The data center, home to mission critical computer systems, is the nerve center of the IT department. To meet the demands of today\'s competitive business environment, organizations have invested hundreds of billions of dollars globally in data center assets, such as servers and application software, and are expected to invest another $240 billion from 2006 through 2010 on physical servers alone. With this growth in computing assets, data centers have become increasingly complex and difficult to manage, driving the need for large investments in personnel and software management tools. In 2006 alone, it is estimated that organizations globally spent $114 billion on managing and administering these assets, the vast majority of which was spent on in-house tools and personnel.

In recent years, the number of physical server shipments has almost doubled, growing from 4.2 million units shipped in 2001 to 7.7 million units shipped in 2006. Moreover, the number of physical servers shipped annually is forecasted to increase to 11.0 million by 2010.

In addition to the dramatic increase in the number of physical servers, the number of applications provisioned in the data center has also experienced rapid growth. With the Internet and intranet becoming the de facto platform for delivering software applications, the data center, not the desktop, has become the home of an increasing number of business applications. The web-based computing architecture facilitates rapid development of applications, which in turn increases the rate at which new applications are deployed in the data center and made available to a much broader base of users.

Compounding the increase in physical servers and the number of applications is the adoption of server virtualization technology. This technology enables multiple instances of an operating system to run on one physical server, creating multiple \"virtual servers.\" The adoption of this technology creates a multiplier effect with respect to the number of servers that need to be managed within the data center. From 2005 to 2010, the number of virtual servers is expected to grow by 41%, compounded annually.

The Company’s customers rely on the Operations Manager suite, with its discovery, compliance and configuration modules, to discover, manage, control and enforce changes to servers in the data center. With the Operations Manager suite, data center staff can determine what has changed within the environment, who made the change, whether the change had its intended effect, the state of compliance and what evidence is available to provide proof of compliance to auditors and other interested parties.

The Operations Manager suite consists of three modules: Discovery Manager, Compliance Manager and Configuration Manager, each of which can be purchased individually or bundled together.

The Company’s Application Release Manager product is designed to automate the process to roll-out applications from development to production environments in the data center. Application Release Manager provides a sophisticated packaging technology that enables the deployment of an application and all its underlying configuration items via an XML-based package.

With Application Release Manager, IT departments can build packages that include the specific software components that need to be deployed, the instructions that describe the particular sequence to install and configure the application and any required dependencies before installation can begin.

Orchestration Manager allows for the development of workflows to address specific management processes across different functional groups in the data center. Additionally, it enables the seamless integration of the Company’s suite of software solutions with other major enterprise management applications, such as service desk, event correlation, monitoring/fault management, asset management and other device-specific tools.

Using Orchestration Manager, IT departments can address true cross-functional service management initiatives related to best practices such as ITIL and COBIT, and enable the deployment and use of more complete CMDBs.

Total cost of revenue was $1.9 million for the three months ended December 31, 2006 and $1.1 million for the three months ended December 31, 2005, an increase of $0.8 million.

Gross profit was $10.9 million for the three months ended December 31, 2006 and $5 million for the three months ended December 31, 2005, an increase of $5.9 million.

Total operating expenses were $11.1 million for the three months ended December 31, 2006 and $6 million for the three months ended December 31, 2005, an increase of $5.1 million.

Net loss was $26,000 million for the three months ended December 31, 2006 and $1 million for the three months ended December 31, 2005, a decrease of $74,000 million.