The global adoption of local area networks, wide area networks, e-mail and the Internet has increased communications within and between organizations and has created the ability to generate, store, share and distribute massive amounts of electronic information instantaneously without regard to physical location. While the adoption and reliance on these technologies has significantly increased productivity and lowered the cost of doing business for Global 2000 companies, government agencies and other organizations, it has also exposed organizations to many increasing areas of risk associated with the continued proliferation of electronic data.

Traditional digital investigations involve internal investigators or third-party consultants manually searching through a multitude of electronic data in an attempt to discover traces or “fingerprints” of an electronic data-related incident. Such investigators or third-party consultants typically use software applications, utilities or processes, such as taking the affected servers, desktops and laptops off-line, so that they can remove, image or copy the hard drives, manually extract the data in question on each affected computer and save the affected files to another hard drive for processing and analysis by consultants or other third-party experts.

The market for digital investigation and cyber forensic solutions is expected to grow from $600 million in 2005 to $1.4 billion in 2009, representing a compounded annual growth rate of 24%, according to International Data Corporation. The market for eDiscovery solutions is expected to grow from $832 million in 2004 to $3.1 billion in 2008, representing a compounded annual growth rate of approximately 40%, according to Socha-Gelbmann. According to the 2005 Litigation Trends Survey by Fulbright & Jaworski LLP, a law firm, the average U.S. corporation with over $1 billion in revenues is involved in more than 140 domestic lawsuits at any given time. This survey polled 354 corporate general counsel in the United States and United Kingdom.

EnCase Enterprise provides an investigative platform that enables an organization to search, collect, preserve and analyze data on the servers, desktops and laptops on its computer network. EnCase Enterprise enables organizations to conduct internal investigations, whether HR-related or focused on compliance or fraud, collect and preserve data in response to requests from regulators or for civil litigation matters and take decisive action in the face of security and data breaches, whether the origin of the worm, virus or other exploit is internal (e.g., “rogue employees”) or external (e.g., “hackers”).

The EnCase eDiscovery Suite automates the search, collection and preservation of data across multiple servers, desktops or laptops on an organization’s network. The user is able to utilize the EnCase eDiscovery Suite to search specifically targeted computers and collect only the potentially relevant information, thereby eliminating the collection, processing and review of meaningless or duplicate information. The EnCase eDiscovery Suite allows the user to search and collect data from servers, desktops or laptops throughout the enterprise, and searches can be conducted based on a variety of criteria, including, but not limited to, by file type, “keywords,” custodian, file digital fingerprint, or metadata such as creation, modified or last accessed times, or any combination of these criteria. The EnCase eDiscovery Suite is able to collect individual files, including the associated metadata, while preserving the data in its original state, including, uniquely, the associated metadata.

EnCase Forensic software is the leading tool for searching, collecting, preserving and analyzing computer forensic data and authenticating such data in court. EnCase Forensic enables an investigator to conduct the full array of forensic functions on a single machine while preserving the integrity of the evidence for future use in court. Used by investigators and consultants in law enforcement, government agencies, small businesses, consulting firms and corporations, EnCase Forensic software provides a robust way to authenticate, search and recover computer evidence rapidly and thoroughly.

FastBloc hardware and software is used to connect EnCase Forensic to a hard drive to which investigators have physical access. FastBloc hardware acts as a middleman between the operating system and the hard drive and physically blocks any hard drive write requests. This is a failsafe system primarily used by law enforcement and non-enterprise class investigations that provides an extra level of protection against damaging original evidence in cases that require such measures.

Cost of revenues was $7.0 million for the six months ended June 30, 2006 compared to $5.1 million for the six months ended June 30, 2005, an increase of $1.9 million or 36.0%.

Cost of product revenue was $1.1 million for the six months ended June 30, 2006 compared to $1.0 million for the six months ended June 30, 2005, an increase of $0.1 million or 12.7%.

Selling and marketing expenses increased to $12.4 million for the six months ended June 30, 2006 compared to $7.1 million for the six months ended June 30, 2005, an increase of $5.3 million or 75.0%.

Research and development expenses increased to $3.3 million for the six months ended June 30, 2006 compared to $1.8 million for the six months ended June 30, 2005, an increase of $1.5 million or 84.0%.