which, if revenues are to be recognized upon product delivery, requires among other things vendor-specific objective evidence of fair value, or VSOE, for each undelivered element of multiple element customer contracts.

     Fiscal 2007 revenues included revenues related to sales transactions consummated in prior fiscal years for which revenue recognition was deferred as a result of undelivered product elements for which we did not have VSOE. In fiscal 2007, we either delivered these product elements, or we and our customers amended the contractual terms of these sales transactions to remove the undelivered product elements, resulting in recognition of revenues in fiscal 2007. Similarly, but to a lesser extent, revenues related to sales transactions consummated in fiscal 2007 were deferred and will be recognized in future years. The net impact of these transactions reduced revenues in the nine months ended January 31, 2007 by $2.4 million and increased revenues in the nine months ended January 31, 2008 by $2.6 million. In each case, the net impact caused our fiscal period-to-period revenue growth rate to appear lesser or greater, as applicable, than it otherwise would. As of April 30, 2007 and January 31, 2008, deferred revenues included $5.4 million and $2.8 million, respectively, related to transactions such as these.

     In addition, if we determine that collectibility is not reasonably assured, we defer the revenues until collectibility becomes reasonably assured, generally upon receipt of cash. As a result, comparison of deferred revenues, which are recorded net of pre-billed services, post-contract customer support obligations for which the term has not commenced and invoices for cash basis customers, and analysis of changes in deferred revenues as they impact revenues in a particular period are difficult, absent information regarding these net-downs.

Product Revenues

     Product revenues consist of license fees for our software products and, beginning in fiscal 2007, also includes revenues for sales of our TRM, Logger and NCM appliance products. License fees are based on a number of factors, including the type and number of devices that our customer intends to monitor using our software as well as the number of users and locations. In addition to our core solution, some of our customers purchase additional licenses for optional extension modules that provide enhanced discovery and analytics capabilities. Sales of our appliance products consist of sales of the appliance hardware and associated perpetual licenses to the embedded software. We first introduced our TRM and NCM appliance products in June 2006 and our Logger appliance product in December 2006. Appliance fees are based on the number of appliances purchased and, in some cases, on the number of network devices with which our customer intends to use the appliances. We generally recognize product revenues at the time of product delivery, provided all other revenue recognition criteria have been met. We recognize revenues associated with products sold through distribution partners on a sell-through basis once either we or our distribution partner has a contractual agreement in place with the end user, the products have been delivered to the end user, collectibility is probable and all other revenue recognition criteria have been met.

     Historically, we have engaged in long sales cycles with our customers, typically three to six months and more than a year for some sales, and many customers make their purchase decisions in the last few weeks of a fiscal quarter, following procurement trends in the industry. Further, average deal size can vary considerably depending on our customers’ configuration requirements, implementation plan and budget availability. As a result, it is difficult to predict timing or size of product sales on a quarterly basis. In addition, we may fail to forecast sufficient production of our appliance products due to our limited experience with them, or we may be unable to physically deliver appliances within the quarter, depending on the proximity of the order to the end of the quarter. These situations may lead to delay of revenues until we can deliver products. The loss or delay of one or more large sales transactions in a quarter could impact our operating results for that quarter and any future quarters into which revenues from that transaction are delayed.

     As of April 30, 2007 and January 31, 2008, deferred product revenues were $10.3 million and $9.0 million, respectively. Included in deferred product revenues as of April 30, 2007 and January 31, 2008 were $4.9 million and $2.4 million, respectively, related to multiple element arrangements where one or more product elements for which we did not have VSOE remained undelivered. The remainder of deferred product revenues as of April 30, 2007 and January 31, 2008 were $5.4 million and $6.6 million, respectively, and primarily related to product revenues to be recognized ratably over the term of the maintenance arrangements, prepayments in advance of delivery and other delivery deferrals. As of April 30, 2007 and January 31, 2008, deferred product revenues were $10.3 million and $9.0 million and include net-down adjustments of $2.6 million and $6.8 million, respectively. Net-down adjustments decrease both accounts receivable and deferred revenue and typically relate to sales transactions invoiced during the period that are recognized as revenue upon cash receipt. Any such transactions included in accounts receivable and deferred revenue at period end are reflected on the balance sheet on a net basis. See “Critical Accounting Policies, Significant Judgments and Estimates—Revenue Recognition” and Note 2 to our Unaudited Condensed Consolidated Financial Statements (“Significant Accounting Policies—Revenue Recognition”) elsewhere in this report.

Maintenance Revenues

     Maintenance includes rights to unspecified software product updates and upgrades, maintenance releases and patches released during the term of the support period, and internet and telephone access to maintenance personnel and content. Maintenance revenues are generated both from maintenance that we agree to provide in connection with initial sales of software and hardware products and from maintenance renewals. We generally sell maintenance on an annual basis. We offer two levels of maintenance – standard and, for customers that require 24-hour coverage seven days a week, premium. In most cases, we provide maintenance for sales made through channel partners. In addition, we sell an enhanced maintenance offering that provides frequent security content updates for our software. Maintenance fees are deferred at the time the maintenance agreement is initiated and recognized ratably over the term of the maintenance agreement. As our customer base expands, we expect maintenance revenues to continue to grow, as maintenance is sold to new customers and existing customers renew.

     As of April 30, 2007, deferred maintenance revenues were $17.1 million, of which $14.5 million represented current deferred maintenance revenues. As of January 31, 2008, deferred maintenance revenues were $18.7 million, of which $16.6 million represented current deferred maintenance revenues. Deferred maintenance revenues relate to advanced payments for support contracts that are recognized ratably. As of April 30, 2007 and January 31, 2008, deferred maintenance revenues were $17.1 million and $18.7 million and include net-downs of $0.9 million and $2.2 million, respectively. Net-down adjustments decrease both accounts receivable and deferred revenue and typically relate to billed but unpaid customer transactions for maintenance renewal support terms where services have not yet been provided. See “Critical Accounting Policies, Significant Judgments and Estimates—Revenue Recognition” and Note 2 to our Unaudited Condensed Consolidated Financial Statements (“Significant Accounting Policies—Revenue Recognition”) elsewhere in this report.

Services Revenues

     Services revenues are generated from sales of services to our customers, including installation and implementation of our software, consulting and training. Professional services are not essential to the functionality of the associated software products. We generally sell our services on a time-and-materials basis and recognize revenues as the services are performed. Services revenues have generally increased over time as we have sold and delivered installation and training services to our new customers and continued to sell training and consulting services to our existing customers.

     As of April 30, 2007, deferred service revenues were $2.2 million, all of which represented current deferred services revenues. As of January 31, 2008, deferred service revenues were $3.8 million, all of which represented current deferred services revenues. Deferred services revenues relate to customer payments in advance of services being performed. As of April 30, 2007 and January 31, 2008,

deferred service revenues were $2.2 million and $3.8 million and include net-downs of $0.9 million and $0.5 million, respectively. Net-down adjustments decrease both accounts receivable and deferred revenue and typically relate to billed but unpaid customer transactions for service engagements where services have not yet been provided. See “Critical Accounting Policies, Significant Judgments and Estimates—Revenue Recognition” and Note 2 to our Unaudited Condensed Consolidated Financial Statements (“Significant Accounting Policies—Revenue Recognition”) elsewhere in this report.

Cost of Revenues

     Cost of revenues for our software products consists of third-party royalties and license fees for licensed technology incorporated into our software product offerings. Cost of revenues for appliance products consists of the hardware costs of the appliances and, for certain appliance products, third-party royalties for licensed technology. The cost of product revenues is primarily impacted by the mix of software and appliance products as well as the relative ratio of royalty bearing products included in software sales transactions. Sales of our appliance products are generally at a lower margin than sales of our software products.

     Cost of maintenance revenues consists primarily of salaries and benefits related to maintenance personnel, other out-of-pocket expenses, and facilities and other related overhead.

     Cost of services revenues consists primarily of the salaries and benefits of personnel, travel and other out-of-pocket expenses, facilities and other related overhead that are allocated based on the portion of the efforts of such personnel that are related to performance of professional services, and cost of services provided by subcontractors for professional services. Services gross margin may fluctuate as a result of periodic changes in our use of third party service providers, resulting in lower margins for these services.

     We intend to increase sales to the mid-market, a goal that we believe will be aided by our recent introduction of our appliance products. We expect the percentage of our mid-market sales made through our distribution channel will be greater than it has been to date. We also expect a high percentage of our international sales to continue to be made through our distribution channel. Sales through the channel tend to be at a lower margin than direct sales. As a result, we may report lower margins in future periods than has been the case for prior periods.

Operating Expenses

     Research and Development Expenses.  Research and development expenses consist primarily of salaries and benefits of personnel engaged in the development of new products, the enhancement of existing products, quality assurance activities and, to a lesser extent, facilities costs and other related overhead. We expense all of our research and development costs as they are incurred. We expect research and development expenses to increase in absolute dollars for the foreseeable future as we continue to invest in the development of our products.

     Sales and Marketing Expenses.  Sales and marketing expenses consist primarily of salaries, commissions and benefits related to sales and marketing personnel and consultants; travel and other out-of-pocket expenses; expenses for marketing programs, such as for trade shows and our annual users conference, marketing materials and corporate communications; and facilities costs and other related overhead. Commissions on sales of products and initial maintenance are typically earned and expensed when revenue recognition for the respective revenue elements commences and for services when the customer is invoiced. We also pay commissions for channel sales not only to our direct sales force but also to our channel sales force in an effort to minimize channel conflicts as we develop our channel network. We intend to hire additional sales personnel, initiate additional marketing programs and build additional relationships with resellers, systems integrators and strategic partners on a global basis. Accordingly, we expect that our sales and marketing expenses will continue to increase for the foreseeable future in absolute dollars.

     General and Administrative Expenses.  General and administrative expenses consist primarily of salaries and benefits related to general and administrative personnel and consultants; accounting and legal fees; insurance costs and facilities costs and other related overhead. We expect that, in the future, general and administrative expenses will increase in absolute dollars as we add personnel and incur additional insurance costs related to the growth of our business and additional legal, accounting and other expenses in connection with our reporting and compliance obligations as a public company.

     Other Income (Expense), Net.  Other income (expense), net consists of interest earned on our cash investments and foreign currency-related gains and losses. Our interest income will vary each reporting period depending on our average cash balances during the period and the current level of interest rates. Following the IPO, we had additional cash and cash equivalents of approximately

$46.3 million resulting from the net proceeds of the IPO, after deducting the underwriting discounts and estimated offering expenses. This will likely cause a substantial increase in our interest income compared to periods prior to the IPO. Similarly, our foreign currency-related gains and losses will also vary depending upon movements in underlying exchange rates.

     Provision for Income Taxes.  Provision for income taxes consists of tax expense related to current period earnings, while income tax benefit consists of a recoupment of historical tax expenses due to losses in the then current reporting period. We have previously experienced a greater than 50% shift in our stock ownership, which creates annual limitations on our ability to use a portion of our net operating loss carry-forwards. As a result, our provision for income taxes and our resulting effective tax rate may be greater than if our net operating loss carry-forwards were available without limitation. In addition, our net operating loss carry-forwards may expire before we fully utilize them.

Critical Accounting Policies, Significant Judgments and Estimates

     Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on our historical experience, knowledge of current conditions and our beliefs regarding likely occurrences in the future, given available information. Estimates are used for, but are not limited to, revenue recognition, determination of fair value of stock awards, valuation of goodwill and intangible assets acquired in business combinations, impairment of goodwill and other intangible assets, amortization of intangible assets, accounting for uncertainties in income taxes, contingencies and litigation, allowances for doubtful accounts, and accrued liabilities. Actual results may differ from those estimates, and any differences may be material to our financial statements. Further, if we apply different factors, or change the method by which we apply the various factors that are used, in making our critical estimates and judgments, our reported operating results and financial condition could be materially affected.

Revenue Recognition

     We recognize revenues in accordance with SOP 97-2. Accordingly, we exercise judgment and use estimates in connection with the determination of the amount of product and maintenance and services revenues to be recognized in each accounting period.

     We derive revenues primarily from three sources: (i) sales of our software and hardware products, (ii) fees for maintenance to provide unspecified upgrades and customer technical support, and (iii) fees for services, including professional services for product installation and training. Our appliance products contain software that is more than incidental to the functionality of the product. In accordance with SOP 97-2, we recognize revenues when the following conditions have been met:

	•		persuasive evidence of an arrangement exists;
	•		the fee is fixed or determinable;
	•		product delivery has occurred or services have been rendered; and
	•		collection is considered probable.

     We typically use a binding purchase order in conjunction with either a signed contract or reference on the purchase order to the terms and conditions of our shrinkwrap or end-user license agreement as evidence of an arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or forfeiture, concession or other adjustment. We do not generally grant rights of return or price protection to our distribution partners or end users, other than limited rights of return during the warranty period in some cases. We use shipping documents, contractual terms and conditions and customer acceptance, when applicable, to verify product delivery to the customer. For perpetual software license fees in arrangements that do not include customization, or services that are not considered essential to the functionality of the licenses, delivery is deemed to occur when the product is delivered to the customer. Services and consulting arrangements that are not essential to the functionality of the licensed product are recognized as revenues as these services are provided. Delivery of maintenance is considered to occur on a straight-line basis over the life of the contract. We consider probability of collection based on a number of factors, such as creditworthiness of the customer as determined by credit checks and analysis, past transaction history, the geographic

location and financial viability. We do not request, nor do we require, collateral from customers. If we determine that collectibility is not reasonably assured, we defer the revenues until collectibility becomes reasonably assured, generally upon receipt of cash.

     Our sales of software products to date have typically been multiple element arrangements, which have included software licenses and corresponding maintenance, and have also generally included some amount of professional services. Our sales of appliance products to date have been multiple element arrangements as well, which included hardware, software licenses and corresponding maintenance, and have also generally included some amount of professional services. We allocate the total arrangement fee among these multiple elements based upon their respective fair values as determined by VSOE or, if applicable, by the residual method under SOP 97-2. VSOE for maintenance and support services is based on separate sales and/or renewals to other customers or upon renewal rates quoted in contracts when the quoted renewal rates are deemed substantive in both rate and term. VSOE for professional services is established based on prices charged to customers when those services are sold separately. If we cannot objectively determine the fair value of any undelivered element in a multiple element arrangement, we defer revenues for each element until all elements have been delivered, or until VSOE can objectively be determined for any remaining undelivered element. If VSOE for maintenance does not exist, and this represents the only undelivered element, then revenues for the entire arrangement are recognized ratably over the performance period. When VSOE of a delivered element has not been determined, but the fair value for all undelivered elements has, we use the residual method to record revenues for the delivered element. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and recognized immediately as revenues.

     Our agreements generally do not include acceptance provisions. However, if acceptance provisions exist, we deem delivery to have occurred upon customer acceptance.

     We recognize revenues associated with products and professional services sold through our channel partners once either we or our channel partner has a contractual agreement in place with the end user, delivery has occurred to the end user and all other revenue recognition criteria have been met.

     We assess whether fees are collectible and fixed or determinable at the time of the sale, and recognize revenues if all other revenue recognition criteria have been met. Our standard payment terms are net 30 days and are considered normal up to net three months, while payment terms beyond three months are considered to be extended terms. Payments that are due within three months are generally deemed to be fixed or determinable based on our successful collection history on these agreements.

Stock-Based Compensation

     Prior to May 1, 2006, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25 and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted. We amortize deferred stock-based compensation using the multiple option method as prescribed by Financial Accounting Standards Board, or FASB, Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, or FIN 28, over the option vesting period using an accelerated amortization schedule. We amortized employee stock-based compensation of $19,000 and $65,000 for the three months and $77,000 and $221,000 for the nine months ended January 31, 2008 and 2007, respectively.

     Effective May 1, 2006, we adopted SFAS 123R, which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. SFAS 123R requires nonpublic companies that used the minimum value method under SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS 123, for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, we will continue to apply APB 25 in future periods to unvested equity awards outstanding at the date of adoption of SFAS 123R that were measured using the minimum value method. In addition, we are continuing to amortize those awards granted prior to May 1, 2006 utilizing an accelerated amortization schedule. In accordance with SFAS 123R, we will recognize the compensation cost of employee stock-based awards granted subsequent to April 30, 2006 in the statement of operations using the straight-line method over the vesting period of the award.

     To determine the fair value of stock options granted after May 1, 2006, we have elected to use the Black-Scholes option pricing model, which requires, among other inputs, an estimate of the fair value of the underlying common stock on the date of grant and assumptions as to volatility of our stock over the expected term of the related options, the expected term of the options, the risk-free

interest rate and the option forfeiture rate. As there has been no public market for our common stock prior to this offering, we have determined the volatility for options granted in fiscal 2008 and 2007 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using weighted-average measures of the implied volatility and the historical volatility for this peer group of companies for a period equal to the expected life of the option. The weighted average expected volatility for options granted during the nine months ended January 31, 2008 and fiscal 2007, was 56% and 66%, respectively. The expected life of options has been determined considering the expected life of options granted by a group of peer companies and the average vesting and contractual terms of options granted to our employees. The weighted average expected life of options granted during the nine months ended January 31, 2008, and fiscal 2007 was 5.26 and 5.25 years, respectively. For the nine months ended January 31,2008, and fiscal 2007, the weighted-average risk-free interest rate used was 4.48% and 5.00%, respectively. The risk-free interest rate is based on a zero coupon United States treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS 123. As a result, we applied an estimated annual forfeiture rate of 5% for the nine months ended January 31, 2008 and for fiscal 2007, in determining the expense recorded in our consolidated statement of operations.

     We recorded expense of $1.2 million and $0.2 million for the three months, and $3.0 million and $0.4 million for the nine months ended January 31, 2008 and 2007, respectively, in connection with stock-based awards accounted for under SFAS 123R. As of January 31, 2008 and April 30, 2007, unrecognized stock-based compensation expense of non-vested stock options was $11.5 million and $7.4 million, respectively. As of January 31, 2008, the unrecognized stock-based compensation expense is expected to be recognized using the straight line method over the required service period of the options. We expect stock-based compensation expense to increase in absolute dollars as a result of the adoption of SFAS 123R. The actual amount of stock-based compensation expense we record in any fiscal period will depend on a number of factors, including the number of stock options issued and the volatility of our stock price over time. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, SFAS 123R requires that we recognize compensation expense only for the portion of stock options that are expected to vest. If the actual number of forfeitures differs from that estimated by management, we will be required to record adjustments to stock-based compensation expense in future periods.

Business Combinations

     We account for business combinations in accordance with SFAS No. 141, Business Combinations, or SFAS 141, which requires the purchase method of accounting for business combinations. In accordance with SFAS 141, we determine the recognition of intangible assets based on the following criteria: (i) the intangible asset arises from contractual or other rights; or (ii) the intangible asset is separable or divisible from the acquired entity and capable of being sold, transferred, licensed, returned or exchanged. In accordance with SFAS 141, we allocate the purchase price of our business combinations to the tangible assets, intangible assets and liabilities acquired based on their estimated fair values. We record the excess of the purchase price over the total of those fair values as goodwill.

     Our valuations require significant estimates, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from customer contracts, customer lists and distribution agreements and discount rates. We estimate fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable, and, as a result, actual results may differ from our estimates.

Goodwill and Intangible Assets

     In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142, we do not amortize goodwill or other intangible assets with indefinite lives but rather test them for impairment. SFAS 142 requires us to perform an impairment review of our goodwill balance at least annually and also whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The allocation of the acquisition cost to intangible assets and goodwill requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and amortization of intangible assets, other than goodwill. Further, when impairment indicators are identified with respect to previously recorded intangible assets, the values of the assets are determined using discounted future cash flow techniques. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of the projected discounted cash flows, and should different conditions prevail, material write-downs of net intangible assets could occur. We review

periodically the estimated remaining useful lives of our acquired intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods. Future goodwill impairment tests could result in a charge to earnings.

Allowance for Doubtful Accounts

     We maintain an allowance for doubtful accounts based on a periodic review of customer accounts, payment patterns and specific collection issues. Where account-specific collection issues are identified, we record a specific allowance based on the amount that we believe will not be collected. For accounts where specific collection issues are not identified, we record a reserve based on the age of the receivables.

Accounting for Income Taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure and assess temporary differences between our financial reporting and our tax filings resulting from differing treatment of items, such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities. In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in our consolidated statements of operations become deductible expenses under applicable income tax laws or loss or credit carry-forwards are utilized. Accordingly, realization of our deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance.

     Provision for income taxes is based on our estimated annual effective tax rate in compliance with SFAS No. 109, Accounting for Income Taxes, or SFAS 109, and other related guidance. We update our estimate of our annual effective tax rate at the end of each quarterly period. We make estimates and judgments in the calculation of tax credits and in the calculation of certain tax assets and liabilities which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Changes in these estimates may result in significant increases or decreases to our tax provision in a subsequent period, which in turn would affect net income.

     Management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. We recorded a full valuation allowance (net of deferred tax liability) as of April 30, 2007 and January 31, 2008 because, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of our deferred tax assets in the future. We intend to maintain the full valuation allowances until sufficient evidence exists to support the reversal of all or some portion of these allowances. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted.

     We have previously experienced a greater than 50% shift in our stock ownership, which creates annual limitations on our ability to use a portion of our net operating loss carry-forwards.

     We adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109, or FIN 48, on May 1, 2007. FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a company’s income tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition with respect to income tax uncertainty. Management judgment is required to determine if the weight of available evidence indicates that a tax position is more likely than not to be sustained, as well as the largest amount of benefit from each sustained position that is more likely than not to be realized. As a result of the implementation of FIN 48, we recognized a liability for uncertain tax positions and a cumulative effect adjustment to the beginning balance of accumulated deficit on the balance sheet of $0.1 million. As of January 31, 2008, the liability for uncertain tax positions was $0.2 million. As of the date of adoption, we also recorded a $1.4 million reduction to deferred tax assets for unrecognized tax benefits, all of which is currently offset by a full valuation allowance that had no affect on the beginning balance of accumulated deficit or the net balance sheet. As of January 31, 2008, the unrecognized tax benefit of $1.4 million increased to $1.8 million, all of which is offset by a full valuation allowance. Our total unrecognized tax benefit as of the May 1, 2007 adoption date and as of January 31, 2008 was $1.5 million and $2.1 million, respectively. In addition, as of January 31, 2008, we had $0.2 million of unrealized tax benefits, that, if recognized, would affect our effective tax rate for the nine months ended January 31, 2008. In addition, we do not expect any material changes to the estimated amount of liability associated with our uncertain

tax positions within the next 12 months. Our policy is that we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48 and as of January 31, 2008, we had approximately $21,000 and $11,000, respectively of accrued interest or penalties associated with unrecognized tax benefits.

     We file income tax returns in the U.S. federal jurisdiction, California and various state and foreign tax jurisdictions in which we have a subsidiary or branch operation. The tax years 2001 to 2006 remain open to examination by the U.S. and state tax authorities, and the tax years 2005 and 2006 remain open to examination by the foreign tax authorities.

Results of Operations

     The following tables set forth unaudited quarterly consolidated statements of operations data for the three and nine months ended January 31, 2008 and 2007. We derived this information from our unaudited consolidated financial statements, which we prepared on the same basis as our audited consolidated financial statements contained in our prospectus filed with the SEC on February 14, 2008 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended. In our opinion, these unaudited statements include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair statement of that information when read in conjunction with the consolidated financial statements and related notes included elsewhere in our prospectus filed with the SEC on February 14, 2008 pursuant to Rule 424(b)(4). The operating results for any period presented should not be considered indicative of results for any future period.

     The following table presents our results of operations as a percentage of total revenues for the three and nine months ended January 31, 2008 and 2007:

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2008				2007				2008				2007
Revenues:
Products			64.0	%			61.0	%			63.1	%			60.5	%
Maintenance			26.6				27.6				27.2				27.8
Services			9.4				11.4				9.7				11.7
Total revenues			100.0				100.0				100.0				100.0
Cost of revenues:
Products			5.4				3.7				4.6				3.8
Maintenance			5.3				5.1				5.6				5.6
Services			5.2				5.1				5.4				6.1
Total cost of revenues			15.9				13.9				15.6				15.5
Gross margin			84.1				86.1				84.4				84.5
Operating expenses:
Research and development			18.3				21.7				19.6				23.8
Sales and marketing			46.1				55.2				51.8				55.5
General and administrative			10.6				12.7				13.8				13.5
Total operating expenses			75.0				89.6				85.2				92.8
Income (loss) from operations			9.1	%			(3.5	)%			(0.8	)%			(8.3	)%

Comparison of for the Three Months Ended January 31, 2008 and 2007

Revenues

     Revenues for the three months ended January 31, 2008 and 2007 were as follows (in thousands, except percentages):

		Three Months Ended
		January 31,
		2008				2007				Change in Dollars				Change in Percent
Products		$	17,698			$	10,209			$	7,489				73.4	%
Percentage of total revenues			64.0	%			61.0	%
Maintenance			7,380				4,611				2,769				60.1	%
Percentage of total revenues			26.6	%			27.6	%
Services			2,593				1,914				679				35.5	%
Percentage of total revenues			9.4	%			11.4	%
Total revenues		$	27,671			$	16,734			$	10,937				65.4	%

     Product Revenues.  Product revenues for the three months ended January 31, 2008 included revenues of $12.7 million from 56 new customers and revenues of $5.0 million from existing customers. New customer revenues for the three months ended January 31, 2008 increased by $5.0 million compared to new customer revenues for the three months ended January 31, 2007. Existing customer revenues for the three months ended January 31, 2008 increased by $2.5 million compared to existing customer revenues for the three months ended January 31, 2007. There was a net deferral of $1.2 million of product revenues in the three months ended January 31, 2007 related to sales transactions that included an undelivered product element for which we did not have VSOE, while for the three months ended January 31, 2008 there was a net recognition of product revenues of $1.0 million from those transactions. As of January 31, 2008, deferred product revenues included $2.4 million related to similar transactions. See the related discussion in “—Sources of Revenues, Cost of Revenues and Operating Expenses.”

     Maintenance Revenues.  Maintenance revenues increased $2.8 million for the three months ended January 31, 2008, as a result of providing support services to a larger installed base as well as the incremental maintenance revenues from increased product sales. As a result of the timing of revenue recognition for sales transactions that included an undelivered product element for which we did not have VSOE, there was a net deferral of $0.3 million of maintenance revenues for the three months ended January 31, 2007, and a net recognition of less than $0.1 million of maintenance revenues for the three months ended January 31, 2008. See the related discussion in “—Sources of Revenues, Cost of Revenues and Operating Expenses.”

     Services Revenues.  Services revenues increased by $0.7 million for the three months ended January 31, 2008, as a result of increased service billings related to a larger installed base of customers.

     Geographic Regions.  We sell our product in three geographic regions: Americas; Europe; and Asia Pacific. Net sales, which include product, maintenance and service revenue, for each region are summarized in the following table (in thousands, except percentages):

		Three Months Ended
		January 31,
		2008				2007				Change in Dollars				Change in Percent
Americas		$	21,725			$	12,762			$	8,963				70.2	%
Percentage of total revenue			78.5	%			76.3	%
Europe			4,737				2,880				1,857				64.5	%
Percentage of total revenue			17.1	%			17.2	%
Asia Pacific			1,209				1,092				117				10.7	%
Percentage of total revenue			4.4	%			6.5	%
Total revenue		$	27,671			$	16,734			$	10,937				65.4	%

Cost of Revenues and Gross Margin

The following table is a summary of cost of product, maintenance, and services revenues in absolute amounts and as a percentage of total revenues (in thousands, except percentages):

		Three Months Ended
		January 31,
		2008				2007				Change in Dollars				Change in Percent
Products		$	1,487			$	625			$	862				137.9	%
Percentage of total revenues			5.4	%			3.7	%
Maintenance			1,456				851				605				71.1	%
Percentage of total revenues			5.3	%			5.1	%
Services			1,454				847				607				71.7	%
Percentage of total revenues			5.2	%			5.1	%
Total cost of revenues		$	4,397			$	2,323			$	2,074				89.3	%