The driving forces for the growth of the data management software industry are the rapid growth of data and the need to protect and manage that data. Data is widely considered to be one of an organization’s most valued assets. The increasing reliance on critical enterprise software applications such as e-mail, relational databases, enterprise resource planning, customer relationship management and workgroup collaboration tools is resulting in the rapid growth of data across all enterprises. New government regulations, such as those issued under the Sarbanes-Oxley Act, the Health Insurance Portability and Accountability Act (HIPAA) and the Basel Committee on Banking Supervision (Basel II), as well as company policies requiring data preservation, are expanding the proportion of data that must be archived and easily accessible for future use. In addition, ensuring the security and integrity of the data has become a critical task as regulatory compliance and corporate governance objectives affecting many organizations mandate the creation of multiple copies of data with longer and more complex retention requirements. According to a 2005 report by International Data Corporation, an independent technology research organization, worldwide disk storage systems exceeded 1.2 million terabytes in 2004 and are forecasted to grow to nearly 10.6 million terabytes in 2009, representing an estimated annual growth rate of approximately 52%.

In addition to rapid data growth, data storage has transitioned from being server-attached to becoming widely distributed across local and global networked storage systems. Data previously stored on primary disk and backed up on tape is increasingly being backed up, managed and stored on a broader array of storage tiers ranging from high-cost, high-performance disk systems to lower-cost mid-range and low-end disk systems to tape libraries. This transition has been driven by the growth of data, the pervasive use of distributed critical enterprise software applications, the decrease in disk cost and the demand for 24/7 business continuity. Gartner, Inc., an independent technology research organization, estimated in 2005 that the storage management software market will grow from $5.6 billion in 2004 to $9.4 billion in 2009.

The Company’s QiNetix suite is comprised of eight distinct data management software applications, all of which share its Common Technology Engine. Each application can be used individually or in combination with other applications of the Company’s unified suite.

QiNetix Galaxy provides high-performance backup of enterprise applications and data for restoration when information is accidentally deleted, when disks fail, when servers need to be rebuilt or for disaster recovery of servers. QiNetix QuickRecovery recovers application data and files from disks to minimize disruption of a customer’s operations. QiNetix ContinuousDataReplicator (beta only) continuously captures file-level changes to data and copies those changes to a secondary system to protect from disk, server or site loss. QiNetix DataMigrator actively moves less-used or older data from higher-cost primary storage to less expensive secondary storage and indexes it for search and retrieval purposes without disrupting how applications or end users access information.

QiNetix DataArchiver archives and indexes e-mail messages and attachments to help organizations meet compliance, regulatory and legal discovery requirements. QiNetix Data Classification creates a catalog of key attributes of unstructured data stored on primary computing systems, complementing the indexing of applications and data on secondary storage resources provided by other QiNetix applications. QiNetix StorageManager discovers, tracks and reports on primary disk storage by users, enterprises, files and applications. QiNetix QNet consolidates management and reporting of data management service levels and data movement operations within a single browser interface.

The Company’s QiNetix suite includes intelligent operations management capabilities (iQ Ops) to simplify the management of complex data and network and storage information technology operations. iQ Ops provides proactive and reactive monitoring and reporting functions, alert notification and analysis enabling customers to quickly detect, troubleshoot and resolve potential problems.

Total cost of revenues increased $2.1 million, or 25%, from $8.5 million in the nine months ended December 31, 2004 to $10.6 million in nine months ended December 31, 2005.

Sales and marketing expenses increased $5.7 million, or 18%, from $31.5 million in the nine months ended December 31, 2004 to $37.2 million in the nine months ended December 31, 2005.

Research and development expenses increased $1.3 million, or 11%, from $12.6 million in the nine months ended December 31, 2004 to $13.9 million in the nine months ended December 31, 2005.

Interest income increased $0.6 million from $0.2 million in the nine months ended December 31, 2004 to $0.8 million in the nine months ended December 31, 2005.