Websites have become dynamic, interactive transaction and communications systems capable of supporting a wide range of web applications, many of which can be critical to a company’s business. For businesses offering products and services to end consumers, web applications have become an increasingly significant channel for conducting commerce and transmitting content.

Forrester Research estimated in January 2008 that U.S. retail and travel businesses, for example, will grow their online revenues from $175 billion in 2007 to $335 billion in 2012. Similarly, banks interact more and more frequently with their customers online, as reflected in the estimate of TowerGroup in May 2007 that the number of online customer banking transactions will expand from 11.8 billion in 2006 to 31.0 billion in 2010, a compounded annual growth rate of 27%.

In the 1990s, corporate software applications typically resided on servers within a company’s information technology, or IT, infrastructure and primarily addressed needs of internal personnel. Websites were simple in design and limited in functionality, and they served principally to provide marketing and other content on static web pages. Users typically accessed web applications on a Microsoft Windows-based personal computer using a Netscape Navigator or Microsoft Internet Explorer browser. The web experience was largely controlled by the company’s IT organization and managed by software and hardware tools within the corporate firewall.

In recent years, websites have evolved from static informational resources into dynamic, interactive transaction and communications systems capable of supporting a wide range of applications, many of which can be critical to a company’s business. The web environment is becoming increasingly complex, and the web experience often comes together for the first time at the user’s browser, outside the view and control of the company.

Reality View XF, which the Company introduced in November 2007, is a visual testing service that profiles the behavior of web pages across multiple browsers such as Microsoft Internet Explorer, Mozilla Firefox, Apple Safari, and Opera, operating systems such as Microsoft Windows XP and Vista, Apple Mac OS X, and GNU/Linux, and end-user access devices such as desktop and laptop computers and handheld wireless devices.

Reality Check XF, which the Company introduced in June 2007, is an automated functional testing service for web applications, including complex applications such as those dependent on AJAX.

Reality Load XF, which the Company introduced in May 2007, is an external load testing service designed to mirror the characteristics, demographics, actions and volumes of a company’s actual user population.

Active Network XF, which the Company has offered since 2001, is a monitoring service that measures page-level and transaction-based web application performance from over 150 backbone nodes in more than 30 countries.

Active Last Mile XF, which the Company introduced in April 2004, measures web application performance from its network of 40,000 last mile measurement points, which are personal computers operated by individuals located in more than 100 countries and connected through various broadband and dial-up Internet service providers.

Actual Experience XF, which the Company introduced in May 2007, is a real-user monitoring service that measures users’ web experiences, individually and collectively, directly from the users’ browsers while the users are accessing the web application.

ExperienceFirst Benchmarks, which the Company introduced in 2001, provides companies with benchmarking information about the web experience of similar applications of leading companies in selected industries.

Cost of revenue increased by $3.8 million, or 74%, from $5.1 million for the year ended December 2006 to $8.8 million for the same period in 2007.

Total operating expenses increased by $10 million, or 65%, from $15.3 million for the year ended December 2006 to $25.3 million for the same period in 2007.