The 1990s saw the widespread adoption among large enterprises of packaged business management applications that automated a variety of departmental functions, such as accounting, finance, order and inventory management, human resources, sales and customer support. These sophisticated applications required significant cash outlays for the initial purchase and for ongoing maintenance and support. In addition, these applications were internally managed and maintained by enterprise customers, requiring increasingly large staffs to support complex information technology infrastructures.

Most importantly, the applications generally were provided by multiple vendors, with each application providing only a departmental view of the enterprise. To gain an enterprise-wide view, organizations attempted to tie together their various incompatible packaged applications through long, complex and costly integration efforts. Many of these attempts failed, in whole or in part, often after significant delay and expense.

Small and medium-sized businesses have application software requirements that are similar, in many respects, to large enterprises because their core business processes are substantially the same. These requirements include the integration of back-office activities, such as managing payroll and tracking inventory; front-office activities, including order management and customer support; and, increasingly, sophisticated e-commerce capabilities.

According to a 2006 forecast for the customer relationship management, or CRM, market and 2007 forecasts for the enterprise resource planning, or ERP, and supply chain management, or SCM, markets from Gartner, Inc., companies in North America spent approximately $13.7 billion on ERP, CRM and SCM software applications in 2006, of which SMBs accounted for $4.4 billion, or 32%. Gartner projects that SMB spending on these applications will grow 8.7% annually from 2006 to 2010, compared to 5.7% for large businesses.

In addition, the Company offers industry-specific configurations for use by wholesale/distribution, services and software companies. Finally, the Company sells additional on-demand application modules that customers can purchase to obtain additional functionality required for their specific business needs.

NetSuite is targeted at SMBs and divisions of large companies, and provides a single platform for ERP, CRM and e-commerce capabilities. It contains a broad array of features that enable users to do their individual jobs more effectively. In addition, because all users are transacting business on the same database system, NetSuite easily automates processes across departments.

NetSuite CRM+ is targeted at a wide range of companies, including companies larger than the Company’s traditional SMB customers. SMB customers may use NetSuite CRM+ as an entry point into the entire suite, while larger enterprises often implement it as an alternative to more limited CRM offerings. This application provides traditional sales force automation, marketing automation, customer support and service management functionality. NetSuite CRM+ contrasts with competitive CRM products by also incorporating, without requiring additional integration, order management and many other ERP and e-commerce capabilities.

NetSuite Small Business is targeted primarily at small businesses that require fewer features than the Company’s NetSuite application. It includes basic ERP, CRM and e-commerce functionality, as well as customizable, real-time dashboards.

The Companyalso offers advanced capabilities that are part of its integrated suite, but are typically sold separately. These modules allow the customers to specifically augment aspects of the Company’s suite to enhance its relevance to their businesses.

Cost of revenue was $24.2 million, or 31% of revenue, for the nine months ended September 30, 2007, compared to $16.5 million, or 35% of revenue, for the same period a year ago, an increase of $7.7 million or 47%.

Product development expenses were $18.7 million for the nine months ended September 30, 2007, compared to $15.3 million for the same period a year ago, an increase of $3.4 million or 23%.

Sales and marketing expenses were $41.9 million for the nine months ended September 30, 2007, compared to $31.7 million for the same period a year ago, an increase of $10.2 million or 32%.

Operating loss was $20.3 million for the nine months ended September 30, 2007 compared to $26.9 million for the same period a year ago, a decrease of $6.6 million or 25%.