UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended: December 31, 2007

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

CommVault Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware		22-3447504
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
2 Crescent Place
Oceanport, New Jersey		07757
(Address of principal executive offices)		(Zip Code)

(732) 870-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by the Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” 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 defined in Rule 12b-2 of the Exchange Act).

As of January 31, 2008, there were 43,722,938 shares of the registrant’s common stock, $0.01 par value outstanding.

 

 

COMMVAULT SYSTEMS, INC.
FORM 10-Q

INDEX

				Page
Part I — FINANCIAL INFORMATION
Item 1.		Financial Statements and Notes
		Unaudited Consolidated Balance Sheets as of December 31, 2007 and March 31, 2007			1
		Unaudited Consolidated Statements of Operations for the three and nine months ended December 31, 2007 and 2006			2
		Unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended December 31, 2007			3
		Unaudited Consolidated Statements of Cash Flows for the nine months ended December 31, 2007 and 2006			4
		Notes to Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			27
Item 4.		Controls and Procedures			27
Part II — OTHER INFORMATION
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sale of Equity Securities and Use of Proceeds			28
Item 3.		Defaults Upon Senior Securities			28
Item 4.		Submission of Matters to a Vote of Securities Holders			28
Item 5.		Other Information			28
Item 6.		Exhibits			28
SIGNATURES					29
Exhibit Index					30
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

CommVault Systems, Inc.

Consolidated Balance Sheets

		December 31,				March 31,
		2007				2007
Assets
Current assets:
Cash and cash equivalents		$	95,108			$	65,001
Trade accounts receivable, less allowance for doubtful accounts of $247 at December 31, 2007 and $311 at March 31, 2007			33,786				22,044
Prepaid expenses and other current assets			3,685				3,657
Deferred tax assets			9,618				9,616
Total current assets			142,197				100,318
Deferred tax assets, net			45,550				42,543
Property and equipment, net			5,492				4,624
Other assets			851				554
Total assets		$	194,090			$	148,039
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,672			$	1,500
Accrued liabilities			19,039				20,215
Term loan			—				7,500
Deferred revenue			46,237				36,214
Total current liabilities			66,948				65,429
Deferred revenue, less current portion			6,130				4,284
Other liabilities			6,323				4
Stockholders’ equity:
Preferred stock, $.01 par value: 50,000 shares authorized, no shares issued and outstanding at December 31, 2007 and March 31, 2007			—				—
Common stock, $.01 par value: 250,000 shares authorized, 43,679 shares and 41,968 shares issued and outstanding at December 31, 2007 and March 31, 2007, respectively			437				420
Additional paid-in capital			205,493				182,297
Accumulated deficit			(90,818	)			(104,333	)
Accumulated other comprehensive loss			(423	)			(62	)
Total stockholders’ equity			114,689				78,322
Total liabilities and stockholders’ equity		$	194,090			$	148,039

CommVault Systems, Inc.

Consolidated Statements of Operations

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues:
Software		$	26,994			$	21,132			$	77,630			$	60,180
Services			23,304				17,198				64,063				48,310
Total revenues			50,298				38,330				141,693				108,490
Cost of revenues:
Software			648				528				1,651				1,191
Services			6,315				5,102				17,775				14,459
Total cost of revenues			6,963				5,630				19,426				15,650
Gross margin			43,335				32,700				122,267				92,840
Operating expenses:
Sales and marketing			23,420				17,379				67,735				48,958
Research and development			6,818				5,851				19,944				17,369
General and administrative			6,010				4,470				17,266				13,734
Depreciation and amortization			795				753				2,217				1,832
Income from operations			6,292				4,247				15,105				10,947
Interest expense			—				(167	)			(114	)			(184	)
Interest income			998				665				2,701				1,865
Income before income taxes			7,290				4,745				17,692				12,628
Income tax benefit (expense)			908				(111	)			(3,077	)			(222	)
Net income			8,198				4,634				14,615				12,406
Less: accretion of preferred stock dividends			—				—				—				(2,818	)
Less: accretion of fair value of preferred stock upon conversion			—				—				—				(102,745	)
Net income (loss) attributable to common stockholders		$	8,198			$	4,634			$	14,615			$	(93,157	)
Net income (loss) attributable to common stockholders per share:
Basic		$	0.19			$	0.11			$	0.34			$	(3.44	)
Diluted		$	0.18			$	0.10			$	0.32			$	(3.44	)
Weighted average shares used in computing per share amounts:
Basic			43,518				41,676				42,991				27,052
Diluted			46,136				46,164				45,593				27,052

CommVault Systems, Inc.

Consolidated Statement of Stockholders’ Equity

																		Accumulated
										Additional								Other
		Common Stock								Paid-In				Accumulated				Comprehensive
		Shares				Amount				Capital				Deficit				Loss				Total
Balance as of March 31, 2007			41,968			$	420			$	182,297			$	(104,333	)		$	(62	)		$	78,322
Stock-based compensation											6,233												6,233
Tax benefits from exercise of stock options											4,557												4,557
Stock options exercised			1,411				14				8,094												8,108
Issuance of common stock from follow-on public offering, net			300				3				4,312												4,315
Cumulative effect of adoption of FIN No. 48															(1,100	)							(1,100	)
Comprehensive Income:
Net income															14,615								14,615
Foreign currency translation adjustment																			(361	)			(361	)
Total Comprehensive Income																							14,254
Balance as of December 31, 2007			43,679			$	437			$	205,493			$	(90,818	)		$	(423	)		$	114,689

CommVault Systems, Inc.

Consolidated Statements of Cash Flows

		Nine Months Ended
		December 31,
		2007				2006
Cash flows from operating activities
Net income		$	14,615			$	12,406
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,326				2,045
Noncash stock-based compensation			6,233				4,326
Excess tax benefits from stock-based compensation			(4,497	)			—
Deferred income taxes			(3,647	)			—
Changes in operating assets and liabilities:
Accounts receivable			(10,935	)			(3,499	)
Prepaid expenses and other current assets			313				(323	)
Other assets			(182	)			(160	)
Accounts payable			122				(316	)
Accrued liabilities			8,239				3,442
Deferred revenue and other liabilities			10,807				4,588
Net cash provided by operating activities			23,394				22,509
Cash flows from investing activities
Purchase of property and equipment			(3,083	)			(3,148	)
Net cash used in investing activities			(3,083	)			(3,148	)
Cash flows from financing activities
Proceeds from the exercise of stock options			8,108				343
Net proceeds from follow-on public offering of common stock			4,315				—
Excess tax benefits from stock-based compensation			4,497				—
Repayments on term loan			(7,500	)			(6,250	)
Proceeds from term loan			—				15,000
Payments to Series A through E preferred stockholders upon conversion to common stock			—				(101,833	)
Net proceeds from initial public offering and concurrent private placement			—				82,242
Net cash provided by (used in) financing activities			9,420				(10,498	)
Effects of exchange rate — changes in cash			376				(408	)
Net increase in cash and cash equivalents			30,107				8,455
Cash and cash equivalents at beginning of period			65,001				48,039
Cash and cash equivalents at end of period		$	95,108			$	56,494

CommVault Systems, Inc.

Notes to Consolidated Financial Statements — Unaudited

1. Nature of Business

     CommVault Systems, Inc. and its subsidiaries (“CommVault” or the “Company”) is a leading provider of data management software applications and related services in terms of product breadth and functionality and market penetration. The Company develops, markets and sells a suite of software applications and services, primarily in North America, Europe, Australia and Asia, that provides its customers with high-performance data protection; disaster recovery of data; data migration and archiving; global availability of data; replication of data; creation and management of copies of stored data; storage resource discovery and usage tracking; data classification; and management and operational reports and troubleshooting tools. The Company’s unified suite of data management software applications, which is sold under the Simpana brand, shares an underlying architecture that has been developed to minimize the cost and complexity of managing data on globally distributed and networked storage infrastructures. The Company also provides its customers with a broad range of professional and customer support services.

2. Basis of Presentation

     The consolidated financial statements as of December 31, 2007 and for the three and nine months ended December 31, 2007 and 2006 are unaudited, and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the financial statements and notes in the Company’s Annual Report incorporated by reference in Form 10-K for fiscal 2007. The results reported in these financial statements should not necessarily be taken as indicative of results that may be expected for the entire fiscal year. The balance sheet as of March 31, 2007 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

     Other than the adoption of the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), there have been no significant changes in the Company’s accounting policies during the nine months ended December 31, 2007 as compared to the significant accounting policies prescribed in its Annual Report on Form 10-K for the year ended March 31, 2007.

3. Summary of Significant Accounting Policies

   Use of Estimates

     The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make judgments and estimates that affect the amounts reported in the Company’s consolidated financial statements and the accompanying notes. The Company bases its estimates and judgments on historical experience and on various other assumptions that it believes are reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheets and the amounts of revenues and expenses reported for each of its periods presented are affected by estimates and assumptions, which are used for, but not limited to, the accounting for revenue recognition, allowance for doubtful accounts, income taxes, stock-based compensation and accounting for research and development costs. Actual results could differ from those estimates.

   Revenue Recognition

     The Company derives revenues from two primary sources, or elements: software licenses and services. Services include customer support, consulting, assessment and design services, 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.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

     For sales 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, or 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 or as site licenses. Site licenses give the customer the additional right to deploy the software on a limited basis during a specified term. The Company recognizes software revenue through direct sales channels upon receipt of a purchase order or other persuasive evidence and when all other basic revenue recognition criteria are met as described below. The Company recognizes software revenue through all indirect sales channels on a sell-through model. A sell-through model requires that the Company recognize revenue when the basic revenue recognition criteria are met as described below and these channels complete the sale of the Company’s software products to the end user. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report or purchase order from that original equipment manufacturer partner.

     Services revenue includes revenue from customer support and other professional services. Customer support includes software updates 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 primarily uses historical renewal rates and, in certain cases, it uses stated renewal rates. Historical renewal rates are supported by performing an analysis in which the Company segregates its customer support renewal contracts into different classes based on specific criteria including, but not limited to, the dollar amount of the software purchased, the level of customer support being provided and the distribution channel. As a result of this analysis, the Company has concluded that it has established VSOE for the different classes of customer support when the support is sold as part of a multiple-element sales arrangement.

     The Company’s other professional services include consulting, assessment and design services, installation services and training. Other professional services provided by the Company are not mandatory and can also be performed by the customer or a third party. In addition to a signed purchase order, the Company’s consulting, assessment and design services and installation services are generally evidenced by a Statement of Work (“SOW”), which defines the specific scope of such services to be performed when sold and performed on a stand-alone basis or included in multiple-element sales arrangements. Revenues from consulting, assessment and design services and installation services are based upon a daily or weekly rate and are recognized when the services are completed. Training includes courses taught by the Company’s instructors or third party contractors either at one of the Company’s facilities or at the customer’s site. 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 sales arrangement. The Company generally performs its other professional services within 60 to 90 days of entering into an agreement. 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 sales 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, a SOW evidencing the scope of certain other professional services, or other persuasive evidence that an arrangement exists prior to recognizing revenue on an arrangement.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

	•		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. If products that are essential to the functionality of the delivered software in an arrangement have not been delivered, the Company does not consider delivery to have occurred. 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.
	•		Vendor’s fee is fixed or determinable. The fee customers pay for software applications, customer support and other professional services is negotiated at the outset of a sales 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 at the earlier of when cash is collected or when sufficient credit becomes available, assuming all of the other basic revenue recognition criteria are met.

     The Company’s sales arrangements generally do not 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.

     The Company has offered limited price protection under certain original equipment manufacturer agreements. The Company believes that the likelihood of a future payout due to price protection is remote.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

  Net Income (Loss) Attributable to Common Stockholders per Share

     In the three and nine months ended December 31, 2006, the Company calculated net income (loss) attributable to common stockholders per share in accordance with SFAS No. 128, Earnings per Share (“SFAS 128”) and EITF Issue No. 03-6, Participating Securities and the Two — Class Method under FASB Statement 128 (“EITF No. 03-6”). In the three and nine months ended December 31, 2007, the Company calculated net income attributable to common stockholders per share in accordance with SFAS 128. The information required to compute basic and diluted net income attributable to common stockholders per share is as follows:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Reconciliation of net income to net income (loss) attributable to common stockholders for the basic computation:
Net income		$	8,198			$	4,634			$	14,615			$	12,406
Accretion of preferred stock dividends (1)			—				—				—				(2,818	)
Accretion of fair value of preferred stock upon conversion (2)			—				—				—				(102,745	)
Net income (loss) attributable to common stockholders		$	8,198			$	4,634			$	14,615			$	(93,157	)
Basic net income (loss) attributable to common stockholders per share:
Basic weighted average shares outstanding			43,518				41,676				42,991				27,052
Basic net income (loss) attributable to common stockholders per share		$	0.19			$	0.11			$	0.34			$	(3.44	)
Reconciliation of net income to net income (loss) attributable to common stockholders for the diluted computation:
Net income		$	8,198			$	4,634			$	14,615			$	12,406
Accretion of preferred stock dividends (1)			—				—				—				(2,818	)
Accretion of fair value of preferred stock upon conversion (2)			—				—				—				(102,745	)
Net income (loss) attributable to common stockholders		$	8,198			$	4,634			$	14,615			$	(93,157	)
Diluted net income (loss) attributable to common stockholders per share:
Basic weighted average shares outstanding			43,518				41,676				42,991				27,052
Dilutive effect of stock options and restricted stock units			2,618				4,488				2,602				—
Diluted weighted average shares outstanding			46,136				46,164				45,593				27,052
Diluted net income (loss) attributable to common stockholders per share		$	0.18			$	0.10			$	0.32			$	(3.44	)

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

Concentration of Credit Risk

     The Company grants credit to customers in a wide variety of industries worldwide and generally does not require collateral. Credit losses relating to these customers have been minimal.

     One customer accounted for approximately 24% and 19% of total revenues for the nine months ended December 31, 2007 and 2006, respectively. That customer accounted for 24% and 14% of accounts receivable as of December 31, 2007 and March 31, 2007, respectively. In addition, another customer accounted for approximately 11% of total revenues for the nine months ended December 31, 2007 and approximately 22% of accounts receivable as of December 31, 2007.

Deferred Revenue

     Deferred revenues represent amounts collected from, or invoiced to, customers in excess of revenues recognized. This results primarily from the billing of annual customer support agreements, as well as billings for other professional services fees that have not yet been performed by the Company and billings for license fees that are deferred due to insufficient persuasive evidence that an arrangement exists. The value of deferred revenues will increase or decrease based on the timing of invoices and recognition of software revenue. The Company expenses internal direct and incremental costs related to contract acquisition and origination as incurred.

Deferred revenue consists of the following:

		December 31, 2007				March 31, 2007
Current:
Deferred software revenue		$	468			$	252
Deferred services revenue			45,769				35,962
		$	46,237			$	36,214
Non-current:
Deferred services revenue		$	6,130			$	4,284

Accounting for Stock-Based Compensation

     On April 1, 2006, the Company adopted the fair value recognition provisions of SFAS Statement No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) using the modified prospective method. Under this transition method, the Company’s stock-based compensation costs beginning April 1, 2006 is based on a combination of the following: (1) all options granted prior to, but not vested as of April 1, 2006, based on the grant date fair value in accordance with the original provisions of SFAS 123 and (2) all options and restricted stock units granted subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123(R). As of December 31, 2007, there was approximately $23,465 of unrecognized stock-based compensation expense related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.63 years.

     Under SFAS 123(R), the Company estimated the fair value of stock options granted using the Black-Scholes formula. Expected volatility was calculated based on reported data for a peer group of publicly traded companies for which historical information was available. The Company will continue to use peer group volatility information until historical volatility of the Company is relevant to measure expected volatility for future option grants. The average expected life was determined according to the “simplified method” as described in SAB 107, Disclosure about Fair Value of Financial Instruments, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to U.S. Treasury yield curve rates with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on the Company’s historical analysis of actual stock option forfeitures.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

     The assumptions used in the Black-Scholes option-pricing model are as follows:

		Three Months Ended December 31,				Nine Months Ended December 31,
		2007		2006		2007		2006
Dividend yield		None		None		None		None
Expected volatility		43%		48%		43%-47%		48%-55%
Weighted average expected volatility		43%		48%		47%		52%
Risk-free interest rates		3.76%-4.48%		4.57%-4.77%		3.76%-5.18%		4.57%-5.04%
Expected life (in years)		6.25		6.25		6.25		6.25

     The following table presents the stock-based compensation expense included in cost of services revenue, sales and marketing, research and development and general and administrative expenses for the three and nine months ended December 31, 2007 and 2006.

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Cost of services revenue		$	44			$	24			$	119			$	75
Sales and marketing			1,073				701				2,990				1,978
Research and development			304				182				884				564
General and administrative			786				538				2,240				1,709
Stock-based compensation expense		$	2,207			$	1,445			$	6,233			$	4,326

Comprehensive Income

     The Company applies the provisions of SFAS No. 130, Reporting Comprehensive Income. Comprehensive income is defined to include all changes in equity, except those resulting from investments by stockholders and distribution to stockholders, and is reported in the statement of stockholders’ equity. Comprehensive income for the three and nine months ended December 31, 2007 and 2006 is as follows:

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Net income		$	8,198			$	4,634			$	14,615			$	12,406
Foreign currency translation adjustment			(51	)			(151	)			(361	)			(408	)
Total comprehensive income		$	8,147			$	4,483			$	14,254			$	11,998

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this Statement on its financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an Amendment of SFAS No. 115", (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact of this Statement on its financial statements.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

     In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment. SAB 110 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share Based Payment. The use of the “simplified” method was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. The Company currently uses the “simplified” method to estimate the expected term for share option grants as it does not have enough historical experience to provide a reasonable estimate due to the limited period the Company’s equity shares have been publicly traded. The Company will continue to use the “simplified” method until it has enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110. SAB 110 is effective for options granted after December 31, 2007.

4. Term Loan

     In May 2006, the Company entered into a $20,000 term loan facility (the “term loan”) in connection with the payments due to the holders of its Series A through E Stock upon the Company’s initial public offering. During the nine months ended December 31, 2007, the Company paid $7,500 in satisfaction of the outstanding principal balance on the term loan.

5. Contingencies

     In the normal course of its business, the Company may be involved in various claims, negotiations and legal actions; however, as of December 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. Capitalization

     In June 2007, the Company completed a follow-on public offering of 7,870 shares of common stock at a price of $17.00 per share. The Company sold 300 shares and certain stockholders of the Company sold 7,570 shares in this offering. As a result of its follow-on offering, the Company raised a total of $5,100 in gross proceeds, or approximately $4,315 in net proceeds after deducting underwriting discounts and commissions of $281 and other offering costs of $504. In June 2007, the Company’s underwriters also exercised their over-allotment option and purchased an additional 1,172 shares of the Company’s common stock owned by affiliates of Credit Suisse Securities (USA) LLC at the public offering price of $17.00 per share. The Company did not receive any proceeds as a result of the underwriters exercise of their over-allotment option.

     In September 2006, the Company completed its initial public offering of 11,111 shares of common stock at a price of $14.50 per share. The Company sold 6,148 shares and certain stockholders of the Company sold 4,963 shares in this offering. As a result of its initial public offering, the Company raised $89,148 in gross proceeds, or approximately $80,248 in net proceeds after deducting underwriting discounts and commissions and other offering costs. In conjunction with its initial public offering, the Company also sold 103 shares of common stock in a concurrent private placement at the initial public offering price pursuant to preemptive rights as a result of the initial public offering. The Company’s net proceeds from the concurrent private placement were approximately $1,488.

7. Stock Plans

     As of December 31, 2007, the Company maintains two stock incentive plans, the 1996 Stock Option Plan (the “Plan”) and the 2006 Long-Term Stock Incentive Plan (the “LTIP”).

     Under the Plan, the Company may grant non-qualified stock options to purchase 11,705 shares of common stock to certain officers and employees. Stock options are granted at the discretion of the Board and expire 10 years from the date of the grant. Stock options granted by the Company generally vest over a four-year period. As of December 31, 2007, there were 434 options available for future grant under the Plan.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

     The LTIP permits the grant of incentive stock options, non-qualified stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance stock awards and stock unit awards based on, or related to, shares of the Company’s common stock. Under the LTIP, the maximum number of shares of the Company’s common stock that may be initially awarded was 4,000. On each April 1, the number of shares available for issuance under the LTIP is increased, if applicable, such that the total number of shares available for awards under the LTIP as of any April 1 is equal to 5% of the number of outstanding shares of the Company’s common stock on that April 1. As of December 31, 2007, there were 2,324 shares available for future issuance under the LTIP.

     Stock option activity for the nine months ended December 31, 2007 is as follows:

										Weighted-
						Weighted-				Average
		Number				Average				Remaining				Aggregate
		of				Exercise				Contractual				Intrinsic
Options		Options				Price				Term (Years)				Value
Outstanding as of March 31, 2007			7,671			$	6.39
Options granted			1,159				17.29
Options exercised			(1,411	)			5.74
Options canceled			(192	)			10.53
Outstanding as of December 31, 2007			7,227			$	8.15				6.55			$	94,180
Vested or expected to vest as of December 31, 2007			6,998			$	7.95				6.46			$	92,411
Exercisable as of December 31, 2007			4,413			$	5.81				5.30			$	67,812

     The weighted average fair value of stock options granted was $9.94 and $8.98 during the three and nine months ended December 31, 2007, respectively, and $9.90 and $7.91 during the three and nine months ended December 31, 2006, respectively. The total intrinsic value of options exercised was $5,595 and $17,940 during the three and nine months ended December 31, 2007, respectively, and $414 and $767 during the three and nine months ended December 31, 2006, respectively.

     Restricted stock unit activity for the nine months ended December 31, 2007 is as follows:

		Number of
Non-vested Restricted Stock Units		Awards
Non-Vested as of April 1, 2007			—
Granted			350
Vested			—
Forfeited			(11	)
Non-vested as of December 31, 2007			339

     In the three and nine months ended December 31, 2007, the Company awarded 57 and 350 restricted stock units at a weighted average fair value of $20.56 and $17.66 per share, respectively. The restricted stock units vest over a four-year period.

8. Income Taxes

     Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting and the amount used for income tax purposes. The Company’s net deferred tax assets relate primarily to net operating loss (“NOL”) carry forwards, research and development tax credits (“R&D credits”), depreciation and amortization, deferred revenue and stock-based compensation. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent that the Company believes recovery is not likely, the Company establishes a valuation allowance.

CommVault Systems, Inc.
Notes to Consolidated Financial Statements — Unaudited (Continued)
(In thousands, except per share data)

     The provision (benefit) for income taxes for the three and nine months ended December 31, 2007 was ($908) and $3,077, respectively, with effective tax rates of (12%) and 17%, respectively. The Company’s effective tax rate for the three and nine months ended December 31, 2007 differs from the U.S. federal statutory tax rate of 35% primarily due to a reversal of the Company’s deferred income tax valuation allowance, foreign tax credits and R&D credits, partially offset by state income taxes.

     Until the third quarter of fiscal 2008, the Company had recorded a valuation allowance in certain international jurisdictions primarily related to net operating loss carryforwards based on the Company’s assessment that the realization of the net deferred tax assets did not meet the “more than likely not” criterion under SFAS No. 109, “Accounting for Income Taxes.” During the quarter ended December 31, 2007, the Company modified its transfer pricing policies for software sold to certain of its international subsidiaries. In assessing the need for a valuation allowance against its deferred tax assets in such international jurisdictions, the Company considered projected future income as part of its analysis. Due to the transfer pricing changes made during the quarter ended December 31, 2007, the Company projects that certain of its international subsidiaries will be in a profitable position for the foreseeable future. Therefore, the Company no longer believes that a valuation allowance is necessary against its deferred tax assets in these international operations and recorded a tax benefit of $2,372 related to the reversal of such valuation allowances. As of December 31, 2007, the Company does not maintain a valuation allowance against any of its deferred tax assets.

     The provision for income taxes for the three and nine months ended December 31, 2006 was $111 and $222, respectively, with an effective tax rate of 2% in each period. The 2% effective tax rate was primarily the result of a full valuation allowance that the Company maintained against its deferred tax assets at that time.

     On April 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). As a result of the adoption of FIN 48, the Company recognized a charge of $1,100 to the April 1, 2007 accumulated deficit balance. As of the adoption date, the Company had unrecognized tax benefits of $6,120 which included accrued interest expense of $255 related to the unrecognized tax benefits. In the nine months ended December 31, 2007, the Company reduced its unrecognized tax benefits by $100 due to the expiration of the statute of limitations on a tax issue and recognized $171 of additional interest related to income tax. Interest and penalties, if any, related to unrecognized tax benefits, are recorded in income tax expense. As of December 31, 2007, the Company had unrecognized tax benefits of $6,191 which is included in Other Liabilities on the Consolidated Balance Sheet. All of these unrecognized tax benefits, if recognized, would favorably affect the effective tax rate. The Company does not anticipate any material changes in the amount of unrecognized tax benefits (exclusive of interest) within the next twelve months.

     The Company conducts business globally and as a result, files income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom. The Company is not currently under audit in any tax jurisdiction. The following table summarizes the tax years in the Company’s major tax jurisdictions that remain subject to income tax examinations by tax authorities as of December 31, 2007. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOL’s.

		Years Subject to Income
Tax Jurisdiction		Tax Examination
U.S. Federal		1999 - Present
New Jersey		2001 - Present
Canada		2001 - Present
Other foreign jurisdictions		2004 - Present

9. Subsequent Events

     On January 30, 2008, the Company’s Board of Directors approved a share-repurchase program permitting the Company to repurchase up to $40,000 of its common stock over the next 12 months.

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

     You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, and other non-historical statements are forward-looking statements within the meaning of Section 21 E of the Securities Act of 1934. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2007. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

     CommVault is a leading provider of data management software applications and related services in terms of product breadth and functionality and market penetration. We develop, market and sell a unified suite of data management software applications under the Simpana brand. Our unified data management suite was formerly marketed under the QiNetix brand name. Simpana is specifically designed to protect and manage data throughout its lifecycle in less time, at lower cost and with fewer resources than alternative solutions. Our products and capabilities enable our customers to deploy solutions for data protection, business continuance, corporate compliance and centralized management and reporting. We also provide our customers with a broad range of highly effective services that are delivered by our worldwide support and field operations. As of December 31, 2007, we had licensed our software applications to approximately 7,500 registered customers.

     Our software suite includes the following eight applications which are built upon our unified architectural design: Galaxy Backup and Recovery (released in 2000), DataMigrator (released in 2002), QuickRecovery (released in 2002), DataArchiver (released in 2003), StorageManager (released in 2003), QNet (released in 2003), Data Classification (released in 2005) and ContinuousDataReplicator (released June 2006). In addition to Galaxy, the subsequent release of our other software has substantially increased our addressable market. In July 2007, we released our CommVault Simpana 7.0 software suite which significantly expanded the breadth and depth of our existing data management suite. We believe that CommVault Simpana 7.0, which builds on and significantly expands our previous QiNetix platform, will create competitive differentiation in the data management related markets as well as provide us a foundation to shift to providing information management solutions. CommVault Simpana 7.0 is the largest release in our history and contains major enhancements to our software suite of products. Specifically, CommVault Simpana 7.0 provides major enhancements to our existing Backup, Archiving and Replication products and also delivers new product features that are non backup related including Single Instancing, Advanced Archiving, Enterprise-wide Search and Discovery and Data Classification.

     We currently derive the majority of our software revenue from our Galaxy Backup and Recovery software application. Sales of Galaxy Backup and Recovery represented approximately 79% of our total software revenue for the nine months ended December 31, 2007 and 83% of our total software revenue for fiscal 2007. In addition, we derive the majority of our services revenue from customer and technical support associated with our Galaxy Backup and Recovery software application. The increase in software revenue generated by our non-Galaxy Backup and Recovery software products, or emerging products, was primarily driven by new components and enhancements related to our CommVault Simpana 7.0 software suite. We anticipate that emerging products software revenue as an overall percentage of our total software revenue will increase in the future as we expand our domestic and international sales activities and continue to build brand awareness. However, we anticipate that we will continue to derive a majority of our software and services revenue from our Galaxy Backup and Recovery software application for the foreseeable future.

     Given the nature of the industry in which we operate, our software applications are subject to obsolescence. We continually develop and introduce updates to our existing software applications in order to keep pace with technological developments, evolving industry standards, changing customer requirements and competitive software applications that may render our existing software applications obsolete. For each of our software applications, we provide full support for the current generally available release and one prior release. When we declare a product release obsolete, a customer notice is delivered twelve months prior to the effective date of obsolescence announcing

continuation of full product support for the first six months. We provide an additional six months of extended assistance support in which we provide existing workarounds or fixes only, which do not require additional development activity. We do not have existing plans to make any of our software products permanently obsolete.

     We completed our follow-on public offering in June 2007 in which we sold 300,000 shares and certain of our stockholders sold 7,570,000 shares of common stock to the public at a price of $17.00 per share. After deducting the underwriting discounts, our net proceeds from the offering were approximately $4.3 million. During the nine months ended December 31, 2007, we used the net proceeds from our follow-on public offering, together with approximately $3.2 million of our existing cash, to pay approximately $7.5 million in satisfaction of the outstanding principal on our term loan.

     We completed our initial public offering in September 2006 in which we sold 6,148,148 shares and certain of our stockholders sold 4,962,963 shares of common stock to the public at a price of $14.50 per share. After deducting the underwriting discounts and commissions and the other offering expenses, our net proceeds from the initial public offering were approximately $80.2 million. In conjunction with the initial public offering, we also sold 102,640 shares of common stock in a concurrent private placement at the initial public offering price pursuant to preemptive rights as a result of the initial public offering. Our net proceeds from the concurrent private placement were approximately $1.5 million. We used the net proceeds of the offering and the private placement, together with borrowings under our term loan and $10.1 million of our existing cash and cash equivalents, to pay $101.8 million in satisfaction of amounts due on our Series A, B, C, D and E preferred stock upon its conversions into common stock, which occurred upon the closing of the offering. In conjunction with the offering, all of our outstanding shares of preferred stock were converted into 16,019,480 shares of our common stock.

Sources of Revenues

     We derive the majority of our total revenues from sales of licenses of our software applications. We do not customize our software for a specific end user customer. We sell our software applications to end user customers both directly through our sales force and indirectly through our global network of value-added reseller partners, systems integrators, corporate resellers and original equipment manufacturers. Our corporate resellers bundle or sell our software applications together with their own products, and our value added resellers sell our software applications independently. Our software revenue was 55% of our total revenues in both the nine months ended December 31, 2007 and 2006.

     Software revenue generated through indirect distribution channels was approximately 80% of total software revenue in the nine months ended December 31, 2007 and was approximately 70% of total software revenue in the nine months ended December 31, 2006. Software revenue generated through direct distribution channels was approximately 20% of total software revenue in the nine months ended December 31, 2007 and was approximately 30% of total software revenue in the nine months ended December 31, 2006. The shift in software revenue generated through indirect distribution channels compared to our direct sales force is the result of both an increase in software revenue from our international operations (which is almost exclusively transacted through indirect distribution) and a shift to indirect distribution channels from direct distribution in software revenue generated in the United States. In addition, deals initiated by our direct sales force in the United States are sometimes transacted through indirect channels based on end-user customer requirements, which are not always in our control. As such, there may be fluctuations in the dollars and percentage of software revenue generated through our direct distribution channels from time to time. We believe that the growth of our software revenue derived from both our indirect channel partners and direct sales force are key attributes to our long-term growth strategy. We will continue to invest in both our channel relationships and direct sales force in the future but would expect more revenue to be generated through indirect distribution over the long term. The failure of our indirect distribution channels or our direct sales force to effectively sell our software applications could have a material adverse effect on our revenues and results of operations.

     We have original equipment manufacturer agreements with Dell and Hitachi Data Systems for them to market, sell and support our software applications and services on a stand-alone basis and/or incorporate our software applications into their own hardware products. Dell and Hitachi Data Systems have no obligation to recommend or offer our software applications exclusively or at all, and they have no minimum sales requirements and can

terminate our relationship at any time. An increasing amount of our software revenue is related to such sales arrangements with original equipment manufacturers that have no obligation to sell our software applications. A material portion of our software revenue is generated through these arrangements, and we expect this contribution to grow in the future. Sales through our original equipment manufacturer agreements accounted for approximately 13% of our total revenues for the nine months ended December 31, 2007 and approximately 14% of our total revenues for the nine months ended December 31, 2006.

     In December 2007, we entered into a collaborative reseller agreement with Sun Microsystems Inc. (“Sun”) pursuant to which they have agreed to promote, market, resell and distribute certain of our products. Our agreement with Sun is a world-wide agreement. To date, we have not generated any revenue through Sun.

     In February 2007, we signed a wide-ranging distribution agreement with Arrow Electronics, Inc. (“Arrow”) covering our North American commercial markets. In July 2007, we amended our agreement with Arrow to include our U.S. Federal Government market. Pursuant to the distribution agreement, Arrow’s primary role is to enable a more efficient and effective two-tier distribution channel for our products and services by managing our reseller partners and leveraging their own industry experience. Many of our North American resellers have been transitioned to Arrow throughout fiscal 2007 and fiscal 2008. We generated approximately 11% of our total revenue through Arrow in the nine months ended December 31, 2007. If Arrow were to discontinue or reduce the sales of our products or if our agreement with Arrow was terminated, and if we were unable to take back the management of our reseller channel or find another North American distributor to replace Arrow, then it could have a material adverse effect on our future revenues.

     In May 2007, we signed an original equipment manufacturer agreement with Bull SAS (“Bull”) pursuant to which they have agreed to market, sell, and support our software applications and services. To date, we have not generated any revenue through Bull.

     In recent fiscal years, we have generated approximately two-thirds of our software revenue from our existing customer base and approximately one-third of our software revenue from new customers. In addition, our total software revenue in any particular period is, to a certain extent, dependent upon our ability to generate revenues from large customer software deals. We expect the number of software transactions over $0.1 million to increase throughout fiscal 2008, although the size and timing of any particular software transaction is more difficult to forecast. Such software transactions typically represent approximately 30% to 35% of our total software revenue in any given period.

     Our services revenue is made up of fees from the delivery of customer support and other professional services, which are typically sold in connection with the sale of our software applications. Customer support agreements provide technical support and unspecified software updates on a when-and-if-available basis for an annual fee based on licenses purchased and the level of service subscribed. Other professional services include consulting, assessment and design services, implementation and post-deployment services and training, all of which to date have predominantly been sold in connection with the sale of software applications. Our services revenue was 45% of our total revenues for both the nine months ended December 31, 2007 and 2006. The gross margin of our services revenue was 72.3% for the nine months ended December 31, 2007 and 70.1% for the nine months ended December 31, 2006. Our services revenue has lower gross margins than our software revenue. An increase in the percentage of total revenues represented by services revenue would adversely affect our overall gross margins.

Description of Costs and Expenses

     Our cost of revenues is as follows:

	•		Cost of Software Revenue, consists primarily of third party royalties and other costs such as media, manuals, translation and distribution costs; and
	•		Cost of Services Revenue, consists primarily of salary and employee benefit costs in providing customer support and other professional services.

     Our operating expenses are as follows:

•

Sales and Marketing, consists primarily of salaries, commissions, employee benefits and other direct and indirect business expenses, including travel related expenses, sales promotion expenses, public relations

			expenses and costs for marketing materials and other marketing events (such as trade shows and advertising);
	•		Research and Development, which is primarily the expense of developing new software applications and modifying existing software applications, consists principally of salaries and benefits for research and development personnel and related expenses; contract labor expense and consulting fees as well as other expenses associated with the design, certification and testing of our software applications; and legal costs associated with the patent registration of such software applications;
	•		General and Administrative, consists primarily of salaries and benefits for our executive, accounting, human resources, legal, information systems and other administrative personnel. Also included in this category are other general corporate expenses, such as outside legal and accounting services and insurance; and
	•		Depreciation and Amortization, consists of depreciation expense primarily for computer equipment we use for information services and in our development and test labs.

     We anticipate that each of the above categories of operating expenses will increase in dollar amounts, but will decline as a percentage of total revenues in the long-term.

Critical Accounting Policies

     In presenting our consolidated financial statements in conformity with U.S. generally accepted accounting principles, we are required to make estimates and judgments that affect the amounts reported therein. 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 base these estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate. Actual results may differ significantly from these estimates. The following is a description of our accounting policies that we believe require subjective and complex judgments, which could potentially have a material effect on our reported financial condition or results of operations.

Revenue Recognition

     We recognize revenue in accordance with 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. Our revenue recognition policy is based on complex rules that require us to make significant judgments and estimates. In applying our revenue recognition policy, we must determine which portions of our revenue are recognized currently (generally software revenue) and which portions must be deferred and recognized in future periods (generally services revenue). We analyze various factors including, but not limited to, the sales of undelivered services when sold on a stand-alone basis, our pricing policies, the credit-worthiness of our customers and resellers, accounts receivable aging data and contractual terms and conditions in helping us to make such judgments about revenue recognition. Changes in judgment on any of these factors could materially impact the timing and amount of revenue recognized in a given period.

     Currently, we derive revenues from two primary sources, or elements: software licenses and services. Services include customer support, consulting, assessment and design services, installation services and training. A typical sales arrangement includes both of these elements.

     For sales 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 (“VSOE”).

     Software licenses typically provide for the perpetual right to use our software and are sold on a per copy basis or as site licenses. Site licenses give the customer the additional right to deploy the software on a limited basis during a

specified term. We recognize software revenue through direct sales channels upon receipt of a purchase order or other persuasive evidence and when the other three basic revenue recognition criteria are met as described in the revenue recognition section in Note 3 of our “Notes to Consolidated Financial Statements.” We recognize software revenue through all indirect sales channels on a sell-through model. A sell-through model requires that we recognize revenue when the basic revenue recognition criteria are met and these channels complete the sale of our software products to the end user. Revenue from software licenses sold through an original equipment manufacturer partner is recognized upon the receipt of a royalty report or purchase order from that original equipment manufacturer partner.

     Services revenue includes revenue from customer support and other professional services. Customer support includes software updates 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 primarily use historical renewal rates and, in certain cases, we use stated renewal rates. Historical renewal rates are supported by a rolling 12-month VSOE analysis in which we segregate our customer support renewal contracts into different classes based on specific criteria including, but not limited to, dollar amount of software purchased, level of customer support being provided and distribution channel. The purpose of such an analysis is to determine if the customer support element that is deferred at the time of a software sale is consistent with how it is sold on a stand-alone renewal basis.

     Our other professional services include consulting, assessment and design services, installation services and training. Other professional services provided by us are not mandatory and can also be performed by the customer or a third party. In addition to a signed purchase order, our consulting, assessment and design services and installation services are generally evidenced by a Statement of Work, which defines the specific scope of the services to be performed when sold and performed on a stand-alone basis or included in multiple-element sales arrangements. Revenues from consulting, assessment and design services and installation services are based upon a daily or weekly rate and are recognized when the services are completed. Training includes courses taught by our instructors or third party contractors either at one of our facilities or at the customer’s site. 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 have concluded we have established VSOE for such other professional services when sold in connection with a multiple-element sales arrangement.

     In summary, we have analyzed all of the undelivered elements included in our multiple-element sales arrangements and determined that we have VSOE of fair value to allocate revenues to services. Our analysis of the undelivered elements has provided us with results that are consistent with the estimates and assumptions used to determine the timing and amount of revenue recognized in our multiple-element sales arrangements. 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 are not likely to materially change our pricing and discounting practices in the future.

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

     We have offered limited price protection under certain original equipment manufacturer agreements. We believe that the likelihood of a future payout due to price protection is remote.

Stock-Based Compensation

     On April 1, 2006, we adopted the fair value recognition provisions of SFAS Statement No. 123 (revised 2004), Share-Based Payment, (“SFAS 123(R)”) using the modified prospective method. Under this transition method, our stock-based compensation costs beginning April 1, 2006 is based on a combination of the following: (1) all options granted prior to, but not vested as of April 1, 2006, based on the grant date fair value in accordance with the original provisions of SFAS 123 and (2) all options and restricted stock units granted subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123(R).

     Under SFAS 123(R), we estimated the fair value of stock options granted using the Black-Scholes formula. The fair value of stock option awards subsequent to April 1, 2006 is amortized on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. Expected volatility was calculated based on reported data for a peer group of publicly traded companies for which historical information was available. We will continue to use peer group volatility information until our historical volatility is relevant to measure expected volatility for future option grants. The average expected life was determined according to the “simplified method” as described in SAB 107, Disclosure about Fair Value of Financial Instruments, which is the mid-point between the vesting date and the end of the contractual term. The risk-free interest rate is determined by reference to U.S. Treasury yield curve rates with a remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on a historical analysis of our actual stock option forfeitures.

     The assumptions used in the Black-Scholes option-pricing model in the three and nine months ended December 31, 2007 and 2006 are as follows:

		Three Months Ended December 31,				Nine Months Ended December 31,
		2007		2006		2007		2006
Dividend yield		None		None		None		None
Expected volatility		43%		48%		43%-47%		48%-55%
Weighted average expected volatility		43%		48%		47%		52%
Risk-free interest rates		3.76%-4.48%		4.57%-4.77%		3.76%-5.18%		4.57%-5.04%
Expected life (in years)		6.25		6.25		6.25		6.25

     The weighted average fair value of stock options granted was $9.94 and $8.98 during the three and nine months ended December 31, 2007, respectively, and $9.90 and $7.91 during the three and nine months ended December 31, 2006, respectively. In addition, the weighted average fair value of restricted stock units awarded was $20.56 and $17.66 per share during the three and nine months ended December 31, 2007, respectively. As of December 31, 2007, there was approximately $23.5 million of unrecognized stock-based compensation expense related to non-vested stock option and restricted stock unit awards that is expected to be recognized over a weighted average period of 2.63 years.

Accounting for Income Taxes

     As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. We record this amount as a provision or benefit for taxes in accordance with SFAS No. 109, Accounting for Income Taxes. This process involves estimating our actual current tax exposure, including assessing the risks associated with tax audits, and assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. As of December 31, 2007, we had deferred tax assets of approximately $55.2 million, which were primarily related to federal, state and foreign net operating loss carryforwards and federal and state research tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent that we believe recovery is not likely, we establish a valuation allowance. As of December 31, 2007, we do not maintain a valuation allowance against any of our deferred tax assets.

     On April 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). As a result of the adoption of FIN 48, we recognized a charge of $1.1 million to the April 1, 2007 accumulated deficit balance. As of the adoption date, we had unrecognized tax benefits of $6.1 million which included accrued interest expense of $0.3 million related to the unrecognized tax benefits. In the nine months ended December 31, 2007, we reduced our unrecognized tax benefits by $0.1 million as a result of tax positions resolved and recognized $0.2 million of additional interest related to income tax. Interest and penalties, if any, related to unrecognized tax benefits are recorded in income tax expense. As of December 31, 2007, we had unrecognized tax benefits of $6.2 million, which is included in Other Liabilities on the Consolidated Balance Sheet. All of these unrecognized tax benefits, if recognized, would favorably affect the effective tax rate. We do not anticipate any material changes in the amount of unrecognized tax benefits (exclusive of interest) within the next twelve months.

     We conduct business globally and as a result, file income tax returns in the United States and in various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States, Australia, Canada, Germany, Netherlands and United Kingdom. We are not currently under audit in any tax jurisdiction. The following table summarizes the tax years in the major tax jurisdictions that remain subject to income tax examinations by tax authorities as of December 31, 2007. Due to NOL carryforwards, in some cases the tax years continue to remain subject to examination with respect to such NOL’s.

		Years Subject to Income
Tax Jurisdiction		Tax Examination
U.S. Federal		1999 - Present
New Jersey		2001 - Present
Canada		2001 - Present
Other foreign jurisdictions		2004 - Present

Software Development Costs

     Research and development expenditures are charged to operations as incurred. SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility. Based on our software development process, technological feasibility is established upon completion of a working model, which also requires certification and extensive testing. Costs incurred by us between completion of the working model and the point at which the product is ready for general release are immaterial.

Results of Operations

     The following table sets forth each of our sources of revenues and costs of revenues for the specified periods as a percentage of our total revenues for those periods (due to rounding, numbers in column may not sum to totals):

		Three Months Ended								Nine Months Ended
		December 31,								December 31,
		2007				2006				2007				2006
Revenues:
Software			54	%			55	%			55	%			55	%
Services			46				45				45				45
Total revenues			100	%			100	%			100	%			100	%
Cost of revenues:
Software			1	%			1	%			1	%			1	%
Services			13				13				13				13
Total cost of revenues			14	%			15	%			14	%			14	%
Gross margin			86	%			85	%			86	%			86	%

Three months ended December 31, 2007 compared to the three months ended December 31, 2006

Revenues

     Total revenues increased $12.0 million, or 31%, from $38.3 million in the three months ended December 31, 2006 to $50.3 million in the three months ended December 31, 2007.

     Software Revenue. Software revenue increased $5.9 million, or 28%, from $21.1 million in the three months ended December 31, 2006 to $27.0 million in the three months ended December 31, 2007. Software revenue represented 54% of our total revenues for the three months ended December 31, 2007 and 55% for the three months ended December 31, 2006. Our overall growth in software revenue was derived from a higher volume of purchases of our software applications from both new customers as well as from our expanding base of existing customers. In the three months ended December 31, 2007, the increase in software revenue was primarily driven by software revenue derived from foreign locations, which increased 86% compared to the three months ended December 31, 2006. The growth in software revenue in foreign locations was primarily due to increases in Europe, Australia and Asia as we expand our international operations. Software revenue derived from the United States increased 4% in the three months ended December 31, 2007 compared to the three months ended December 31, 2006.

     Software revenue through our resellers increased $7.1 million in the three months ended December 31, 2007 compared to the three months ended December 31, 2006. The overall increase in software revenue through our resellers was primarily due to the higher growth percentage of software generated in foreign locations which is substantially sold through our channel partners as well as higher revenue through our reseller arrangement with Dell in the United States. Software revenue through our direct sales force decreased $1.6 million in the three months ended December 31, 2007 compared to the three months ended December 31, 2006 primarily due to lower software revenue derived from our direct sales force in the United States. In addition, software revenue through our original equipment manufacturers contributed $0.4 million to our overall increase in software revenue primarily due to higher revenue from our arrangement with Hitachi Data Systems. The overall shift in software revenue generated through indirect distribution channels compared to our direct sales force is more fully discussed above in the “Sources of Revenue” section.

     Software revenue derived from transactions greater than $0.1 million represented approximately 33% of our software revenue in the three months ended December 31, 2007 and approximately 30% of our software revenue in the three months ended December 31, 2006. As a result, software revenue from transactions greater than $0.1 million increased by $2.7 million in the three months ended December 31, 2007 compared to the three months ended December 31, 2006. This increase was primarily due to a 47% increase in the number of transactions of this type. In the both the three months ended December 31, 2007 and 2006, the average dollar amount of such transactions was $0.2 million. Movements in foreign exchange rates accounted for approximately $1.2 million, or 20%, of the $5.9 million increase in software revenue.

     Services Revenue. Services revenue increased $6.1 million, or 36%, from $17.2 million in the three months ended December 31, 2006 to $23.3 million in the three months ended December 31, 2007. Services revenue represented 46% of our total revenues in the three months ended December 31, 2007 and 45% in the three months ended December 31, 2006. The overall growth in services revenue is due to a higher volume of purchases of our services offerings. Services revenue from customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base increased $5.1 million in the three months ended December 31, 2007. Movements in foreign exchange rates accounted for approximately $0.8 million, or 13%, of the $6.1 million increase in services revenue.

Cost of Revenues

     Total cost of revenues increased $1.3 million, or 24%, from $5.6 million in the three months ended December 31, 2006 to $7.0 million in the three months ended December 31, 2007. Total cost of revenues represented 14% of our total revenues in the three months ended December 31, 2007 and 15% in the three months ended December 31, 2006.

     Cost of Software Revenue. Cost of software revenue increased $0.1 million, or 23%, from $0.5 million in the three months ended December 31, 2006 to $0.6 million in the three months ended December 31, 2007. Cost of software revenue represented 2% of our total software revenue in both the three months ended December 31, 2007 and 2006. The increase in cost of software revenue is primarily due to higher distribution and third party media costs related to our CommVault Simpana 7.0 software suite.

     Cost of Services Revenue. Cost of services revenue increased $1.2 million, or 24%, from $5.1 million in the three months ended December 31, 2006 to $6.3 million in the three months ended December 31, 2007. Cost of services revenue represented 27% of our services revenue in the three months ended December 31, 2007 and 30% in the three months ended December 31, 2006. The increase in cost of services revenue was primarily the result of an increase in employee compensation and travel expenses totaling $0.7 million resulting from higher headcount and increased sales as well as a $0.2 million increase in third party outsourcing costs.

Operating Expenses

     Sales and Marketing. Sales and marketing expenses increased $6.0 million, or 35%, from $17.4 million in the three months ended December 31, 2006 to $23.4 million in the three months ended December 31, 2007. The increase was primarily due to a $3.9 million increase in employee compensation which includes higher headcount costs as well as higher commissions on record revenues, a $0.6 million increase in travel and related expenses due to increased headcount and a $0.5 million increase in advertising and marketing related expenses. Movements in foreign exchange rates accounted for approximately $1.0 million, or 17%, of the $6.0 million increase in sales and marketing expenses. We anticipate that that our selling and marketing expenses will increase on an absolute basis in the future as we expand our domestic and international sales activities and continue to build brand awareness.

     Research and Development. Research and development expenses increased $1.0 million, or 17%, from $5.9 million in the three months ended December 31, 2006 to $6.8 million in the three months ended December 31, 2007. The increase was primarily due to $0.6 million of higher employee compensation resulting from higher headcount and $0.1 million of higher stock-based compensation costs recorded in accordance with SFAS 123(R). We plan to continue to invest in research and development as we develop new products and make further enhancements to our existing products.

     General and Administrative. General and administrative expenses increased $1.5 million, or 34%, from $4.5 million in the three months ended December 31, 2006 to $6.0 million in the three months ended December 31, 2007. The increase was primarily due to a $0.7 million increase in employee compensation and related expenses resulting mainly from higher headcount and a $0.2 million increase in stock-based compensation costs recorded in accordance with SFAS 123(R).

Interest Expense

     Interest expense decreased $0.2 million, from $0.2 million in the three months ended December 31, 2006 to zero in the three months ended December 31, 2007. Interest expense in the three months ended December 31, 2006 was related to interest incurred on our term loan which we entered into in connection with the payments due to the holders of the Series A through E stock at the time of our initial public offering. We repaid our term loan in the quarter ending June 30, 2007.

Interest Income

     Interest income increased $0.3 million, from $0.7 million in the three months ended December 31, 2006 to $1.0 million in the three months ended December 31, 2007. The increase was due to higher cash balances in our deposit accounts.

Income Tax Benefit (Expense)

     Income tax benefit (expense) was an expense of $0.1 million in the three months ended December 31, 2006 compared to a benefit of $0.9 million in the three months ended December 31, 2007. The income tax benefit in the three months ended December 31, 2007 includes a $2.4 million reversal of our deferred income tax valuation

allowance. Until the third quarter of fiscal 2008, we recorded a valuation allowance in certain international jurisdictions primarily related to net operating loss carryforwards based on our assessment that the realization of the net deferred tax assets did not meet the “more than likely not” criterion under SFAS No. 109, “Accounting for Income Taxes.” During the quarter ended December 31, 2007, we modified our transfer pricing policies for software sold to certain of our international subsidiaries. In assessing the need for a valuation allowance against the deferred tax assets in such international jurisdictions, we considered projected future income as part of its analysis. Due to the transfer pricing changes made during the quarter ended December 31, 2007, we project that certain of our international subsidiaries will be in a profitable position for the foreseeable future. Therefore, we no longer believe that a valuation allowance is necessary against the deferred tax assets in these international operations and recorded a tax benefit of $2.4 million related to the reversal of such valuation allowances. In the three months ended December 31, 2006, the income tax expense of $0.1 million resulted in an effective tax rate of 2% which was primarily the result of the full valuation allowance we maintained against our deferred tax assets at that time.

Nine months ended December 31, 2007 compared to the nine months ended December 31, 2006

Revenues

     Total revenues increased $33.2 million, or 31%, from $108.5 million in the nine months ended December 31, 2006 to $141.7 million in the nine months ended December 31, 2007.

     Software Revenue. Software revenue increased $17.5 million, or 29%, from $60.2 million in the nine months ended December 31, 2006 to $77.6 million in the nine months ended December 31, 2007. Software revenue represented 55% of our total revenues in both the nine months ended December 31, 2007 and 2006. Our overall growth in software revenue is derived from a higher volume of purchases of our software applications from both new customers as well as from our expanding base of existing customers. In the nine months ended December 31, 2007, the increase in software revenue was primarily driven by software revenue derived from foreign locations, which increased 73% compared to the nine months ended December 31, 2006. The growth in software revenue in foreign locations was primarily due to increases in Europe, Asia and Canada as we expand our international operations. Software revenue derived from the United States increased 11% in the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006.

     Software revenue through our resellers increased $18.0 million in the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006. The overall increase in software revenue through our resellers was primarily due to the higher growth percentage of software generated in foreign locations which is substantially sold through our channel partners as well as higher revenue through our reseller arrangement with Dell in the United States. Software revenue through our direct sales force decreased $2.3 million in the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006 primarily due to lower software revenue derived from our direct sales force in the United States. In addition, software revenue through our original equipment manufacturers contributed $1.8 million to our overall increase in software revenue primarily due to higher revenue from our arrangements with Dell and Hitachi Data Systems. The overall shift in software revenue generated through indirect distribution channels compared to our direct sales force is more fully discussed above in the “Sources of Revenue” section.

     Software revenue derived from transactions greater than $0.1 million represented approximately 32% of our software revenue in the nine months ended December 31, 2007 and approximately 28% of our software revenue in the nine months ended December 31, 2006. As a result, software revenue from transactions greater than $0.1 million increased by $8.4 million in the nine months ended December 31, 2007 compared to the nine months ended December 31, 2006. This increase was primarily due to a 38% increase in the number of transactions of this type. In the both the three months ended December 31, 2007 and 2006, the average dollar amount of such transactions was $0.2 million. Movements in foreign exchange rates accounted for approximately $2.2 million, or 13%, of the $17.5 million increase in software revenue.

     Services Revenue. Services revenue increased $15.8 million, or 33%, from $48.3 million in the nine months ended December 31, 2006 to $64.1 million in the nine months ended December 31, 2007. Services revenue represented 45% of our total revenues in both the nine months ended December 31, 2007 and 2006. The overall growth in services revenue is due to a higher volume of purchases of our services offerings. Services revenue from

customer support agreements as a result of software sales to new customers and renewal agreements with our installed software base increased $13.6 million in the nine months ended December 31, 2007. Movements in foreign exchange rates accounted for approximately $1.7 million, or 11%, of the $15.8 million increase in services revenue.

Cost of Revenues

     Total cost of revenues increased $3.8 million, or 24%, from $15.7 million in the nine months ended December 31, 2006 to $19.4 million in the nine months ended December 31, 2007. Total cost of revenues represented 14% of our total revenues in both the nine months ended December 31, 2007 and 2006.

     Cost of Software Revenue. Cost of software revenue increased $0.5 million, or 39%, from $1.2 million in the nine months ended December 31, 2006 to $1.7 million in the nine months ended December 31, 2007. Cost of software revenue represented 2% of our total software revenue in both the nine months ended December 31, 2007 and 2006. The increase in cost of software revenue is primarily due to higher distribution and third party media costs related to our CommVault Simpana 7.0 software suite.

     Cost of Services Revenue. Cost of services revenue increased $3.3 million, or 23%, from $14.5 million in the nine months ended December 31, 2006 to $17.8 million in the nine months ended December 31, 2007. Cost of services revenue represented 28% of our services revenue in the nine months ended December 31, 2007 and 30% in the nine months ended December 31, 2006. The increase in cost of services revenue was primarily the result of higher employee compensation and travel expenses totaling $1.6 million resulting from higher headcount, a $0.9 million increase in third party outsourcing costs.

Operating Expenses

     Sales and Marketing. Sales and marketing expenses increased $18.8 million, or 38%, from $49.0 million in the nine months ended December 31, 2006 to $67.7 million in the nine months ended December 31, 2007. The increase was primarily due to an $11.4 million increase in employee compensation which includes higher headcount costs as well as higher commissions on record revenues, a $2.5 million increase in travel and related expenses due to increased headcount and a $1.5 million increase in advertising and marketing related expenses as we continue to build brand awareness. Movements in foreign exchange rates accounted for approximately $1.9 million, or 10%, of the $18.8 million increase in sales and marketing expenses.

     Research and Development. Research and development expenses increased $2.6 million, or 15%, from $17.4 million in the nine months ended December 31, 2006 to $19.9 million in the nine months ended December 31, 2007. The increase was primarily due to $1.8 million of higher employee compensation resulting from higher headcount and a $0.3 million increase in stock-based compensation costs recorded in accordance with SFAS 123(R).

     General and Administrative. General and administrative expenses increased $3.5 million, or 26%, from $13.7 million in the nine months ended December 31, 2006 to $17.3 million in the nine months ended December 31, 2007. The increase was primarily due to a $1.6 million increase in employee compensation and related expenses resulting mainly from higher headcount, a $0.7 million increase in compliance and insurance costs associated with being a public company and a $0.5 million increase in stock-based compensation costs recorded in accordance with SFAS 123(R).

     Depreciation and Amortization. Depreciation expense increased $0.4 million, or 21%, from $1.8 million in the nine months ended December 31, 2006 to $2.2 million in the nine months ended December 31, 2007. This reflects higher depreciation associated with increased capital expenditures primarily for product development and other computer-related equipment.

Interest Income

     Interest income increased $0.8 million, from $1.9 million in the nine months ended December 31, 2006 to $2.7 million in the nine months ended December 31, 2007. The increase was primarily due to higher cash balances in our deposit accounts.

Income Tax Benefit (Expense)

     Income tax expense increased $2.9 million, from $0.2 million in the nine months ended December 31, 2006 to $3.1 million in the nine months ended December 31, 2007. The effective tax rate was approximately 17% in the nine months ended December 31, 2007 and approximately 2% in the nine months ended December 31, 2006. The income tax expense in the nine months ended December 31, 2007 includes a $2.4 million reversal of our deferred income tax valuation allowance. Until the third quarter of fiscal 2008, we recorded a valuation allowance in certain international jurisdictions primarily related to net operating loss carryforwards based on our assessment that the realization of the net deferred tax assets did not meet the “more than likely not” criterion under SFAS No. 109, “Accounting for Income Taxes.” During the quarter ended December 31, 2007, we modified our transfer pricing policies for software sold to certain of our international subsidiaries. In assessing the need for a valuation allowance against the deferred tax assets in such international jurisdictions, we considered projected future income as part of its analysis. Due to the transfer pricing changes made during the quarter ended December 31, 2007, we project that certain of our international subsidiaries will be in a profitable position for the foreseeable future. Therefore, we no longer believe that a valuation allowance is necessary against the deferred tax assets in these international operations and recorded a tax benefit of $2.4 million related to the reversal of such valuation allowances. In the nine months ended December 31, 2006, the 2% effective tax rate was primarily the result of the full valuation allowance we maintained against our deferred tax assets at that time.

Liquidity and Capital Resources

     As of December 31, 2007, we had $95.1 million of cash and cash equivalents. In recent fiscal years, our principal sources of liquidity have been cash provided by operations and cash provided from our public offerings of common stock. Historically, our principle source of liquidity had been cash provided by private placements of preferred equity securities and common stock.

     In June 2007, we completed our follow-on public offering in which we sold 300,000 shares and certain of our stockholders sold 7,570,000 shares of common stock to the public at a price of $17.00 per share. After deducting the underwriting discounts, commissions and other offering costs, our net proceeds from the offering were approximately $4.3 million. During the nine months ended December 31, 2007, we used the net proceeds from our follow-on public offering, together with approximately $3.2 million of our existing cash, to pay approximately $7.5 million in satisfaction of the outstanding principal on our term loan.

     In September 2006, we completed our initial public offering and related concurrent private placement and generated net proceeds of approximately $81.7 million. We used the net proceeds, together with net borrowings of $10.0 million under our term loan and $10.1 million of our existing cash and cash equivalents, to pay $101.8 million in satisfaction of amounts due on our Series A, B, C, D and E preferred stock upon its conversions into common stock.

     Net cash provided by operating activities was $23.4 million in the nine months ended December 31, 2007 and $22.5 million in the nine months ended December 31, 2006. In both the nine months ended December 31, 2007 and 2006, cash generated by operating activities was primarily due to net income adjusted for the impact of noncash charges and increases in deferred services revenue and accrued liabilities, partially offset by an increase in accounts receivable due to higher revenue. We anticipate that as our revenues continue to grow, accounts receivable and deferred services revenue balances should continue to grow as well.

     Net cash used in investing activities was $3.1 million in both the nine months ended December 31, 2007 and 2006. Cash used in investing activities in each period was due to purchases of property and equipment related to the growth in our business as we continue to invest in and enhance our global infrastructure.

     Net cash provided by (used in) financing activities was $9.4 million in the nine months ended December 31, 2007 and ($10.5) million in the nine months ended December 31, 2006. The cash provided by financing activities in the nine months ended December 31, 2007 was due to $8.1 million of proceeds from the exercise of stock options, $4.5 million of excess tax benefits recognized as a result of the stock option exercises and $4.3 million of net proceeds generated from our follow-on public offering, partially offset by the cash use of $7.5 million in principal repayment on our term loan. The cash used in financing activities in the nine months ended December 31, 2006 was

primarily due to the cash use of $101.8 million in satisfaction of amounts due on our Series A, B, C, D and E preferred stock upon its conversions into common stock, partially offset by proceeds generated of approximately $82.2 million from our initial public offering and concurrent private placement, net of underwriting fees and offering cost. In addition, we incurred net borrowings of $8.8 million in the nine months ended December 31, 2006 under our term loan in connection with the payments due to the holders of our Series A, B, C, D and E preferred stock upon our initial public offering.

     Working capital increased $40.4 million from $34.9 million as of March 31, 2007 to $75.2 million as of December 31, 2007. The increase in working capital is primarily due to a $30.1 million increase in cash and cash equivalents and an $11.7 million increase in accounts receivable, partially offset by a $10.0 million increase in deferred revenue. The increase in cash and cash equivalents is primarily due to net income generated during the period adjusted for the impact of noncash charges, cash received from the exercise of stock options and the increase in deferred revenue, partially offset by the net cash used in connection with the transactions associated with our follow-on public offering and purchases of property and equipment. The increase in accounts receivable is primarily due to the growth in revenue.

     We believe that our existing cash, cash equivalents and cash from operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. We may seek additional funding through public or private financings or other arrangements during this period. Adequate funds may not be available when needed or may not be available on terms favorable to us, or at all. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants or other restrictions on our business that could impair our operational flexibility, and would also require us to fund additional interest expense. If funding is insufficient at any time in the future, we may be unable to develop or enhance our products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

Off-Balance Sheet Arrangements

     As of December 31, 2007, we had no off-balance sheet arrangements.

Indemnifications

     Certain of our software licensing agreements contain certain provisions that indemnify our customers from any claim, suit or proceeding arising from alleged or actual intellectual property infringement. These provisions continue in perpetuity along with our software licensing agreements. We have never incurred a liability relating to one of these indemnification provisions in the past and we believe that the likelihood of any future payout relating to these provisions is remote. Therefore, we have not recorded a liability during any period related to these indemnification provisions.

Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of this Statement on our financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an Amendment of SFAS No. 115”, (“SFAS 159”). SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact of this Statement on our financial statements.

     In December 2007, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends and replaces Question 6 of Section D.2 of Topic 14, Share-Based Payment. SAB 110 expresses the views of the staff regarding the use of the “simplified” method in developing an estimate of expected term of “plain vanilla” share options in accordance with FASB Statement No. 123(R), Share Based Payment. The use of the “simplified” method was scheduled to expire on December 31, 2007. SAB 110 extends the use of the “simplified” method for “plain vanilla” awards in certain situations. We currently use the “simplified” method to estimate the expected term for share option grants as we do not have enough historical experience to provide a reasonable estimate due to the limited period our equity shares have been publicly traded. We will continue to use the “simplified” method until we have enough historical experience to provide a reasonable estimate of expected term in accordance with SAB 110. SAB 110 is effective for options granted after December 31, 2007.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

     As of December 31, 2007, our cash and cash equivalents balance consisted primarily of money market funds. Due to the short-term nature of these investments, we are not subject to any material interest rate risk on these balances.

Foreign Currency Risk

     As a global company, we face exposure to adverse movements in foreign currency exchange rates. Our international sales are generally denominated in foreign currencies, and this revenue could be materially affected by currency fluctuations. Approximately 36% of our sales were outside the United States in the nine months ended December 31, 2007 and 30% were outside the United States in fiscal 2007. Our primary exposures are to fluctuations in exchange rates for the U.S. dollar versus the Euro and, to a lesser extent, the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, Indian rupee and Singapore dollar. Changes in currency exchange rates could adversely affect our reported revenues and require us to reduce our prices to remain competitive in foreign markets, which could also have a material adverse effect on our results of operations. Historically, we have periodically reviewed and revised the pricing of our products available to our customers in foreign countries and we have not maintained excess cash balances in foreign accounts. To date, we have not hedged our exposure to changes in foreign currency exchange rates and, as a result, could incur unanticipated gains or losses.

     We estimate that a 10% change in foreign exchange rates would impact our reported operating profit by approximately $1.7 million annually. This sensitivity analysis disregards the possibilities that rates can move in opposite directions and that losses from one geographic area may be offset by gains from another geographic area.

Item 4. Controls and Procedures

     Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2007 and, based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective.

     Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Securities Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

     There were no changes in our internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

     From time to time, we are subject to claims in legal proceedings arising in the normal course of our business. We do not believe that we are party to any pending legal action that could reasonably be expected to have a material adverse effect on our business or operating results.

Item 1A. Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended March 31, 2007, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any of the risks actually occur, our business, financial conditions or results of operations could be negatively affected. In that case, the trading price of our stock could decline, and our stockholders may lose part or all of their investment.

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

(a) None

(b) Not applicable

(c) None

Item 3. Defaults Upon Senior Securities

None

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

None

Item 5. Other Information

None

Item 6. Exhibits

     A list of exhibits filed herewith is included on the Exhibit Index which immediately precedes such exhibits and is incorporated herein by reference.

Signatures

     Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX

Exhibit
No.		Description
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002