e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file number: 001-33184

Double-Take Software, Inc.

(Exact name of registrant as specified in its charter)


Delaware		20-0230046
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

257 Turnpike Road, Suite 210, Southborough, MA		01772
(Address of Principal Executive Offices)		(Zip Code)

(877) 335-5674
(Registrant’s telephone number, including area code)

None.
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one).

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as determined in Rule 12b-2 of the Exchange Act). YES o NO þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:


Class		Outstanding at May 8, 2007
common stock, $0.001 par value		21,027,345

DOUBLE-TAKE SOFTWARE, INC.
For The Quarterly Period Ended March 31, 2007

INDEX


		Page No.
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Condensed Consolidated Balance Sheets at March 31, 2007 (unaudited) and December 31, 2006		1
	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and March 31, 2006		2
	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and March 31, 2006		3
	Unaudited Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		22
Item 4.	Controls and Procedures		23

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		24
Item 1A.	Risk Factors		24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
Item 3.	Defaults Upon Senior Securities		24
Item 4.	Submission of Matters to a Vote of Security Holders		24
Item 5.	Other Information		25
Item 6.	Exhibits		25

	Signatures		26

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

DOUBLE-TAKE SOFTWARE, INC.
Condensed Consolidated Balance Sheets
As of March 31, 2007 and December 31, 2006
(in thousands, except share and per share amounts)


	March 31,			December 31,
	2007			2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	56,651		$	55,170
Accounts receivable, net of allowance for doubtful accounts of $556 and $570 at March 31, 2007 and December 31, 2006, respectively		11,971			12,676
Inventory		—			14
Prepaid expenses and other current assets		1,622			2,210

Total current assets		70,244			70,070

Property and equipment — at cost, net of accumulated depreciation of $3,184 and $2,838 at March 31, 2007 and December 31, 2006, respectively		2,845			3,000
Goodwill		102			—
Customer relationships, net of accumulated amortization of $387 and $274 at March 31, 2007 and December 31, 2006, respectively		1,880			1,993
Marketing relationships, net of accumulated amortization of $213 and $150 at March 31, 2007 and December 31, 2006, respectively		1,779			1,842
Other assets		118			121


Total assets	$	76,968		$	77,026


Liabilities
Current liabilities:
Accounts payable		1,143			2,217
Accrued expenses		5,055			6,845
Accrued purchase price payable		—			1,425
Other liabilities		180			135
Deferred revenue		17,273			16,774

Total current liabilities		23,651			27,396


Long-term deferred revenue		4,264			3,977
Long-term deferred rent		372			406
Long-term capital lease obligations		12			17

Total long-term liabilities		4,648			4,400

Total liabilities		28,299			31,796


Stockholders’ Equity
Preferred Stock, $.01 par value per share; 20,000,000 shares authorized; 0 shares issued and outstanding		—			—
Common stock, $.001 par value per share; 130,000,000 shares authorized; 20,988,938 and 20,726,589 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively		21			21
Additional paid-in capital		139,031			138,398
Accumulated deficit		(90,379	)		(93,317	)
Cumulative foreign currency translation adjustment		(4	)		128

Total stockholders’ equity		48,669			45,230

Total liabilities and stockholders’ equity	$	76,968		$	77,026

See notes to financial statements

DOUBLE-TAKE SOFTWARE, INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2007			2006
Revenue:
Software licenses	$	10,390		$	6,372
Maintenance and professional services		7,535			4,307

Total revenue		17,925			10,679


Cost of revenue:
Software licenses		27			4
Maintenance and professional services		1,857			1,261

Total cost of revenue		1,884			1,265


Gross profit		16,041			9,414


Operating expenses:
Sales and marketing		6,903			4,330
Research and development		2,875			2,464
General and administrative		3,217			2,027
Depreciation and amortization		549			251

Total operating expenses		13,544			9,072


Operating income		2,497			342
Interest income		643			51
Interest expense		(19	)		(17	)
Foreign exchange gains (losses)		(1	)		—

Income before income taxes		3,120			376
Income tax expense		182			3

Net income		2,938			373

Accretion on redeemable shares:
Series B		—			(1,328	)
Series C		—			(6	)
Dividends on Series B		—			(528	)
Dividends on Series C		—			(170	)

Net income (loss) attributable to common stockholders	$	2,938		$	(1,659	)


Net income (loss) attributable to common stockholders per share:
Basic	$	0.14		$	(0.44	)

Diluted	$	0.13		$	(0.44	)


Weighted-average number of shares used in per share amounts:
Basic		20,888			3,791

Diluted		22,946			3,791

See notes to financial statements

DOUBLE-TAKE SOFTWARE, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2007			2006
Cash flows from operating activities:
Net income	$	2,938		$	373
Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Depreciation and amortization		373			251
Amortization of intangible assets		176			—
Provision for (recovery of) doubtful accounts		(13	)		50
Issuance of options for services		272			418
Issuance of redeemable convertible Series C preferred to management as compensation		—			107

Changes in:
Accounts receivable		782			750
Prepaid expenses and other assets		635			85
Inventory		18			—
Other assets		4			(58	)
Accounts payable and accrued expenses		(2,926	)		(4,618	)
Other liabilities		53			—
Deferred revenue		691			497

Net cash provided by (used in) operating activities		3,003			(2,145	)


Cash flows from investing activities:
Purchase of property and equipment		(212	)		(448	)
Earn-out payments on acquisition of Double-Take EMEA		(1,527	)		—

Net cash used in investing activities		(1,739	)		(448	)

Cash flows from financing activities:
Costs of public offering		(113	)		—
Proceeds from exercise of stock options		473			2
Payment on capital lease obligation		(5	)		—

Net cash provided by financing activities		355			2


Effect of exchange rate changes on cash		(138	)		—

Net increase (decrease) in cash and cash equivalents		1,619			(2,591	)
Cash and cash equivalents — beginning of period		55,170			8,341

Cash and cash equivalents — end of period	$	56,651		$	5,750


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	—		$	6
Income taxes	$	29		$	16

See notes to financial statements

DOUBLE-TAKE SOFTWARE, INC.
Unaudited Notes to Condensed Consolidated Financial Statements
(in thousands, except for share and per share amounts)

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

Double-Take Software, Inc. (the “Company”), a Delaware corporation, is engaged in developing, marketing and supporting data protection software solutions for high availability, disaster recovery and centralized backup. The Company operates in one reportable segment and its revenues are mainly derived from sales of software and related services. Software is licensed by the Company primarily to distributors, value added resellers (“VARS”) and original equipment manufacturers (“OEMS”), located primarily in the United States and in Europe.

The Company completed an initial public offering of its common stock in December 2006.

In connection with the Company’s initial public offering:

	•		There were 7.5 million shares of common stock sold at $11.00 per share to the public, comprising 5 million shares of common stock sold by the Company and 2.5 million shares of common stock sold by existing stockholders. The Company received gross proceeds of $55,000, or $47,549 after deducting underwriting discounts and commissions of $3,850 and offering costs of $3,601. Upon closing of the IPO, all shares of redeemable preferred stock automatically converted into 11,553,130 shares of common stock.

	•		On January 4, 2007, the underwriters of the Company’s initial public offering exercised their over-allotment option to purchase an additional 1,125,000 shares of common stock of the Company from certain existing stockholders. The Company did not receive any proceeds from the sale of the shares of the selling stockholders.

Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include all subsidiaries. All inter-company transactions and balances have been eliminated. Double-Take Software S.A.S., or Double-Take EMEA, was acquired by the Company on May 23, 2006; therefore the consolidated financial statements only include Double-Take EMEA’s financial results and activities from the date of acquisition.

Basis of Presentation

The accompanying consolidated balance sheet as of March 31, 2007, the consolidated statements of operations for the three months ended March 31, 2007 and March 31, 2006, and the consolidated statements of cash flows for the three months ended March 31, 2007 and March 31, 2006 are unaudited. The accompanying statements should be read in conjunction with the audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. They do not include all of the financial information and footnotes required by GAAP for complete financial statements. We believe the consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments necessary for the fair presentation of our statement of financial position as of March 31, 2007, and our results of operations and cash flows for the three months ended March 31, 2007 and March 31, 2006. All adjustments are of a normal recurring nature. The results for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending December 31, 2007. Other than the adoption of the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, or FIN 48, there have been no significant changes in our accounting policies during the three months ended March 31, 2007 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2006.

Use of Estimates

GAAP requires us to make certain estimates and judgments that can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Significant estimates and assumptions made by management include the determination of the fair value of stock options issued and the allowance for doubtful accounts. We believe that the estimates and judgments upon which we rely are reasonable based upon information available to us at the time that these estimates and judgments were made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements will be affected.

Goodwill

The Company accounts for goodwill in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“FAS 142”). FAS 142 requires that goodwill with indefinite lives are not amortized but reviewed for impairment if impairment indicators arise and, at a minimum, annually. The Company reviews goodwill on an annual basis for impairment.

Revenue Recognition

In accordance with EITF 01-9, our revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount. The Company derives revenues from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements. The Company applies the provisions of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.

For software arrangements involving multiple elements, the Company recognizes revenue using the residual method as described in SOP 98-9. Under the residual method, the Company allocates and defers revenue for the undelivered elements based on relative fair value and recognizes the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence (“VSOE”).

The Company’s software licenses typically provide for a perpetual right to use the Company’s software and are sold on a per-copy basis. The Company recognizes software revenue through direct sales channels and resellers upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report evidencing sales.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, the Company uses actual rates at which it has previously sold support as established VSOE.

Other professional services such as consulting and installation services provided by the Company are not essential to the functionality of the software and can also be performed by the customer or a third party. Revenues from consulting and installation services are recognized when the services are completed. Training fees are recognized after the training course has been provided. Based on the Company’s analysis of such other professional services transactions sold on a stand-alone basis, the Company has concluded it has established VSOE for such other professional services when sold in connection with a multiple-element software arrangement. The price for other professional services has not materially changed for the periods presented.

The Company has analyzed all of the undelivered elements included in its multiple-element arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method in accordance with SOP 98-9.

The Company considers the four basic revenue recognition criteria for each of the elements as follows:

Persuasive evidence of an arrangement with the customer exists. The Company’s customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and the Company prior to recognizing revenue on an arrangement.

Delivery or performance has occurred. The Company’s software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point. Software and/or software license keys for add-on orders or software updates are typically delivered via email. We recognize software revenue upon shipment to resellers and distributors because there is no right of return or refund and no price protection agreements. In situations where multiple copies of licenses are purchased, all copies are delivered to the customer in one shipment and revenue is recognized upon shipment. Occasionally, the Company enters into a site license with a customer that allows the customer to use a specified number of licenses within the organization. When a site license is sold, the Company delivers a master disk to the customer that allows the product to be installed on multiple servers. The Company has no further obligation to provide additional copies of the software or user manuals. Revenue on site licenses is recognized upon shipment of the master disk to the customer. Sales made by the Company’s Original Equipment Manufacturer (OEM) partners are recognized as revenue in the month the product is shipped. The Company estimates the revenue from a preliminary report received from the OEM shortly after the end of the month. Once the final report is received, the revenue is adjusted to that based on the final report, usually in the following month. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically one year.

Fee is fixed or determinable. The fee customers pay for software applications, customer support and other professional services is negotiated at the outset of an arrangement. The fees are therefore considered to be fixed or determinable at the inception of the arrangement.

Collection is probable. Probability of collection is assessed on a customer-by-customer basis. Each new customer undergoes a credit review process to evaluate its financial position and ability to pay. If the Company determines from the outset of an arrangement that collection is not probable based upon the review process, revenue is recognized on a cash-collected basis.

The Company’s arrangements do not generally include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment,” using the prospective transition method, which requires the Company to apply its provisions only to awards granted, modified, repurchased or cancelled after the effective date. Under this transition method, stock-based compensation expense recognized beginning January 1, 2006 is based on the grant-date fair value of stock option awards granted or modified after January 1, 2006. As the Company had used the minimum value method for valuing its stock options under SFAS 123, all options granted prior to January 1, 2006 continue to be accounted for under APB Opinion No. 25.

The Company accounts for stock option grants to non-employees in accordance with SFAS No. 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

The fair values of options granted were estimated at the date of grant using the following assumptions:


	Three Months Ended March 31,
	2007			2006
Expected Term	7		years	7		years
Volatility		80.64	%		82.06	%
Risk free rate		4.82	%		4.36%-4.70	%
Dividend Yield		—			—
Discount		—			—

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted laws and tax rates that are expected to be in effect when the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits not expected to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted.

2. NET INCOME (LOSS) PER COMMON SHARE

Basic and diluted net income (loss) per share information for all periods is presented under the requirements of SFAS No. 128, “Earnings Per Share.” Basic loss per share is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share is calculated by dividing net loss attributable to common stockholders by the weighted-average number of common shares outstanding, adjusted for the dilutive effect, if any, of potential common shares.

The following table sets forth the computation of income (loss) per share:


	Three months Ended March 31,
	2007		2006
Net Income (loss) attributable to common stockholders	$	2,938	$	(1,659	)

Weighted average common shares outstanding net of weighted-average shares subject to repurchase – basic		20,888		3,791
Dilutive effect of stock options		2,015		—
Dilutive effect of common stock warrants		43		—

Weighted average common shares outstanding net of weighted-average shares subject to repurchase – diluted		22,946		3,791

Basic net income (loss) per share	$	0.14	$	(0.44	)
Diluted net income (loss) per share	$	0.13	$	(0.44	)

The following potential common shares (in thousands) were excluded from the computation of diluted net income (loss) attributable to common stockholders per share because they had an anti-dilutive impact:


	Three Months Ended March 31,
	2007		2006
Stock options		247		2,529
Warrants		—		163
Redeemable convertible preferred stock		—		10,896

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:


	March 31,		December 31,
	2007		2006
Equipment	$	96	$	95
Furniture and fixtures		455		460
Motor Vehicles		103		104
Computer hardware		4,767		4,561
Leasehold improvements		608		618

		6,029		5,838

Less accumulated depreciation and amortization		3,184		2,838

	$	2,845	$	3,000

4. INTANGIBLE ASSETS

In connection with the acquisition of Double-Take EMEA, a portion of the contingent purchase price equal to the excess of the fair value of the assets acquired and liabilities assumed over the non-contingent portion of the purchase price was accrued in accordance with SFAS No. 141. Earn-out payments in excess of the initial amount recorded as a liability are recorded as additional purchase price and goodwill. For the three months ended March 31, 2007, the Company paid aggregate earn-out payments of $1,527 to the former owners of Double-Take EMEA, $102 of which was recorded as goodwill.

Intangible assets consist of the following:


	March 31,			December 31,
	2007			2006
Customer relationships	$	2,267		$	2,267
Less accumulated amortization		(387	)		(274	)

	$	1,880		$	1,993


Marketing relationships	$	1,992		$	1,992
Less accumulated amortization		(213	)		(150	)

	$	1,779		$	1,842

5. CONTINGENCIES

In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, at March 31, 2007, the Company is not party to any litigation that is expected to have a material effect on the Company’s financial position, results of operations or cash flows.

6. STOCKHOLDERS’ EQUITY

Common stock

Options to purchase 231,683 and 2,579 shares of common stock were exercised for the three months ended March 31, 2007 and March 31, 2006, respectively, and the Company received aggregated proceeds of $475 and $2, respectively.

Warrants

For the three months ended March 31, 2007, the Company issued 30,666 shares of common stock upon the exercise of warrants to purchase shares of common stock. The warrants were exercisable for up to 35,714 shares of common stock, however, pursuant to the terms of the warrant agreements, the holders of the warrants performed cashless exercises in which the Company issued fewer shares in lieu of receiving proceeds of $66.

As of March 31, 2007, 45,918 warrants were outstanding to purchase common stock exercisable at $2.94 per share. These warrants have a cashless exercise provision and expire in 2013.

Stock option plans

In the three months ended March 31, 2007, the Company issued options to purchase 25,100 shares of common stock, with a weighted average exercise price of $14.90 per share, which is based on exercise prices equal to the fair market value per share on the dates of grant.

A summary of the Company’s stock option activity for the three months ended March 31, 2007 is presented below:


				Weighted
	Shares			Average
Outstanding at December 31, 2006		2,929,081		$	3.12
Options granted		25,100		$	14.90
Options cancelled		(29,685	)	$	11.42
Options exercised ⁽¹⁾		(231,683	)	$	2.05

Outstanding at March 31, 2007		2,692,813		$	3.23

Options exercisable at March 31, 2007		1,909,547		$	2.94
Options not vested at March 31, 2007⁽²⁾		783,266		$	3.92


(1)		Intrinsic value of $1,804 and cash received of $475.

(2)		330,413 additional options are expected to vest in the remainder of 2007.

The Company’s policy is to issue new shares upon exercise of options as the Company does not hold shares in treasury.

The aggregate intrinsic value of stock options outstanding at March 31, 2007 was approximately $28,778. The aggregate intrinsic value of stock options exercisable at March 31, 2007 was approximately $21,234.

All options granted are equity awards and the Company has not granted any liability awards. The Company expects to recognize future compensation costs aggregating $3,254 for options granted but not vested as of March 31, 2007. Such amount will be recognized over the weighted average requisite service period, which is expected to be approximately 2 years.

The following table presents the stock-based compensation expense for the three months ended March 31, 2007 and 2006:


	Three Months		Three Months
	Ended March 31,		Ended March 31,
	2007		2006
Cost of revenue, maintenance and professional services	$	21	$	8
Sales and marketing		51		18
Research and development		29		19
General and administrative		171		2

	$	272	$	47

Executive bonus plans

In February 2006, the Company issued 67,998 shares of Series C Preferred to certain of its executives and recorded a compensation charge of $102 based on the fair value of the Series C Preferred at $1.50 per share.

7. INCOME TAXES

For the three months ended March 31, 2007 the Company generated operating profits. After applying available net federal and state operating loss and tax credit carryforwards, the tax provision accrued at March 31, 2007 relates primarily to foreign and state provisions for income tax.

As of December 31, 2006, the Company recorded a full valuation allowance against net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception. Realization of deferred tax

assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ ownership changes “ that have occurred.

As of March 31, 2007, the tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and tax credit carryforwards. In determining future taxable income, assumptions are made to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with forecasts used to manage the business. The remaining valuation allowance will be maintained until sufficient further positive evidence exists to support a reversal of, or decrease in, the valuation allowance.

The Company adopted the provisions of FIN 48 on January 1, 2007. The application of this Interpretation requires a two-step process that separates recognition from measurement. Upon implementing FIN 48 and performing the analysis, there has not been any increase or decrease to reserves for uncertain tax positions.

The Company is subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax assessments by tax authorities for the years before 2002.

The Company has elected to record interest and penalties recognized in accordance with FIN 48 in the financial statements as income taxes. Any subsequent change in classification of FIN 48 interest and penalties will be treated as a change in accounting principle subject to the requirements of SFAS No. 154, Accounting Changes and Error Corrections.

8. PROFIT SHARING PLAN

Effective March 1, 1996, the Company adopted a defined contribution plan (the “Plan”), which, as amended, qualifies under Section 401(k) of the Internal Revenue Code. The Plan covers all employees who meet eligibility requirements. Employer contributions are discretionary. The Company recorded an expense of $100 and $0 for the three months ended March 31, 2007 and March 31, 2006, respectively.

9. SEGMENT INFORMATION

The Company operates in one reportable segment.

The Company operates in three geographic regions: North America, Europe, Middle East & Africa and Asia-Pacific. All transfers between geographic regions have been eliminated from consolidated revenues. Revenue, long-lived assets and intangible assets by geographic region are as follows:


	Three Months Ended
	March 31,
	2007		2006
Revenue:
North America	$	11,337	$	9,451
Europe, Middle East & Africa		5,987		653
Asia-Pacific		601		575

	$	17,925	$	10,679


	March 31,		December 31,
	2007		2006
Long-lived assets:
North America	$	2,596	$	2,733
Europe, Middle East & Africa		249		267
Asia-Pacific		—		—

	$	2,845	$	3,000


	March 31,		December 31,
	2007		2006
Intangible assets:
North America	$	—	$	—
Europe, Middle East & Africa		3,659		3,835
Asia-Pacific		—		—

	$	3,659	$	3,835

10. RELATED PARTY TRANSACTIONS

The Company has had transactions with Sunbelt Software Distribution, Inc., or Sunbelt Distribution. An officer of the Company who joined the Company as a result of the acquisition of Double-Take EMEA is Chairman of Sunbelt Distribution. The balances and transactions with Sunbelt Distribution are described below:


	March 31, 2007
	2007
Trade Receivable	$	1,728
Trade Payable	$	—

	Three Months Ended
	March 31, 2007
	2007
Sales to Sunbelt Distribution	$	2,264
Purchases from Sunbelt Distribution	$	44

11. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (FAS 159). The fair value option established by FAS 159 permits, but does not require, all entities to choose to measure eligible items at fair value at specified election dates. An entity would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing what the impact of the adoption of this Statement will be on the Company’s financial position and results of operations.

In June 2006, the EITF reached consensus on EITF Issue No. 06-3, “Disclosure Requirements for Taxes Assessed by a Government Authority on Revenue-Producing Transactions” (“EITF No. 06-3”). EITF 06-3 requires disclosure of a company’s accounting policy with respect to presentation of taxes collected on a revenue producing transaction between a seller and a customer. For taxes that are reported on a gross basis (included in revenues and costs), EITF 06-E also requires disclosure of the amounts of taxes included in the financial statements. The Company records sales tax collected from its customers on a net basis. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF 06-3 did not have a material impact on the Company’s consolidated financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY ADVICE REGARDING FORWARD-LOOKING STATEMENT

Some of the statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Exchange Act. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the Securities and Exchange Commission (“SEC”).

We may, in some cases, use words such as “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” “will,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Form 10-Q include statements about:

	•		competition and competitive factors in the markets in which we operate;

	•		demand for replication software;

	•		the advantages of our technology as compared to others;

	•		changes in customer preferences and our ability to adapt our product and services offerings;

	•		our ability to obtain and maintain distribution partners and the terms of these arrangements;

	•		our ability to develop and maintain positive relationships with our customers;

	•		our ability to maintain and establish intellectual property rights;

	•		our ability to retain and hire necessary employees and appropriately staff our development, marketing, sales and distribution efforts;

	•		our cash needs and expectations regarding cash flow from operations;

	•		our ability to manage and grow our business and execution of our business strategy; and

	•		our financial performance.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition and results of operations may vary materially from those expressed in our forward-looking statements. There are a number of important factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. These important factors include those that we discuss in this section of our Form 10-Q and in the “Risk Factors” section in this Form 10-Q and in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on March 29, 2007. You should read these factors and the other cautionary statements made in this Form 10-Q in combination with the more detailed description of our business in our annual report on Form 10-K as being applicable to all related forward-looking statements wherever they appear in this quarterly report. If one or more of these factors materialize, or if any underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from any future results, performance or achievements expressed or implied by these forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

Double-Take Software develops, sells and supports affordable software that reduces downtime and protects data for business-critical systems. We believe that we are the leading supplier of replication software for Microsoft server environments. By simply loading our software onto servers running current Windows operating systems, organizations of any size can maintain an off-site standby server with replicated data, providing rapid recovery in the event of a disaster. We estimate that we have sold licenses for approximately 105,000 copies of Double-Take to more than 12,000 customers.

In recent years, we have experienced substantial growth, increasing our total revenue from $14.3 million for the year ended December 31, 2002 to $60.8 million for the year ended December 31, 2006, and we have gone from having net losses of $14.3 million to a net income of $6.8 million during that same period. Revenue for the three months ended March 31, 2007 totaled $17.9 million and we recorded net income of $2.9 million. We believe that our focus on providing affordable replication software to companies of all sizes through an efficient direct sales team and a robust distribution network has been instrumental to our continued revenue growth. Revenue generated by sales of our software represented 58% and 60% of our total revenue in the three months ended March 31, 2007 and March 31, 2006, respectively. Sales of maintenance and professional services generated the remainder of our revenue.

As a result of our investments in developing our software and establishing our broad distribution network (as well as legal fees and settlement costs associated with the defense and settlement of a legal case involving our intellectual property) we experienced significant operating losses through 2005. Our ability to increase the productivity of our sales force and distribution partners while controlling our other expenses has driven an improvement in our results, from an operating loss of $11.4 million and a net loss of $14.3 million in 2002 to an operating income of $7.0 million and net income of $6.8 million in 2006. We achieved operating income of $2.5 million and net income of $2.9 million in the first quarter of 2007.

Some Important Aspects of Our Operations

We license our software under perpetual licenses to end-user customers directly and to a network of distributors, value-added resellers and original equipment manufacturers, or OEMs. Our distributors primarily sell our software to our resellers. Our resellers bundle or sell our software together with their own products and also sell our software independently. Our OEMs market, sell and support our software and services on a stand-alone basis and incorporate our software into their own hardware and software products.

Software sales made to or through our distributors, value-added resellers and OEMs generated approximately 90% and 95% of total software revenue in the three months ended March 31, 2007 and March 31, 2006, respectively. During the three months ended March 31, 2007 and March 31, 2006, approximately 10% and 5%, respectively, of our software sales were made solely by our direct sales force, approximately 20% and 10%, respectively, were made to our distributors for sale to value-added resellers, approximately 57% and 76%, respectively, were made directly through resellers and approximately 13% and 9%, respectively, were made through OEMs, primarily Hewlett-Packard Co. We believe that we will need to continue to maintain close relationships with our partners to sustain and increase profitability. We have no current plans to focus future growth on one distribution channel versus another.

In the three months ended March 31, 2007, the median price of sales of Double-Take software licenses to customers was approximately $4,000 and the average sales cycle was less than three months. On May 1, 2007, we implemented a nominal price increase across all of our products. We believe that these factors have contributed to more balanced sales throughout the quarter and more predictable revenue streams in comparison to other software companies with perpetual license models.

On May 23, 2006, we completed our acquisition of Sunbelt System Software S.A.S., which is now known as Double-Take Software S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take EMEA was the principal or exclusive distributor of our software in our European, Middle Eastern and African markets and a certified Double-Take training organization. Sales of our software and related services generated 93% of Double-Take EMEA’s revenue in 2005. Our acquisition of Double-Take EMEA has provided us with a direct presence in the European, Middle Eastern and African markets, the opportunity to further our strategic initiative to increase revenue generated outside of the United States, and opportunities for improved margins. The inclusion of Double-Take EMEA’s assets and operations in our business since May 23, 2006 has contributed to a significant increase in the size of our business.

Revenue

We derive revenue from sales of perpetual licenses for our software and from maintenance and professional services.

Software Licenses. We derive the majority of our revenue from sales of perpetual licenses of our software applications, which allow our customers to use the software indefinitely. We do not customize our software for a specific end user customer. We recognize revenue from sales of perpetual licenses generally upon shipment of the software. In accordance with EITF 01-9, our software revenue is reported net of rebates and discounts because we do not receive an identifiable benefit in exchange for the rebate or discount.

Our software revenue generated approximately 58% and 60% of our total revenue in the three months ended March 31, 2007 and March 31, 2006, respectively. Sales to existing customers generated approximately 57% and 41% of our software revenue in the three months ended March 31, 2007 and March 31, 2006, respectively. Sales to new customers generated the remainder of our software revenue for these periods.

Our software revenue generally experiences some seasonality. Many organizations do not make the bulk of their information technology purchases, including software, in the first quarter of any year. We believe that this generally has resulted in lower revenue generated by software sales in our first quarter in prior years. We also have experienced in prior years lower revenue in the summer months.

Maintenance and Professional Services. We also generate revenue by providing our customers with maintenance comprised of software updates and product support. We generally include our maintenance for a designated period in the price of the software at the time of sale. In addition, many of our customers enter into a maintenance agreement for periods longer than a year. These agreements entitle our customers to software updates on a when-and-if-available basis and product support for an annual fee based on the licenses purchased and the level of service subscribed. Almost all of our customers that purchase maintenance pay the entire amount payable under the agreement in advance, although we recognize maintenance revenue ratably over the term of the agreement. This policy has contributed to increasing deferred revenue balances on our balance sheet and positive cash flow from operations.

In some cases, most often in connection with the licensing of our software, we provide professional services to assist our customers in strategic planning for disaster recovery and application high availability, the installation of our software and the training of their employees to use our software. We provide most of our professional services on a fixed price basis and we recognize the revenue for professional services once we complete the engagement.

Of total maintenance and professional services revenue, maintenance revenue represented 85% and 86% in the three months ended March 31, 2007 and March 31, 2006, respectively. Professional services generated the remainder of our total maintenance and professional services revenue in these periods.

Of our total revenue, maintenance revenue represented 36% and 35%in in the three months ended March 31, 2007 and March 31, 2006, respectively. Professional services accounted for 6% and 5% of our total revenue in the three months ended March 31, 2007 and March 31, 2006. Our maintenance and professional services revenue historically has generated lower gross margins than our software revenue. The gross margin generated by our maintenance and professional services revenue was 75% and 71% in the three months ended March 31, 2007 and March 31, 2006, respectively. We expect the proportion of revenue derived from sales of maintenance to increase in the future as we increase the number of software licenses sold and in service. As the percentage of total revenue attributable to maintenance increases, our overall gross margins will be adversely affected.

Cost of Revenue

Our cost of revenue primarily consists of the following:

Cost of Software Revenue. Cost of software revenue consists primarily of media, manual, translation and distribution costs and may in the future include royalties to third-party software developers for technology embedded within our software. Cost of software revenue also has included amortization of internally-developed capitalized software. Because our recent development initiatives have resulted in a significant decrease in the time and costs incurred between technological feasibility and the point at which the software is

ready for general release, we no longer capitalize costs of our internally-developed software. As a result, we do not believe that amortization of internally developed software will have any effect on our cost of software revenue in future periods.

Cost of Services Revenue. Cost of services revenue consists primarily of salary and other personnel-related costs incurred in connection with our provision of maintenance and professional services. Cost of services revenue also includes other allocated overhead expenses for our professional services and product support personnel, as well as travel-related expenses for our staff to perform work at a customer’s site.

Operating Expenses

We classify our operating expenses as follows:

Sales and Marketing. Sales and marketing expenses primarily consist of the following:

	•		personnel and related costs for employees engaged in sales, corporate marketing, product marketing and product management, including salaries, commissions and other incentive compensation, including equity-based compensation, related employee benefit costs and allocated overhead expenses;

	•		travel related expenses to meet with existing and potential customers, and for other sales and marketing related purposes; and

	•		sales promotion expenses, public relations expenses and costs for marketing materials and other marketing events, including trade shows, industry conventions and advertising, and marketing development funds for our distribution partners.

We expense our sales commissions at the time of sale. We expect our sales and marketing expense to increase in the future as we increase the number of direct sales professionals and invest in marketing programs. However, we expect sales and marketing expense to decrease as a percentage of revenue for the near future as we anticipate that our revenue will increase more rapidly than our sales and marketing costs.

Research and Development. Research and development expenses primarily represent the expense of developing new software and modifying existing software. These expenses primarily consist of the following:

	•		personnel and related costs, including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for research and development personnel, including software engineers, software quality assurance engineers and systems engineers; and

	•		contract labor expense and consulting fees paid to independent consultants and others who provide software engineering services to us, as well as other expenses associated with the design and testing of our software.

To date, our research and development efforts have been primarily devoted to increases in features and functionality of our existing software. We expect research and development expense to increase in the future as we continue to develop new solutions for our customers. However, we expect research and development expense to remain relatively consistent, or possibly decrease slightly, as a percentage of revenue.

General and Administrative. General and administrative expenses represent the costs and expenses of managing and supporting our operations. General and administrative expenses consist primarily of the following:

	•		personnel and related costs including salaries, employee benefits, equity and other incentive compensation and allocated overhead expenses, for our executives, finance, human resources, corporate information technology systems, strategic business, corporate quality, corporate training and other administrative personnel

	•		legal and accounting professional fees;

	•		recruiting and training costs;

	•		travel related expenses for executives and other administrative personnel; and

	•		computer maintenance and support for our internal information technology system.

General and administrative expenses have increased as we have incurred increased expenses related to being a publicly-traded company and have invested in an infrastructure to support our continued growth. However, we expect general and administrative expenses to decrease as a percentage of revenue for the foreseeable future, as we believe the rate at which our revenue will increase will exceed the rate at which we expect to incur these additional expenses.

Depreciation and Amortization. Depreciation and amortization expense consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs, and amortization of intangible assets acquired.

Results of Operations

Three Months Ended March 31, 2007 Compared to Three Months Ended March, 31, 2006

Revenue. We derive our revenue from sales of our products and support and services. Revenue increased 68% to $17.9 million, from $10.7 million for the three months ended March 31 2007 to March 31, 2006. Revenue for 2007 includes revenue from Double-Take EMEA which was acquired on May 23, 2006. Of our total revenue in the three months ended March 31, 2007, 93% was attributable to sales to or through our distribution partners, which was an increase from 91% of our total revenue attributable to sales to or through our distribution partners in the three months ended March 31, 2006. Of our total revenue in the three months ended March 31, 2007,7% was attributable to direct sales to end users, a decrease from 9% of our total revenue attributable to end users in the three months ended March 31, 2006.

Software License Revenue. Software revenue increased $4.0 million, or 63%, from $6.4 million in the three months ended March 31 2006 to $10.4 million in the three months ended March 31, 2007. The increase in software revenue was due to increased volume of $1.1 million resulting from broader demand for, and acceptance of, our software, $0.3 million due to the release of our new product Double-Take for Virtual Systems, and $2.6 million from Double-Take EMEA sales.

Maintenance and Professional Services Revenue. Maintenance and professional services revenue increased $3.2 million, or 75%, from $4.3 million in the three months ended March 31, 2006 to $7.5 million in the three months ended March 31 2007. Maintenance and professional services revenue represented 40% of our total revenue in the three months ended March 31, 2006 and 42% of our total revenue in the three months ended March 31, 2007. Maintenance revenue increased $2.7 million, or 74%, from $3.7 million in the three months ended March 31, 2006 to $6.4 million in the three months ended March 31, 2007. The increase in maintenance revenue was attributable to higher sales to our expanding base of customers, as well as maintenance revenue of $2.5 million generated by Double-Take EMEA. Professional services revenue increased $0.5 million, or 84%, from $0.6 million in the three months ended March 31, 2006 to $1.1 million in the three months ended March 31, 2007. The increase in professional services revenue was due to more professional service deliveries due to an increase in professional services personnel as well as $0.3 million of revenue generated by Double-Take EMEA.

Cost of Revenue and Gross Profit

Total cost of revenue increased $0.6 million, or 49%, from $1.3 million for the three months ended March 31 2006 to $1.9 million in the three months ended March 31, 2007. Total cost of revenue represented 12% of our total revenue in the three months ended March 31, 2006 and 11% of our total revenue in the three months ended March 31, 2007.

Cost of software revenue increased a nominal amount from the three months ended March 31, 2006 to March 31, 2007. Cost of software revenue represented 0% of our software revenue in the three months ended March 31, 2006 and March 31, 2007.

Cost of services revenue increased $0.6 million, or 47%, from $1.3 million for the three months ended March 31, 2006 to $1.9 million in the three months ended March 31, 2007. The increase was the result of higher employee compensation of $0.2 million due to an increase in the number of our maintenance and professional services personnel and $0.3 million of costs of Double-Take EMEA maintenance and professional services personnel. Cost of services revenue represented 29% of our services revenue in the three months ended March 31, 2006 and 25% of our services revenue in the three months ended March 31, 2007.

Gross profit increased $6.6 million, or 70%, from $9.4 million for the three months ended March 31, 2006 to $16.0 million for the three months ended March 31, 2007. Gross profit increased from 88% in the three months ended March 31, 2006 to 89% in the three months ended March 31, 2007. This increase is primarily related to higher maintenance revenue associated with Double-Take EMEA.

Operating Expenses

Sales and Marketing. Sales and marketing expenses increased $2.6 million, or 59%, from $4.3 million for the three months ended March 31, 2006 to $6.9 million for the three months ended March 31, 2007. The increase was due to an increase of compensation and commission expense of $0.3 million resulting from increased sales, an increase of $0.3 million in marketing and advertising related to creating Double-Take brand awareness and $1.7 million of costs of Double-Take EMEA sales and marketing efforts.

Research and Development. Research and development expenses increased $0.4 million, or 17%, from $2.5 for the three months ended March 31, 2006 to $2.9 million for the three months ended March 31, 2007. The increase resulted from higher compensation expense of $0.2 million due to an increase in personnel and $0.1 million from outsourced development projects.

General and Administrative. General and administrative expenses increased $1.2 million, or 59%, from $2.0 million for the three months ended March 31, 2006 to $3.2 million for the three months ended March 31, 2007. The increase was related to $0.2 million in compensation expense in the three months ended March 31, 2007 attributable to expensing of stock options because of the adoption of SFAS 123R in January 2006, an increase in insurance expense of $0.2 million related to higher premiums associated with coverages for a public company, an increase of $0.4 million in legal and accounting fees due to being a public company and $0.6 million of costs from Double-Take EMEA. These increases were offset by a decrease in stock option expense for our former CEO of $0.4 million which occurred in the three months ended March 31, 2006 associated with accelerated vesting of stock options.

Depreciation and Amortization. Depreciation and amortization expense increased $0.3 million, or 119%, from $0.3 million for the three months ended March 31, 2006 to $0.6 million for the three months ended March 31, 2007. The increase was attributable to increased depreciation expense associated with increased capital expenditures, which were applied primarily for product development and other computer-related equipment, as well as amortization related to the intangible assets acquired in the Double-Take EMEA acquisition.

Interest Income. Interest income increased $0.5 million, or 1161%, from $0.1 million for the three months ended March 31, 2006 to $0.6 million for the three months ended March 31, 2007. The increase is attributable to higher cash balances in our deposit accounts as a result of our initial public offering in December 2006.

Foreign Exchange gains (losses)

Foreign currency losses increased a nominal amount due to foreign currency fluctuations related to Double-Take EMEA for the three months ended March 31, 2007.

Income Tax Expense

Income tax expense increased $0.2 million from $0.0 million for the three months ended March 31, 2006 to $0.2 million for the three months ended March 31, 2007. The increase is related to income tax expense incurred by Double-Take EMEA. We expect that our income tax expense will continue to increase in future periods related to Double-Take EMEA’s operations. This increase will be partially offset by our domestic operating loss carryforwards available as well as associated foreign tax credits related to Double-Take EMEA tax payments.

As of March 31, 2007, the tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and tax credit carryforwards. .We evaluate these items on an ongoing basis and adjust our tax expense appropriately. Should we determine that the valuation allowance on the deferred tax assets be further adjusted, our effective tax rate will decrease and possibly be negative for future periods.

Net Income

Net income increased $2.5 million, or 688%, from $0.4 million for the three months ended March 31, 2006 to $2.9 million for the three months ended March 31, 2007. This increase is related to our revenue growth of 68% from the three months ended March 31, 2007 while operating expenses have increased by only 49% in the same period. This increase was the result of our continued focus on expense control and continuing to leverage our existing sales force and partners to generate incremental revenue, as well as our acquisition of Double-Take EMEA, which occurred on May 23, 2006.

Preferred Stock

Accretion on our Series B and Series C Preferred stock decreased from $1.3 million in the three months ended March 31, 2006 to $0.0 million in the three months ended March 31, 2007. The accretion increased the carrying value of the preferred shares from their carrying value to their redemption value on a straight-line basis over the period from the investment date to the mandatory redemption date. Accretion ceased as of November 12, 2006, the original redemption date for both issuances.

Dividends on our Series B and Series C Preferred stock decreased from $0.7 million in the three months ended March 31, 2006 to $0.0 million in the three months ended March 31, 2007. Upon completion of the offering in December 2006, all shares of our Series B and Series C Preferred stock converted into 11,553,130 shares of common stock. Thus, there are no dividends for the three months ended March 31, 2007.

Critical Accounting Policies

In presenting our financial statements in conformity with accounting principles generally accepted in the United States, we are required to make estimates and judgments that affect the amounts reported in our financial statements. Some of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. We formulate these estimates and assumptions based on historical experience and on various other matters that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. Of our significant accounting policies described in Note 1 to the financial statements included elsewhere in this Form 10-Q, we believe that the following policies may involve a higher degree of judgment and complexity.

Revenue Recognition

We derive revenue from two primary sources or elements: software licenses and services. Services include customer support, consulting, installation services and training. A typical sales arrangement includes both of these elements. We apply the provisions of Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-4 and SOP 98-9, and related interpretations to all transactions to determine the recognition of revenue.

For software arrangements involving multiple elements, we recognize revenue using the residual method as described in SOP 98-9. Under the residual method, we allocate and defer revenue for the undelivered elements based on relative fair value and recognize the difference between the total arrangement fee and the amount deferred for the undelivered elements as revenue. The determination of fair value of the undelivered elements in multiple element arrangements is based on the price charged when such elements are sold separately, which is commonly referred to as vendor-specific objective-evidence, or VSOE.

Our software licenses typically provide for a perpetual right to use our software and are sold on a per copy basis. We recognize software revenue through direct sales channels and resellers upon receipt of a purchase order and when all other basic revenue recognition criteria are met as described below. Revenue from software licenses sold through an OEM is recognized upon the receipt of a royalty report evidencing sales.

Services revenue includes revenue from customer support and other professional services. Customer support includes software updates (including unspecified product upgrades and enhancements) on a when-and-if-available basis, telephone support and bug fixes or patches. Customer support revenue is recognized ratably over the term of the customer support agreement, which is typically one year. To determine the price for the customer support element when sold separately, we use actual rates at which we have previously sold support as established VSOE.

Other professional services such as consulting and installation services provided by us are not essential to the functionality of the software and can also be performed by the customer or a third party. Revenues from consulting and installation services are recognized when the services are completed. Training fees are recognized after the training course has been provided. Based on our analysis of such other professional services transactions sold on a stand-alone basis, we establish VSOE for such other professional services when sold in connection with a multiple-element software arrangement.

We have analyzed all of the undelivered elements included in our multiple-element arrangements and determined that VSOE of fair value exists to allocate revenues to services. Accordingly, assuming all basic revenue recognition criteria are met, software revenue is recognized upon delivery of the software license using the residual method in accordance with SOP 98-9.

We consider the four basic revenue recognition criteria for each of the elements as follows:

Persuasive evidence of an arrangement with the customer exists. Our customary practice is to require a purchase order and, in some cases, a written contract signed by both the customer and us prior to recognizing revenue on an agreement.

Delivery or performance has occurred. Our software applications are usually physically delivered to customers with standard transfer terms such as FOB shipping point. Software and/or software license keys for add-on orders or software updates are typically delivered via email. We recognize software revenue upon shipment to resellers and distributors because there is no right of return or refund and no price protection agreements. In situations where multiple copies of licenses are purchased, all copies are delivered to the customer in one shipment and revenue is recognized upon shipment. Occasionally, the Company enters into a site license with a customer that allows the customer to use a specified number of licenses within the organization. When a site license is sold, the Company delivers a master disk to the customer that allows the product to be installed on multiple servers. The Company has no further obligation to provide additional copies of the software or user manuals. Revenue on site licenses is recognized upon shipment of the master disk to the customer. Sales made by our OEM partners are recognized as revenue in the month the product is shipped to the end user. We estimate the revenue from a preliminary report received from the OEM shortly after the end of the month. Once the final report is received, the revenue is adjusted to that based on the final report, usually in the following month. Services revenue is recognized when the services are completed, except for customer support, which is recognized ratably over the term of the customer support agreement, which is typically a year.

Our arrangements do not generally include acceptance clauses. However, if an arrangement does include an acceptance clause, revenue for such an arrangement is deferred and recognized upon acceptance. Acceptance occurs upon the earliest of receipt of a written customer acceptance, waiver of customer acceptance or expiration of the acceptance period.

Stock-Based Compensation

The fair values of options granted were estimated at the date of grant using the following assumptions:


	Three Months Ended March 31,
	2007			2006
Expected Term	7 years			7 years
Volatility		80.64	%		82.06%
Risk free rate		4.82	%		4.36%-4.70	%
Dividend Yield		—			—
Discount		—			—

Income Taxes

For the three months ended March 31, 2007 we generated operating profits. After applying our available net federal and state operating loss and tax credit carryforwards, our tax provision accrued at March 31, 2007 relates primarily to foreign and state provisions for income tax.

As of December 31, 2006, we recorded a full valuation allowance against our net deferred tax assets, which are primarily comprised of net operating loss carryforwards as a result of operating losses incurred since inception. Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets were fully offset by a valuation allowance. If not utilized, the federal and state net operating loss and tax credit carryforwards will expire between 2011 and 2025. Utilization of these net operating losses and credit carryforwards are subject to annual limitations due to provisions of the Internal Revenue Code of 1986, as amended, that are applicable due to “ ownership changes ” that have occurred.

As of March 31, 2007, our tax provision includes a deferred tax benefit for the projected reduction in the valuation allowance as a result of forecasted taxable income and corresponding utilization of net operation losses and tax credit carryforwards. In determining future taxable income, we make assumptions to forecast federal, state and international operating income, the reversal of temporary differences, and the implementation of any feasible and prudent tax planning strategies. The assumptions require significant judgment regarding the forecasts of future taxable income, and are consistent with our forecasts used to manage our business. We intend to maintain the remaining valuation allowance until sufficient further positive evidence exists to support a reversal of, or decrease, in the valuation allowance.

We adopted the provisions of FIN 48 on January 1, 2007. The application of this Interpretation requires a two-step process that separates recognition from measurement. Upon implementing FIN 48 and performing the analysis, we will not recognize any increase or decrease to reserves for uncertain tax positions.

We have elected to record interest and penalties recognized in accordance with FIN 48 in the financial statements as income taxes. Any subsequent change in classification of FIN 48 interest and penalties will be treated as a change in accounting principle subject to the requirements of SFAS No. 154, Accounting Changes and Error Corrections.

Liquidity and Capital Resources

Overview

During the development stages of our business, we incurred significant losses from operating activities. Since the three months ended June 30, 2005, however, our operations have generated sufficient cash flow to meet substantially all of the cash requirements of our business, including our operating, capital and other cash requirements. Our ability to sustain a level of positive cash flow from operations that is sufficient to continue to meet all of our future operating, capital and other cash requirements is subject to the risks associated with our business, including those described under “Risk Factors” in our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on March 29, 2007, and to changes in our business plan, capital structure and other events.

From the start of our operations in 1991 until the three months ended June 30, 2005, we financed our operations primarily through the issuance of preferred stock and common stock. Since the three months ended June 30, 2005, we have primarily financed our operations through internally generated cash flows. In December 2006, we received $47.5 million in net proceeds from our initial public offering. As of March 31, 2007, we had cash and cash equivalents of $56.7 million and accounts receivable of $12.0 million.

In January 2006, in connection with the settlement of an intellectual property dispute reached in December 2005, we paid $3.8 million to another company. We also agreed to make future payments of $0.5 million in each of January 2007, 2008, 2009 and 2010, which we collateralized by a $2.0 million letter of credit to that company. The letter of credit will be drawn down automatically in increments of $0.5 million at the time of each payment requirement. In December 2006, we purchased $0.5 million of the company’s products which was paid for in January 2007. Our future obligations under the settlement will be reduced on a dollar-for-dollar basis to the extent that we purchase or resell the other company’s products.

In May 2006, we paid $1.1 million to the former stockholders of Double-Take EMEA, which was our primary distributor in Europe, the Middle East and Africa as the initial payment for the acquisition of that company. Subsequent payments totaling $4.0 million were made through the three months ended March 31, 2007. The remaining portion of the total purchase price, which we estimate will range between $5.0 million and $7.0 million, will be payable in monthly increments based upon a specified percentage of the intercompany amounts paid by Double-Take EMEA to us each month in respect of purchases under our intercompany distribution agreement with Double-Take EMEA through December 31, 2007. A portion of our earn-out payments are held in escrow through December 31, 2007, to satisfy claims against the selling shareholders that we may have from time to time as a result of breaches of representations, warranties or covenants.

At March 31, 2007, we had no borrowings under our existing credit facility with Silicon Valley Bank (“Bank”). There was a letter of credit relating to our settled legal proceeding outstanding for $1.5 million

In May 2007, we entered into an amendment to our credit facility that extended the term of the facility to April 29, 2008. Under the terms of the amended credit facility, our maximum borrowings are $2 million less the aggregate amounts undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by the bank. Up to $0.5 million of the facility is available for foreign exchange contracts. The rate of interest for this facility is 0.75% above the prime rate. The facility is collateralized by all of our assets, excluding our intellectual property.

Our credit facility contains a number of restrictions that will limit our ability, among other things, to do the following: borrow money; enter into transactions outside the ordinary course of business; pledge our accounts receivable, inventory, intellectual property and most of our other assets as security in other borrowings or transactions; pay dividends on stock, redeem or acquire any of our securities; sell certain assets; make certain investments; guaranty obligations of third-parties; undergo a merger or consolidation; or engage in any business other than the business in which we are currently engaged or business that is reasonably related to that business.

Sources and Uses of Cash


	Three Months Ended
	March 31,
	2007			2006
	(in thousands)
Cash flow data:
Net cash provided by (used in) operating activities	$	3,003		$	(2,145	)
Cash used by investing activities		(1,739	)		(448	)
Net cash provided by financing activities		355			2
Effect of exchange rate changes on cash and cash equivalents		(138	)		—

Net increase in cash and equivalents		1,481			(2,591	)
Cash and cash equivalents, beginning of period		55,170			8,341

Cash and equivalents, end of period	$	56,651		$	5,750

Cash Flows from Operating Activities

Cash provided by operating activities increased in the three months ended March 31, 2007 to March 31, 2006 primarily due to having $2.9 million of net income in March 31, 2007 as opposed to a net income of $0.4 million in March 31, 2006. Another contributing factor was our continued growth of deferred revenue of $0.7 million, which was a result of our increase in software license sales and maintenance renewals and $0.8 million in positive cash flow from collections from our customers. These increases in cash flow from operations have been partially offset by the change in accounts payable and accrued expenses of $2.9 million resulting from payments made during the three months ended March 31, 2007.

Cash Flows from Investing Activities

Cash used in investing activities increased in the three months ended March 31, 2007 to March 31, 2006 primarily due to increased research and development lab equipment expenditures, and our acquisition of Double-Take EMEA on May 23, 2006. As we continue to make earn-out payments related to our acquisition of Double-Take EMEA, which we estimate will range between $5.0 and $7.0 million, we expect that cash used in investing activities will continue to increase until the end of the earn-out period at the end of 2007.

Cash Flows from Financing Activities

Cash provided by financing activities increased $0.4 million in the three months ended March 31, 2007 to March 31, 2006 due to proceeds from exercises of stock options. This was offset by additional costs paid in connection with the public offering.

Off-Balance Sheet Arrangements

As of March 31, 2007, other than our operating leases described under “—Liquidity and Capital Resources— Cash Requirements” above, we do not have off-balance sheet financing arrangements, including any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Historically, our exposure to foreign currency exchange rates was limited as our international sales were denominated in the United States dollar. As a result of our acquisition of Double-Take EMEA in May 2006, we now have international sales that are denominated in foreign currencies, and we face exposure to adverse movements in foreign currency exchange rates. Depending on the amount of our revenue generated from Double-Take EMEA, adverse movement in foreign currency exchange rates could have a material adverse impact on our financial results. Our primary exposures are to fluctuations in exchange rates for the United States dollar versus the Euro and to a lesser extent, the United States dollar versus the British Pound. Changes in currency exchange rates

could adversely affect our reported revenue and could require us to reduce our prices to remain competitive in foreign markets, which could also materially adversely affect our results of operations. We have not historically hedged exposure to changes in foreign currency exchange rates and, as a result, we could incur unanticipated gains or losses.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

We currently have no material legal proceedings pending.

Item 1A. Risk Factors.

An investment in our stock involves a high degree of risk. You should carefully consider the risks set forth in the Risk Factors section of our annual report on Form 10-K, which we filed with the Securities and Exchange Commission on March 29, 2007, and all of the other information set forth in this Form 10-Q and our Form 10-K before deciding to invest in our common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

On January 18, 2007, we issued 26,272 shares of our common stock upon the conversion of outstanding warrants to purchase common stock (“January Warrants”), which we originally issued on April 1, 2002. The January Warrants were exercisable for up to 30,612 shares of common stock at an exercise price of $1.8375 per share of common stock, but were converted into 26,272 shares of common stock pursuant to a “cashless” exercise provision. On February 6, 2007, we issued 4,394 shares of our common stock upon the conversion of outstanding warrants to purchase common stock (“February Warrants”), which we originally issued on April 1, 2002. The February Warrants were exercisable for up to 5,102 shares of common stock at an exercise price of $1.8375 per share of common stock, but were converted into 4,394 shares of common stock pursuant to a “cashless” exercise provision. We received no proceeds in connection with the conversion of the January Warrants or the February Warrants. We relied on the exemption from registration under the Securities Act of 1933 afforded by Section 3(a)(9) thereof for the issuance of shares of common stock upon the conversion of these warrants because no commission or other remuneration was paid for soliciting the conversion of these warrants.

Use of Proceeds

On December 14, 2006, our Registration Statement on Form S-1 (333-136499) covering our initial public offering was declared effective by the SEC. We used approximately $10.2 million of the proceeds from our initial public offering to make payment of a special dividend to the holders of the Series B Preferred Stock in December 2006. We intend to use the remaining $37.4 million of the proceeds from the offering for working capital and other general corporate purposes. Our management has significant flexibility in applying the net proceeds of the offering. Pending their use, we have invested the net proceeds of the offering in short-term, interest-bearing securities.

Item 3. Defaults Upon Senior Securities.

Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Our Annual Meeting of Stockholders was held on May 8, 2007. The following nominees were elected to serve on the Board of Directors for a term of one year:


	For		Withheld		Abstain
Dean Goodermote		15,751,433		1,903,381		0
Paul Birch		15,757,680		1,895,860		1,274
Ashoke Goswami		15,658,067		1,995,473		1,274
John Landry		15,754,576		1,898,860		1,378
Laura Witt		15,658,067		1,995,473		1,274
John Young		15,758,904		1,895,860		50

The voting results of the other matter submitted to a stockholder vote at the Annual Meeting were as follows:

Ratification of the appointment of Eisner LLP as the independent registered public accounting firm for 2007:


	For		Against		Abstain
Eisner LLP		17,589,278		64,165		1,371

Item 5. Other Information.

None.

Item 6. Exhibits.


	Exhibit No.		Exhibit Description
	10.1		Loan Modification Agreement dated May 9, 2007 between Silicon Valley Bank and Double-Take Software, Inc.

	31.01		Certification of Chief Executive officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.02		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.01		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	DOUBLE-TAKE SOFTWARE, INC.
May 15, 2007	By:	/s/ S. Craig Huke
		S. Craig Huke
		Chief Financial Officer (Principal Financial and Principal Accounting Officer)

	A.		Section 5.4 to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“*5.4 Access to Collateral, Books and Records.* At reasonable times, and on one Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing inspections and audits shall be at Borrower’s expense, which inspections and audits shall not exceed four (4) per calendar year prior to the occurrence of an Event of Default, and the charge therefor shall be $750 per person per day (or such higher amount as shall represent Silicon’s then current standard charge for the same), plus reasonable out-of-pocket expenses. In the event Borrower and Silicon schedule an audit more than 10 days in advance, and Borrower seeks to reschedule the audit with less than 10 days written notice to Silicon, then (without limiting any of Silicon’s rights or remedies), Borrower shall pay Silicon a cancellation fee of $1,000 plus any out-of-pocket expenses incurred by Silicon, to compensate Silicon for the anticipated costs and expenses of the cancellation.”

			and inserting in lieu thereof the following:

			“*5.4 Access to Collateral, Books and Records.* At reasonable times, and on one Business Day’s notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy Borrower’s books and records. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process.”

	B.		Section 8 of the Loan Agreement is hereby amended by deleting the definitions of “Adjusted Quick Ratio”, “Current Liabilities”, “Deferred Revenue”, “Deferred Revenue Offsets”, “EBITDA”, “Eligible Receivables”, “Quick Assets”, and “Total Liabilities” set forth therein.

	C.		Section 1 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“1. Credit Limit

			(Section 1.1): An amount not to exceed the lesser of (A) or (B), below:

	(A)

			(i) $4,750,00.00 at any one time outstanding (the “Maximum Credit Limit”); minus

			(ii) the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.

	(B)

			(i) 80% of the amount of the Borrower’s Eligible Receivables, exclusive of Deferred Revenue Offsets and rebate accruals; provided, however, in the event that Borrower has an Adjusted Quick Ratio (to be tested on a monthly basis, as of the end of each month) of at least 1.25 to 1.0, then Silicon will not exclude such Deferred Revenue Offsets or rebate accruals; minus

			(ii) the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.”

	D.		Section 1 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“Letter of Credit/ Cash Management Services Sublimit (Section 1.5, 1.6): $2,500,000.00 (less foreign exchange contract exposure)

			Foreign Exchange Contract Sublimit (Section 1.6) $500,000.00”

			and inserting in lieu thereof the following:

			“Letter of Credit/ Cash Management Services Sublimit (Section 1.5, 1.6): $1,500,000.00 (less foreign exchange contract exposure)

			Foreign Exchange Contract Sublimit (Section 1.6) $500,000.00”

			and inserting in lieu thereof the following

			“1. Credit Limit

			(Section 1.1): An amount not to exceed:

			(i) $2,000,00.00 at any one time outstanding (the “Maximum Credit Limit”); minus

			(ii) the aggregate amounts then undrawn on all outstanding letters of credit, foreign exchange contracts, or any other accommodations issued or incurred, or caused to be issued or incurred by Silicon for the account and/or benefit of the Borrower.”

	E.		Section 3 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“Early Termination Fee: If the Obligations are voluntarily or involuntarily prepaid or if this Agreement is otherwise terminated prior to its maturity, the Borrower shall pay to Silicon a termination fee in the amount equal to one (1%) percent of the greater of $4,750,000 or the then Maximum Credit Limit, provided that no such termination fee shall be charged if the credit facility hereunder is replaced or transferred to another division of Silicon. The termination fee shall be due and payable upon prepayment by the Borrower in the case of voluntary prepayments or upon demand by Silicon in the event of involuntary prepayment, and if not paid immediately shall bear interest at a rate equal to the highest rate applicable to any of the Obligations.”

			and substituting the following text therefor

			“Early Termination Fee: (intentionally omitted).”

	F.		Section 3 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“Unused Line Fee: In the event, in any calendar month (or portion thereof at the beginning and end of the term hereof), the average daily principal balance of the Loans outstanding during the month (including outstanding Letters of Credit) is less than the amount of the Maximum Credit Limit, Borrower shall pay Silicon an unused line fee in an amount equal to 0.50% per annum on the difference between the amount of the Maximum Credit Limit and the average daily principal balance of the Loans outstanding during the month, which unused line fee shall be computed and paid monthly, in arrears, on the last day of each month.”

			and substituting the following text therefor:

			“Unused Line Fee: (Intentionally omitted).”

	G.		Section 4 of the Schedule to the Loan Agreement is hereby amended by deleting same in its entirety and substituting the following text therefor:

			“4. Maturity Date

			(Section 6.1) April 29, 2008.”

	H.		Section 5 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“5. FINANCIAL COVENANTS

			(Section 5.1): Borrower shall comply with each of the following covenants. Compliance shall be determined as of the end of each month, except as otherwise specifically provided below:

			a. Adjusted Quick Ratio. Borrower shall maintain a ratio of Quick Assets to Current Liabilities minus Deferred Revenue of at least 1.50 to 1.00.

			b. EBITDA. Borrower and its Subsidiaries, on a consolidated basis, shall maintain, measured as of the end of each fiscal quarter, EBITDA minus capital expenditures of at least $1.00.

			and substituting the following text therefor:

			“5. INTENTIONALLY DELETED.”

	I.		Section 6 of the Schedule to the Loan Agreement is hereby amended by deleting the following text appearing therein:

			“Borrower shall provide Silicon with the following:

			1. Monthly, borrowing base certificates and transaction reports, within fifteen days after the end of each month.

			2. Monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, within thirty days after the end of each month.

			3. Monthly Receivable agings, aged by invoice date, and receivable reconciliations, within thirty days after the end of each month.

			4. Monthly consolidated and consolidating unaudited financial statements, as soon as available, and in any event within thirty days after the end of each month.

			5. Monthly Compliance Certificates, within thirty days after the end of each month, in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of Borrower, certifying that as of the end of such month Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Silicon shall reasonably request, including, without limitation, a statement that at the end of such month there were no held checks.

			6. Annual operating budgets (including income statements, balance sheets and cash flow statements, by month) for the upcoming fiscal year of Borrower within thirty days prior to the end of each fiscal year of Borrower.

			7. Annual consolidated and consolidating audited financial statements, as soon as available, and in any event within 120 days following the end of Borrower’s fiscal year, prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Silicon, provided, however, Borrower may deliver its year end December 31, 2005 annual audited financial statements to Silicon on or before June 30, 2006.

			8. Such additional reports and information as Silicon may from time to time specify.”

			and substituting the following text therefor:

			“Borrower shall provide Silicon with the following:

			1. Within five (5) days of filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission or a link thereto on Borrower’s or another website on the Internet.

			2. Such additional reports and information as Silicon may from time to time specify.”


By:		/s/ S. Craig Huke

Name:		S. Craig Huke
Title:		Chief Financial Officer

BANK:

SILICON VALLEY BANK

By:		/s/ John Kinzer

Name:		John Kinzer
Title:		Deal Team Leader



	/s/ Dean Goodermote
	Dean Goodermote
	President, Chief Executive Officer and Chairman of the Board of Directors (Principal Executive Officer)


Date: May 15, 2007	/s/ S. Craig Huke
	S. Craig Huke
	Chief Financial Officer (Principal Financial Officer)

	(1)		The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

	(2)		The information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the registrant.


/s/ Dean Goodermote
Dean Goodermote
Chief Executive Officer

/s/ S. Craig Huke
S. Craig Huke
Chief Financial Officer