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EX-32.1 - EX-32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - NETEZZA CORPb78357exv32w1.htm
EX-31.1 - EX-31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - NETEZZA CORPb78357exv31w1.htm
EX-31.2 - EX-31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER - NETEZZA CORPb78357exv31w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from               to          
Commission file number 001-33445
NETEZZA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   04-3527320
(State or Other Jurisdiction of Incorporation or
Organization)
  (I.R.S. Employer Identification No.)
     
26 Forest Street
Marlborough, MA
  01752
(Address of Principal Executive Offices)   (Zip Code)
(508) 382-8200
(Registrant’s Telephone Number, Including Area Code)
     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes   o No
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes   o No
     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.
Large accelerated filer o Accelerated filer þ  Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   þ No
As of November 30, 2009, there were 60,846,427 shares of the registrant’s common stock outstanding.
 
 

 


 

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 Ex-31.1 Certification of Chief Executive Officer
 Ex-31.2 Certification of Chief Financial Officer
 Ex-32.1 Certification of Chief Executive Officer and Chief Financial Officer

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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
NETEZZA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
                 
    October 31,     January 31,  
    2009     2009  
 
               
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 70,408     $ 111,635  
Short-term marketable securities
    41,349        
Accounts receivable
    39,090       34,457  
Inventory
    23,142       18,409  
Deferred tax assets, net
    12,962       12,723  
Restricted cash
    60       379  
Prepaid expenses and other current assets
    5,598       3,160  
 
           
Total current assets
    192,609       180,763  
Property and equipment, net
    8,433       9,586  
Deferred tax assets, net
    10,222       9,415  
Goodwill
    2,000       2,000  
Intangible assets, net
    4,325       2,935  
Long-term marketable securities
    40,130       49,222  
Restricted cash
    639       739  
Other long-term assets
    2,210       4,199  
 
           
Total assets
  $ 260,568     $ 258,859  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 11,395     $ 8,424  
Accrued expenses
    7,107       6,301  
Accrued compensation and benefits
    6,190       6,352  
Current portion of deferred revenue
    35,350       46,356  
 
           
Total current liabilities
    60,042       67,433  
 
               
Long-term deferrred revenue
    9,668       11,979  
Other long-term liabilities
    1,953       2,825  
 
           
Total long-term liabilities
    11,621       14,804  
 
           
Total liabilities
    71,663       82,237  
 
           
 
               
Commitments and contingencies (Note 10)
               
 
               
Stockholders’ equity
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized at October 31, 2009 and January 31, 2009; none outstanding
           
Common stock, $0.001 par value; 500,000,000 shares authorized at October 31, 2009 and January 31, 2009; 60,792,702 and 59,760,440 shares issued at October 31, 2009 and January 31, 2009, respectively
    61       60  
Treasury stock, at cost; 139,062 shares at October 31, 2009 and January 31, 2009, respectively
    (14 )     (14 )
Additional paid-in-capital
    237,646       228,658  
Accumulated other comprehensive loss
    (2,508 )     (4,461 )
Accumulated deficit
    (46,280 )     (47,621 )
 
           
Total stockholders’ equity
    188,905       176,622  
 
           
Total liabilities and stockholders’ equity
  $ 260,568     $ 258,859  
 
           
See accompanying Notes to Condensed Consolidated Financial Statements

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NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
 
                               
Revenue
                               
Product
  $ 33,342     $ 38,941     $ 96,013     $ 105,401  
Services
    14,393       11,638       41,023       31,789  
 
                       
Total revenue
    47,735       50,579       137,036       137,190  
Cost of revenue
                               
Product
    12,302       15,783       35,769       42,382  
Services
    3,572       3,549       10,467       8,541  
 
                       
Total cost of revenue
    15,874       19,332       46,236       50,923  
 
                       
Gross margin
    31,861       31,247       90,800       86,267  
Operating expenses
                               
Sales and marketing
    16,777       14,883       47,182       43,505  
Research and development
    10,068       8,406       30,985       23,668  
General and administrative
    3,872       3,985       11,822       10,767  
 
                       
Total operating expenses
    30,717       27,274       89,989       77,940  
 
                       
Operating income
    1,144       3,973       811       8,327  
Interest income
    164       845       671       3,625  
Interest expense
    24       16       74       16  
Other income (expense), net
    (8 )     (36 )     370       (256 )
 
                       
Income before income tax expense
  $ 1,276     $ 4,766     $ 1,778     $ 11,680  
Income tax expense
    426       1,302       435       2,943  
 
                       
Net income
  $ 850     $ 3,464     $ 1,343     $ 8,737  
 
                       
 
                               
Net income per share attributable to common stockholders
                               
Basic
  $ 0.01     $ 0.06     $ 0.02     $ 0.15  
 
                       
Diluted
  $ 0.01     $ 0.05     $ 0.02     $ 0.14  
 
                       
 
                               
Weighted average common shares outstanding — basic
    60,637       59,419       60,286       58,718  
Weighted average common shares outstanding — diluted
    63,663       63,151       62,913       62,868  
See accompanying Notes to Condensed Consolidated Financial Statements

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NETEZZA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)
                 
    Nine Months Ended October 31,  
    2009     2008  
 
               
Cash flows from operating activities
               
Net income
  $ 1,343     $ 8,737  
Adjustments to reconcile net income to net cash provided by (used in) operating activities
               
Depreciation and amortization
    5,590       3,635  
Stock-based compensation expense
    7,237       5,677  
Benefit from deferred income taxes, net
    (371 )      
Gain on bargain purchase from acquisition of business
    (365 )      
Gain on trading securities
    (451 )      
Loss on auction rate securities written put right
    236        
Changes in assets and liabilities, net of acquisitions
               
Accounts receivable
    (4,568 )     (10,823 )
Inventory
    (5,423 )     5,918  
Other assets
    (1,069 )     (578 )
Accounts payable
    2,422       2,575  
Accrued compensation and benefits
    (252 )     108  
Accrued expenses
    546       1,499  
Deferred revenue
    (13,552 )     14,313  
 
           
Net cash provided by (used in) operating activities
    (8,677 )     31,061  
 
           
 
               
Cash flows from investing activities
               
Purchase of investments
    (32,202 )     (7,377 )
Sales, redemptions and maturities of investments
    2,100       43,854  
Acquisition of business, net of cash acquired
    (2,007 )     (6,201 )
Purchases of property and equipment
    (2,158 )     (2,647 )
Change in other long-term assets
    (1,000 )     (1,587 )
Decrease (increase) in restricted cash
    455       (739 )
 
           
Net cash provided by (used in) investing activities
    (34,812 )     25,303  
 
           
 
               
Cash flows from financing activities
               
Proceeds from issuance of common stock, net
    1,750       2,579  
 
           
Net cash provided by financing activities
    1,750       2,579  
 
           
Net increase (decrease) in cash and cash equivalents
    (41,739 )     58,943  
Effect of exchange rate changes on cash and cash equivalents
    512       (171 )
Cash and cash equivalents, beginning of year
    111,635       46,184  
 
           
 
               
Cash and cash equivalents, end of year
  $ 70,408     $ 104,956  
 
           
 
               
Supplemental disclosure of cash flow information
               
Cash paid for taxes
  $ 691     $ 1,570  
See accompanying Notes to Condensed Consolidated Financial Statements

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NETEZZA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Business
     Netezza Corporation (the “Company”) is a leading provider of data warehouse appliances. The Company’s products, the Netezza Performance Server, or NPS, and its recently introduced TwinFin™ appliance, integrate database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses, often referred to as business intelligence, provide organizations with actionable information to improve their business operations. The Company’s data warehouse appliances were designed specifically for analysis of terabytes or petabytes of data at higher performance levels and at a lower total cost of ownership with greater ease of use than can be achieved via traditional data warehouse systems. The Company’s data warehouse appliances perform faster, deeper and more iterative analyses on larger amounts of detailed data, giving customers greater insight into trends and anomalies in their businesses, thereby enabling them to make better strategic decisions.
2. Summary of Significant Accounting Policies
Basis of Presentation
     The accompanying condensed consolidated financial statements include those of the Company and its wholly owned subsidiaries, after elimination of all intercompany accounts and transactions. The Company has prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
     The condensed consolidated balance sheet at January 31, 2009 was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying unaudited financial statements as of October 31, 2009 and for the three and nine months ended October 31, 2009 and 2008 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. Due to a reclassification of an auction rate securities written put right, the Company adjusted the balance presented for prepaid expenses and other current assets and other long-term assets at October 31, 2009 in this Quarterly Report on Form 10-Q from the balance sheet presented in the Company’s press release dated November 24, 2009. The reclassification was based on the Company’s expected timing of redemption of the put right (Note 3). The prepaid expenses and other current assets balance increased from $4,508 to $5,598. Other long-term assets decreased from $3,300 to $2,210. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the fiscal year ended January 31, 2009, filed with the SEC on March 26, 2009.
     In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary to present a fair statement of the Company’s financial position as of October 31, 2009, results of operations for the three and nine months ended October 31, 2009 and 2008 and cash flows for the nine months ended October 31, 2009 and 2008 have been made. The results of operations for the three and nine months ended October 31, 2009 and the cash flows for the nine months ended October 31, 2009 are not necessarily indicative of the results of operations and cash flows that may be expected for the year ending January 31, 2010 or any future periods.
     The Company has evaluated subsequent events through December 9, 2009, the date it filed this Quarterly Report on Form 10-Q with the SEC, and had no material subsequent events to report as of that date.
     The Company’s fiscal year ends on January 31. When the Company refers to a particular fiscal year, the Company is referring to the fiscal year ended January 31 of that year. For example, fiscal 2010 refers to the fiscal year ending January 31, 2010.

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Use of Estimates
     The preparation of these financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates these estimates and judgments, including those related to revenue recognition, the write down of inventory to net realizable value, stock-based compensation, income taxes, goodwill and acquired intangible assets. The Company bases these estimates on historical and anticipated results and trends and on various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. By their nature, estimates are subject to an inherent degree of uncertainty. Actual results may differ from the Company’s estimates.
Foreign Currency Translation
     The functional currency for the Company’s foreign subsidiaries is the applicable local currency. For financial reporting purposes, assets and liabilities of subsidiaries outside the United States of America are translated into U.S. dollars using period-end exchange rates. Revenue and expense accounts are translated at the average rates in effect during the period. The effects of foreign currency translation adjustments are included in accumulated other comprehensive income as a component of stockholders’ equity. Transaction losses for the three and nine months ended October 31, 2009 were $0.1 million and $0.2 million, respectively, and for the three and nine months ended October 31, 2008 were $0.1 million and $0.3 million, respectively, and are recorded as “other income (expense), net” in the condensed consolidated statements of operations.
Concentration of Credit Risk and Significant Customers
     The Company maintains its cash in bank deposit accounts at high quality financial institutions. The individual balances, at times, may exceed federally insured limits. However, the Company does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
     Financial instruments which potentially expose the Company to concentrations of credit risk consist of accounts receivable. Management believes its credit policies are prudent and reflect normal industry terms and business risk. At October 31, 2009, two customers accounted for 17% and 16%, respectively, of accounts receivable. At January 31, 2009, three customers accounted for 15%, 11% and 10%, respectively, of accounts receivable. No customer accounted for 10% or greater of the Company’s total revenue for the nine months ended October 31, 2009, while one customer accounted for 10% or greater of the Company’s total revenue for the nine months ended October 31, 2008.
Stock-Based Compensation
     Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. The Company has selected the Black-Scholes option pricing model to determine fair value of stock option awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected life of the stock awards and the volatility of the underlying common stock. Changes to the assumptions may have a significant impact on the fair value of stock options, which could have a material impact on the Company’s financial statements. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. Should the Company’s actual forfeiture rates differ significantly from the Company’s estimates, the Company’s stock-based compensation expense and results of operations could be materially impacted. The calculation of compensation cost for options issued prior to the Company’s initial public offering in July 2007 required the Company’s Board of Directors, with input from management, to estimate the fair market value of the Company’s common stock on the date of grant of those options. These estimates of fair market value were determined based upon a number of objective and subjective factors and were, therefore, inherently subjective estimates.

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     For stock options and restricted stock the Company recognizes compensation cost on a straight-line basis over the awards’ vesting periods for those awards that contain only a service vesting feature. For awards with a performance condition vesting feature, of which there are none outstanding as of October 31, 2009, the Company recognizes compensation cost on a graded-vesting basis over the awards’ expected vesting periods.
     The Company accounts for stock-based compensation expense for non-employees using the fair value method which requires the award to be re-measured at each reporting date until the award is vested. The Company estimates the fair value using the Black-Scholes option pricing model, and records the fair value of non-employee stock options as an expense using the graded-vesting basis over the term of the option.
     The fair value of each option granted during the three and nine months ended October 31, 2009 and 2008 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
                                 
    Three Months Ended October 31,   Nine Months Ended October 31,
    2009   2008   2009   2008
Dividend yield
  None   None   None   None
Expected volatility
    56.3 %     52.2 %     56.6 %     45.8 %
Risk-free interest rate
    2.37 %     3.06 %     2.06 %     2.69 %
Expected life (in years)
    5.0       5.0       5.0       5.0  
Weighted-average fair value at grant date
  $ 4.89     $ 6.09     $ 3.51     $ 4.55  
     For the three and nine months ended October 31, 2009 and the three months ended October 31, 2008, the expected volatility assumption used in the Black-Scholes option-pricing model was a blended rate based on the historical trading activity of the Company’s common stock since the initial public offering and an analysis of peer group volatility. Prior to the third quarter of fiscal year 2009, the Company’s expected volatility assumption was based on peer group volatility. The expected life assumption is based on the simplified method, in accordance with the SEC’s Staff Accounting Bulletin No. 110, which is based on the vesting period and contractual term for each vesting tranche of awards. The average mid-point between the vesting date and the expiration date for each vesting period is used as the expected term under this method. The risk-free interest rate used in the Black-Scholes model is based on the implied yield curve available on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the Company’s expected term assumption. The Company has never declared or paid a cash dividend and has no current plans to pay cash dividends. Management has made an estimate of expected forfeitures of equity awards and is recognizing compensation costs only for those awards expected to vest.
     The amounts included in the condensed consolidated statements of operations for the three and nine months ended October 31, 2009 and 2008 relating to stock-based compensation expense are as follows (in thousands):
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Cost of product
  $ 12     $ 44     $ 34     $ 130  
Cost of services
    99       54       294       165  
Sales and marketing
    841       668       2,407       1,840  
Research and development
    717       529       2,034       1,529  
General and administrative
    850       764       2,432       1,997  
 
                       
 
  $ 2,519     $ 2,059     $ 7,201     $ 5,661  
 
                       
Net Income Per Share
     The Company computes basic net income per share by dividing its net income for the period by the weighted average number of common shares outstanding during the period, excluding the dilutive effects of common stock equivalents. Diluted net income per share includes the dilutive effect of stock options and warrants to purchase common stock under the treasury stock method.

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     The weighted average shares used to compute net income per share were as follows (in thousands):
                                 
    Three Months Ended October 31,   Nine Months Ended October 31,
    2009   2008   2009   2008
Weighted average shares used to compute net income per share:
                               
Basic
    60,637       59,419       60,286       58,718  
Dilutive options to purchase common stock
    3,026       3,732       2,627       4,150  
 
                               
Diluted
    63,663       63,151       62,913       62,868  
 
                               
     The following stock options to purchase common stock have been excluded from the computation of diluted net income per share for the periods presented because including the stock options would be anti-dilutive.
                                 
    Three Months Ended October 31,   Nine Months Ended October 31,
    2009   2008   2009   2008
       
Options to purchase common stock
    4,580       4,127       7,868       4,993  
Comprehensive Income (Loss)
     Comprehensive income (loss) consists of net income, adjustments to stockholders’ equity for foreign currency translation adjustments and net unrealized gains or losses from investments. For the purposes of comprehensive income (loss) disclosures, the Company does not record tax provisions or benefits for the net changes in the foreign currency translation adjustment, as the Company intends to permanently reinvest undistributed earnings in its foreign subsidiaries. Accumulated other comprehensive loss consists of foreign exchange gains and losses and net unrealized gains or losses from investments.
     The components of comprehensive income (loss) are as follows (in thousands):
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Net income
  $ 850     $ 3,464     $ 1,343     $ 8,737  
Other comprehensive income (loss):
                               
Foreign currency adjustment, net of tax of $0
    62       (379 )     251       (349 )
Net unrealized gain (loss) from investments, net of tax of $0
    483       (3,421 )     1,702       (6,525 )
 
                       
Total comprehensive income (loss)
  $ 1,395     $ (336 )   $ 3,296     $ 1,863  
 
                       
Recent Accounting Pronouncements
     In February 2009, the Company adopted the authoritative guidance for the fair value measurement of all non-financial assets and non-financial liabilities, which are recognized or disclosed at fair value in the financial statements on a non-recurring basis. This adoption did not have a material impact on the Company’s consolidated financial statements.
     In February 2009, the Company adopted an amendment to the accounting and disclosure requirements for unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid). Under this amendment, these awards are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of

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earnings and selected financial data). The adoption did not have a material impact on the Company’s consolidated financial statements.
     In February 2009, an amendment to the accounting and disclosure requirements for business combinations became effective for the Company. This amendment significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in process research and development and restructuring costs. In addition, under this statement, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. The Company’s acquisition of Tizor Systems, Inc. in February 2009 (see Note 5) was accounted for under this amendment. This amendment may have a material impact on the Company’s consolidated financial statements if or when the Company enters into future business combinations.
     In February 2009, a statement that changes the accounting and reporting for minority interests, which are now recharacterized as noncontrolling interests and classified as a component of equity, became effective for the Company. This new consolidation method significantly changes the accounting for transactions with minority interest holders. As of October 31, 2009, the Company did not have any minority interests.
     In June 2009, the Company adopted pronouncements that require disclosures about fair value of financial instruments in interim as well as in annual financial statements. The adoption of these pronouncements did not have a material impact on the Company’s consolidated financial statements.
     In June 2009, a pronouncement that provides guidelines for making fair value measurements became effective for the Company. The pronouncement provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed, is applicable to all assets and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures. The pronouncement did not have a material impact on the Company’s consolidated financial statements.
     In June 2009, amendments to the accounting and disclosure requirements for other-than-temporary impairment for debt and equity securities became effective for the Company. These amendments did not have a material impact on the Company’s consolidated financial statements.
     In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification (“Codification”). The Codification is the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an effect on the Company’s financial position, results of operations or liquidity.
     In October 2009, the FASB issued an accounting standard for multiple-deliverable revenue arrangements, which amends previously issued guidance to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. This standard also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. The Company is currently evaluating the impact of adopting the provisions of this standard.
     In October 2009, the FASB issued an accounting standard for certain revenue arrangements that include software elements. This standard amends previously issued guidance to exclude tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. Entities that sell joint hardware and software products that meet this scope exception will be required to follow the guidance for multiple-deliverable revenue arrangements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. The Company is currently evaluating the impact of adopting the provisions of this standard.
     From time to time, new accounting pronouncements are issued by the FASB and subsequently adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of

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recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated results of operations and financial condition upon adoption.
3. Fair Value Measurements
     On February 1, 2008, the Company adopted a newly issued accounting standard for its financial assets and liabilities measured at fair value on a recurring basis. On February 1, 2009, the Company adopted the remaining provisions of the standard for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. The adoption of this accounting pronouncement did not have a material effect on the Company’s consolidated financial statements for financial and non-financial assets and liabilities and any other assets and liabilities carried at fair value.
     The accounting standard for fair value measurements provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting standard also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
     
Level 1
Quoted prices in active markets for identical assets or liabilities.
 
Level 2
Observable inputs, other than level 1 prices, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
 
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
     The following table summarizes the composition of the Company’s investments at October 31, 2009 and January 31, 2009 (in thousands):
                                                 
                                    Classification on Balance Sheet  
            Gross     Gross             Short Term     Long Term  
            Unrealized     Unrealized     Aggregate     Marketable     Marketable  
October 31, 2009   Cost     Gains     Losses     Fair Value     Securities     Securities  
Available-for-sale U.S. treasury and government agency securities
  $ 32,204     $     $     $ 32,204     $ 26,800     $ 5,404  
Available-for-sale auction rate securities
  $ 36,425     $     $ (1,699 )   $ 34,726     $     $ 34,726  
Trading auction rate securities
  $ 15,650     $     $ (1,101 )   $ 14,549     $ 14,549     $  
 
                                   
 
  $ 84,279     $     $ (2,800 )   $ 81,479     $ 41,349     $ 40,130  
 
                                   
                                                 
                                    Classification on Balance Sheet  
            Gross     Gross             Short Term     Long Term  
            Unrealized     Unrealized     Aggregate     Marketable     Marketable  
January 31, 2009   Cost     Gains     Losses     Fair Value     Securities     Securities  
Available-for-sale auction rate securities
  $ 38,425     $     $ (3,402 )   $ 35,023     $     $ 35,023  
Trading auction rate securities
  $ 15,750     $     $ (1,551 )   $ 14,199     $     $ 14,199  
 
                                   
 
  $ 54,175     $     $ (4,953 )   $ 49,222     $     $ 49,222  
 
                                   

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     The following table details the fair value measurements within the fair value hierarchy of the Company’s financial assets and liabilities at October 31, 2009 (in thousands):
                                 
            Fair Value Measurements at Reporting
Date Using
 
    Total Fair Value at                    
    October 31, 2009     Level 1     Level 2     Level 3  
Financial Assets:
                               
Money market funds
  $ 46,200     $ 46,200     $     $  
U.S. treasury and government agency securities
    48,203       48,203              
Certificates of deposit
    699       699              
Auction rate securities
    49,275                   49,275  
Put right related to auction rate securities
    1,090                   1,090  
 
                       
 
  $ 145,467     $ 95,102     $     $ 50,365  
 
                       
 
                               
Financial Liabilities:
                               
Foreign currency forward contracts
  $ 113     $     $ 113     $  
 
                       
 
  $ 113     $     $ 113     $  
 
                       
     The following table reflects the activity for the Company’s major classes of assets measured at fair value using level 3 inputs (in thousands):
         
    Auction Rate  
    Securities  
Balance as of January 31, 2009
  $ 49,222  
Unrealized gain included in accumulated other comprehensive loss
    1,107  
Unrealized gain included in other income (expense), net
    361  
Sales or redemptions of securities
    (1,700 )
 
     
Balance as of April 30, 2009
  $ 48,990  
 
     
Unrealized gain included in accumulated other comprehensive loss
    112  
Unrealized loss included in other income (expense), net
    (73 )
Sales or redemptions of securities
    (25 )
 
     
Balance as of July 31, 2009
  $ 49,004  
 
     
Unrealized gain included in accumulated other comprehensive loss
    483  
Unrealized gain included in other income (expense), net
    163  
Sales or redemptions of securities
    (375 )
 
     
Balance as of October 31, 2009
  $ 49,275  
 
     
     At October 31, 2009, auction rate securities (“ARS”) represented 34% of total financial assets measured at fair value.
     At October 31, 2009, the Company grouped money market funds and certificates of deposit using a level 1 valuation because market prices were readily available. At October 31, 2009, the foreign currency forward contract valuation inputs were based on quoted prices and quoted pricing intervals from public data and did not involve management judgment. Accordingly, these have been classified within level 2 of the fair value hierarchy. At October 31, 2009, the fair value of the Company’s assets grouped using a level 3 valuation consisted of ARS, most of which were AAA-rated bonds collateralized by federally guaranteed student loans. ARS are long-term variable rate bonds tied to short-term interest rates that are reset through a “Dutch auction” process that typically occurs

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every 7 to 35 days. Historically, the carrying value (par value) of the ARS approximated fair market value due to the resetting of variable interest rates.
     Beginning in late February 2008, the auctions for ARS then held by the Company were unsuccessful. As a result, the interest rates on ARS reset to the maximum rate per the applicable investment offering statements. The Company will not be able to liquidate affected ARS until a future auction on these investments is successful, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the securities mature. Due to these liquidity issues, the Company performed a discounted cash flow analysis to determine the estimated fair value of these investments. The discounted cash flow analysis performed by the Company considered the timing of expected future successful auctions, the impact of extended periods of maximum interest rates, collateralization of underlying security investments and the creditworthiness of the issuer. The discounted cash flow analysis at October 31, 2009 included the following assumptions:
         
Expected Term
  3 Years
Illiquidity Discount
    1.5-1.8 %
Discount Rate
    2.33 %
     The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA-rated ARS market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security, with a greater percentage of FFELP backing resulting in a lower illiquidity discount.
     On November 7, 2008, the Company accepted an offer from UBS AG (“UBS”), one of the Company’s brokers, which provided the Company with rights (the “Put Right”) to sell UBS $15.8 million of its ARS investments at par, which were purchased through UBS, at any time during a two-year period beginning June 30, 2010. In addition, UBS agreed to provide a no net cost loan equal to 75% of the par value of the Company’s ARS positions with UBS should the Company desire such a loan before June 30, 2010. The Company has classified its ARS positions with UBS, totaling $15.7 million at October 31, 2009, as short-term marketable securities in the Company’s consolidated balance sheet. Before accepting the Put Right, the Company had the intent and ability to hold these securities until a successful auction or another liquidating event occurred and had previously recognized the unrealized loss as a temporary impairment and recorded the decline in value in “accumulated other comprehensive loss.” As a result of accepting the Put Right, the Company has entered into a separate financial instrument that has been recorded as an asset that is initially measured at its fair value. The Company has elected to apply the fair value option for accounting for financial assets and liabilities to the Put Right and accordingly will record future changes in fair value of the Put Right through earnings. The Company also elected to reclassify the ARS investment subject to the Put Right from available-for-sale to trading securities and accordingly will record future changes in fair value through earnings. The Company recorded the changes in the fair value of the Put Right during the three and nine months ended October 31, 2009 of approximately $(93,000) and approximately $(234,000), respectively, as unrealized gain (loss) in the “other income (expense), net” section of its condensed consolidated statement of operations. The Put Right represents the right to sell the corresponding ARS back to UBS at par beginning June 30, 2010 and has therefore been classified as an other current asset in the Company’s consolidated balance sheet. As part of assessing the fair value of the Put Right in future periods, the Company will continue to assess the economic ability of UBS to meet its obligation under the Put Right.
     The Company considered the following factors in determining whether the impairment related to its available-for-sale securities was other-than-temporary or temporary: (i) the intent of the Company to sell the security; (ii) whether it is more likely than not that the Company will be required to sell the security before recovering its cost; and (iii) whether or not the Company is expected to recover the security’s entire amortized cost basis. The Company specifically noted that it had a cash, cash equivalents and marketable securities balance of approximately $102.6 million in investments other than ARS, and that the Company expected to continue to generate positive cash flow on an annual basis. Additionally, the Company believed that the present value of expected future cash flows consisting of interest payments and the return of principal was sufficient to recover the amortized cost basis of the securities and expected to collect these cash flows. Therefore, the Company does not believe that the decline in value of its available-for-sale securities was other than temporary, or that any portion of the temporary decline was the result of a credit loss. As a result, as of October 31, 2009, the Company recorded an unrealized loss of $1.7 million related to the temporary impairment of the available-for-sale securities, which was included in accumulated other comprehensive loss within stockholders’ equity.

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4. Inventory
     Inventory consists of the following (in thousands):
                 
    October 31,     January 31,  
    2009     2009  
Raw materials
  $ 1,989     $ 770  
Finished goods
    21,153       17,639  
 
           
 
  $ 23,142     $ 18,409  
 
           
5. Acquisition
     On February 18, 2009, the Company acquired by merger all of the outstanding capital stock of Tizor Systems, Inc. (“Tizor”), a privately held provider of advanced enterprise data auditing and protection solutions for data centers. The results of Tizor’s operations have been included in the consolidated financial statements of the Company since that date.
     The aggregate purchase price was approximately $3.1 million in cash. Acquisition-related costs of approximately $0.2 million were included in general and administrative expenses in the Company’s statement of operations for the nine months ended October 31, 2009. The acquisition was accounted for using the acquisition method of accounting. The following table summarizes the allocation of the purchase price (in thousands):
         
Total purchase consideration:
       
Cash paid
  $ 3,138  
 
     
 
       
Fair value of purchase consideration
  $ 3,138  
 
     
 
       
Allocation of the purchase consideration:
       
Cash and cash equivalents
  $ 1,131  
Accounts receivable
    23  
Prepaid expenses and other assets
    254  
Property and equipment
    141  
Deferred tax assets, net
    736  
Identifiable intangible assets
    2,160  
 
     
 
       
Total assets acquired
    4,445  
 
     
Total liabilities assumed
    942  
Gain on bargain purchase
    365  
 
     
 
       
Total net assets acquired
  $ 3,138  
 
     
     The purchase price allocation resulted in the recognition of a gain on bargain purchase of approximately $0.4 million in the three months ended July 31, 2009, which is recorded as “other income (expense), net” in the condensed consolidated statements of operations. The gain on bargain purchase resulted from the value of the identifiable net assets acquired exceeding the value of the purchase consideration. The purchase price allocation did not result in the recognition of goodwill.

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     The following table reflects the fair value of the acquired identifiable intangible assets and related estimates of useful lives (in thousands):
                 
    Fair     Useful Life  
    Value     (Years)  
Developed technology
  $ 1,560       5  
In-process technology
    350       5  
Customer relationships
    160       5  
Trademark and tradename
    90       5  
 
             
 
               
Total
  $ 2,160          
 
             
     Acquired in-process technology was initially accounted for as an indefinite-lived intangible asset. The technology reached technical feasibility in the three months ended April 30, 2009 and is being amortized over its estimated useful life.
     The following table presents the pro forma statements of operations obtained by combining the historical consolidated statements of operations of the Company and Tizor for the three and nine months ended October 31, 2009 and 2008, giving effect to the merger as if it occurred on August 1, 2009 and 2008 and February 1, 2009 and 2008, respectively (in thousands, except per share data):
                                 
    Three Months Ended   Nine Months Ended
    October 31,   October 31,
    2009   2008   2009   2008
Pro forma revenue
  $ 47,735     $ 50,837     $ 137,091     $ 138,514  
Pro forma operating income
  $ 1,144     $ 2,135     $ 65     $ 3,131  
Pro forma net income
  $ 850     $ 1,987     $ 596     $ 4,362  
Pro forma basic net income per share
  $ 0.01     $ 0.03     $ 0.01     $ 0.07  
Pro forma diluted net income per share
  $ 0.01     $ 0.03     $ 0.01     $ 0.07  
     The pro forma net income and net income per share for each period presented primarily includes adjustments for amortization of intangibles and interest income. This pro forma information does not purport to indicate the results that would have actually been obtained had the acquisition been completed on the assumed dates, or which may be realized in the future.
6. Goodwill and Acquired Intangible Assets
Goodwill
     The carrying amount of goodwill of the Company was $2.0 million as of October 31, 2009 and as of January 31, 2009. The Company’s goodwill resulted from the acquisition of NuTech Solutions, Inc. in May 2008. Goodwill is not amortized, but instead is reviewed for impairment at least annually in the fourth quarter or more frequently when events and circumstances occur indicating that the recorded goodwill may be impaired. The Company’s annual goodwill impairment test did not result in an impairment in fiscal 2009.
     There was no change in the carrying amount of goodwill during the nine months ended October 31, 2009.
Acquired Intangible Assets
     The carrying amount of acquired identifiable intangible assets was $4.3 million as of October 31, 2009 and $2.9 million as of January 31, 2009. Intangible assets acquired in business combinations of $3.4 million on a cost basis are recorded under the purchase method of accounting at their estimated fair values at the date of acquisition. Intangible assets acquired in business combinations of $2.2 million on a cost basis are recorded under the acquisition method of accounting at their estimated fair values at the date of acquisition. The Company amortizes acquired intangible assets over their estimated useful lives.

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     Acquired intangible assets consist of the following as of October 31, 2009 (in thousands):
                         
            Accumulated        
    Cost     Amortization     Net  
Developed technology
  $ 3,210     $ (534 )   $ 2,676  
Order backlog
    300       (223 )     77  
Customer relationships
    1,460       (343 )     1,117  
Trademark and tradename
    590       (135 )     455  
 
                 
 
  $ 5,560     $ (1,235 )   $ 4,325  
 
                 
     Amortization of acquired intangible assets was approximately $0.3 million and $0.2 million for the three months ended October 31, 2009 and 2008, respectively, and $0.8 million and $0.3 million for the nine months ended October 31, 2009 and 2008, respectively.
     The following is the expected future amortization expense of the Company’s acquired intangible assets as of October 31, 2009 for the respective fiscal years ending January 31 (in thousands):
         
2010 (remaining three months)
  $ 269  
2011
    958  
2012
    918  
2013
    920  
2014
    918  
Thereafter
    342  
 
     
Total
  $ 4,325  
 
     
     The weighted average useful life of acquired intangible assets is 6 years.
7. Accrued Expenses
     Accrued expenses consist of the following (in thousands) as of:
                 
    October 31,     January 31,  
    2009     2009  
Accrued license payable
  $ 919     $ 973  
Sales meetings and events
    705       950  
Legal/audit/compliance
    1,059       682  
Rent/phone/utilities
    983       869  
Partner fees
    505       192  
Inventory items
    229       985  
Other
    2,707       1,650  
 
           
 
  $ 7,107     $ 6,301  
 
           

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8. Stock Incentive Plans
Non-employee Awards
     The Company issues equity instruments to non-employees, including warrants and options to purchase common stock. The Company is required to re-measure the awards at each reporting period until the vesting date. The Company records the value of the shares using the graded-vesting basis over the period of time services are provided. Stock-based compensation expense for non-employees for the three months ended October 31, 2009 and 2008 was approximately $13,000 and $2,000, respectively. Stock-based compensation expense for non-employees for the nine months ended October 31, 2009 and 2008 was approximately $36,000 and $16,000, respectively.
     At October 31, 2009, non-employees held nonstatutory options to purchase 22,500 shares of common stock, of which 13,750 were fully vested and exercisable.
Restricted Common Stock
     During fiscal 2009 and during the nine months ended October 31, 2009, the Company awarded its non-employee directors shares of restricted common stock under the Company’s 2007 Stock Incentive Plan. The vesting term of these awards is one year, assuming continued service. The vested shares under these awards cannot be sold until the director’s separation from the Company, or upon an earlier acquisition of the Company. The Company amortizes the fair market value of the awards at the time of the grant to expense over the period of vesting. Recipients of restricted stock have the right to vote such shares and may also receive dividends. The fair value of restricted stock awards is determined based on the number of shares granted and the market value of the Company’s common stock on the grant date, adjusted for any forfeiture factor.
     The following table summarizes the Company’s restricted stock activity during the nine months ended October 31, 2009:
                         
                    Weighted
                    Average Grant
    Shares   Par value   Date Fair Value
Non-vested as of January 31, 2009
    27,708     $ 0.001     $ 12.99  
Granted
    87,808     $ 0.001     $ 7.15  
Vested
    (27,708 )   $ 0.001     $ 12.99  
Cancelled
                 
 
                       
Non-vested as of October 31, 2009
    87,808     $ 0.001     $ 7.15  
 
                       
Stock Options
     The following table summarizes stock option activity for the nine months ended October 31, 2009:
                                         
                            Weighted    
    Shares   Number of   Weighted   Average   Aggregate
    Available for   Options   Average   Remaining   Intrinsic
    Grant   Outstanding   Exercise Price   Life in Years   Value
Outstanding at January 31, 2009
    116,471       10,474,631     $ 6.44                  
Additional shares authorized
    6,086,748                                
Options granted
    (2,813,950 )     2,813,950     $ 7.01                  
Restricted shares granted
    (87,808 )           $ 0.00                  
Exercised
          (944,454 )   $ 1.85                  
Forfeited, cancelled or expired (1)
    232,375       (406,537 )   $ 8.46                  
                             
Outstanding at October 31, 2009
    3,533,836       11,937,590     $ 6.87     6.10 years   $35.6 million
                             
Exercisable at October 31, 2009
          4,375,538     $ 5.38     5.90 years   $19.4 million
                             
Vested and expected to vest at October 31, 2009
          11,573,761     $ 6.83     6.09 years   $34.9 million
                             

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(1)   Options cancelled under the Company’s 2000 Stock Incentive Plan (“the 2000 Plan”) after July 24, 2007 are not considered available for grant, as the Company is no longer granting options under this plan. During the nine months ended October 31, 2009, options for 174,162 shares granted under the 2000 Plan were cancelled.
     The aggregate intrinsic value in the table above was calculated as the difference between the exercise price of the stock options and the fair value of the underlying common stock as of October 31, 2009, which was $9.24 per share. The aggregate intrinsic value of options exercised for the nine months ended October 31, 2009 and 2008 was $6.3 million and $18.5 million, respectively.
     At October 31, 2009, unrecognized compensation expense related to unvested stock options and unvested restricted shares was $27.8 million and $0.3 million, respectively, which is expected to be recognized over a weighted-average period of 3.2 and 0.5 years, respectively.
9. Income Taxes
     The Company recorded income tax expense of approximately $0.4 million and approximately $1.3 million for the three months ended October 31, 2009 and 2008, respectively and income tax expense of approximately $0.4 and approximately $2.9 million for the nine months ended October 31, 2009 and 2008, respectively. The Company’s effective income tax rate was 33.4% and 27.3% for the three months ended October 31, 2009 and 2008, respectively and 24.5% and 25.2% for the nine months ended October 31, 2009 and 2008, respectively. The effective income tax rate is based upon the estimated income for the year, the estimated composition of the income in different jurisdictions and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits, resolution of tax audits or other tax contingencies. For the three and nine months ended October 31, 2009, the effective income tax rate varied from the U.S. federal statutory tax rate of 35%, primarily due to the effects of accounting for share-based compensation, the utilization of federal and state tax credits and the effects of purchase accounting from the Company’s acquisition of Tizor Systems, Inc. The Company’s income tax provision for the three and nine months ended October 31, 2009 consisted of federal, state and foreign taxes owed in relation to income generated. The Company’s income tax provision for the three and nine months ended October 31, 2008 consisted primarily of taxes owed in relation to income generated by its foreign subsidiaries. The federal and state provision for the three and nine months ended October 31, 2008 included amounts in relation to the Company’s income generated in the U.S., reduced by the utilization of available net operating loss (“NOL”) carryforwards and tax credits that were recorded on the balance sheet with a full valuation allowance prior to their utilization.
     The Company continued to provide a full valuation allowance for net operating losses for NuTech Solutions, Inc., acquired by Netezza in May 2008, with operations in Germany and Poland, as the Company believes it is more likely than not that the future tax benefits from accumulated net operating losses will not be realized. The Company continues to assess the need for the valuation allowance at each balance sheet date based on all available evidence. However, it is possible that the “more likely than not” criterion could be met in a future period, which could result in the reversal of a significant portion or all of the valuation allowance. Any reversal of the valuation allowance associated with the NuTech acquisition would be recorded as a tax benefit.
10. Commitments and Contingencies
Guarantees and Indemnification Obligations
     The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies and agrees to reimburse the indemnified party for losses incurred by the indemnified party, generally the Company’s customers, in connection with any patent, copyright, trade secret or other proprietary right infringement claim by any third party with respect to the Company’s products. The term of these indemnification agreements is generally perpetual. Based on historical information and information known as of October 31, 2009, the Company does not expect it will incur any significant liabilities under these indemnification agreements.

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Warranty
     The Company provides warranties on most products and has established a reserve for warranty based on identified warranty costs. The warranty accrual is based upon the Company’s historical experience and expected future costs. The accrual includes amounts accrued for at the time of shipment, adjustments for changes in estimated costs of warranties on systems shipped in the period and changes in estimated costs of warranties on systems shipped in prior periods. While the Company continues its warranty service on most products, warranty service has generally been superseded by coverage provided under simultaneous maintenance and support service contracts. As maintenance and support service revenues are deferred and recorded ratably over the service period, any costs of product replacement are incurred and recorded in the same period, thereby reducing the need for a specific warranty reserve. The reserve is included as part of accrued expenses (Note 7) in the accompanying balance sheets.
     Activity related to the warranty accrual was as follows (in thousands):
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Balance at beginning of period
  $ 180     $ 948     $ 747     $ 1,141  
Provision
    132       585       576       1,533  
Warranty usage *
    (180 )     (443 )     (1,191 )     (1,584 )
 
                       
Balance at end of period
  $ 132     $ 1,090     $ 132     $ 1,090  
 
                       
 
*     Warranty usage includes expiration of product warranty.
11. Industry Segment, Geographic Information and Significant Customers
     The Company is organized as, and operates in, one reportable segment: the development and sale of data warehouse appliances. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region, for purposes of evaluating financial performance and allocating resources. The Company and its Chief Executive Officer evaluate performance based primarily on revenue in the geographic locations in which the Company operates. Revenue is attributed by geographic location based on the location of the end customer.
     Revenue, classified by the major geographic areas in which the Company’s customers are located, was as follows (in thousands):
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
United States
  $ 39,779     $ 46,409     $ 110,099     $ 112,088  
International
    7,956       4,170       26,937       25,102  
 
                       
Total
  $ 47,735     $ 50,579     $ 137,036     $ 137,190  
 
                       
     The following table summarizes the Company’s long-lived assets, consisting of the net book value of the Company’s property and equipment, by geographic location (in thousands):
                 
    October 31,     January 31,  
    2009     2009  
United States
  $ 8,260     $ 9,369  
International
    173       217  
 
           
Total
  $ 8,433     $ 9,586  
 
           

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
     The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2009, which was filed with the Securities and Exchange Commission (“SEC”) on March 26, 2009. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors”, set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Report on Form 10-Q.
Recent Developments
     In August 2009, we announced the general availability of our next generation data warehouse appliance, the TwinFin™ appliance, which is the first in a family of new blade server-based appliances. We expect that sales of our new family of blade server-based data warehouse appliances, of which the TwinFin appliance is the first member, will generate the substantial majority of our anticipated product revenues in the fourth quarter of fiscal 2010 and in fiscal 2011.
Overview
     We were founded in August 2000 to develop data warehouse appliances that enable real-time business intelligence. Our appliances integrate database, server and storage platforms in a purpose-built unit to enable detailed queries and analyses on large volumes of stored data. The results of these queries and analyses provide organizations with actionable information to improve their business operations. The amount of data that is being generated and stored by organizations is exploding. As the volume of data continues to grow, enterprises have recognized the value of analyzing such data to significantly improve their operations and competitive position. This increasing amount of data and the importance of data analysis have led to a heightened demand for data warehouses that provide the critical framework for data-driven enterprise decision-making and business intelligence. Many traditional data warehouse systems were initially designed to aggregate and analyze smaller quantities of data, using general-purpose database, server and storage platforms patched together as a data warehouse system. Such patchwork architectures are often used by default to store and analyze data, despite the fact that they are not optimized to handle terabytes of constantly growing and changing data and as a result, are not as effective in handling the in-depth analyses that large businesses are now requiring of their data warehouse systems. The increasing number of users accessing the data warehouse and the sophistication of the queries employed by these users is making the strain of using these legacy systems even more challenging for many organizations.
     Business intelligence solutions are still in their early stages of growth and their continued adoption and growth in the marketplace remain uncertain. Additionally, our appliance approach requires our customers to run their data warehouses in new and innovative ways and often requires our customers to replace their existing equipment and supplier relationships, which they may be unwilling to do, especially in light of the often critical nature of the

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components and systems involved and the significant capital and other resources they may have previously invested. Furthermore, purchases of our products involve material changes to established purchasing patterns and policies. Even if prospective customers recognize the need for our products, they may not select our appliance solution because they choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our appliance solutions. Therefore, our future success also depends on our ability to maintain our leadership position in the data warehouse market and to proactively address the needs of the market and our customers to further drive the adoption of business intelligence and to sustain our competitive advantage versus competing approaches to business intelligence and alternate product offerings.
     There has been a significant deterioration in economic conditions over the past year in many of the countries and regions in which we do business. These economic conditions have caused some of our current or prospective customers to reduce their information technology spending, causing them to modify, delay or cancel plans to purchase our products. In addition, some of our traditional competitors have introduced their own integrated data warehousing solutions which may cause our sales cycles to be delayed and may have an adverse impact on our business, operating results and financial condition.
     We are headquartered in Marlborough, Massachusetts. Our personnel and operations are also located throughout the United States, as well as in the United Kingdom, Germany, Australia, Japan, Korea, Poland, France, Ireland and Singapore. We expect to continue to add personnel in the United States and internationally to provide additional geographic sales and technical support coverage.
Revenue
     We derive our revenue from sales of products and related services. We sell our data warehouse appliances worldwide to large global enterprises, mid-market companies and government agencies through our direct sales force as well as indirectly via distribution partners. To date, we have derived the substantial majority of our revenue from customers located in the United States. For the nine months ended October 31, 2009 and 2008, U.S. customers accounted for approximately 80% and 78% of our overall revenue, respectively. For fiscal 2009, 2008 and 2007, U.S. customers accounted for approximately 74%, 80% and 76% our revenue, respectively.
     Product Revenue. The significant majority of our revenue is generated through the sale of our appliances, primarily to companies in the following vertical industries: telecommunications, digital media, retail, financial services, outsourced analytics, government and health and life sciences. Our future revenue growth will depend in significant part upon further sales of our appliances to our existing customer base. In addition, increasing our sales to new customers in existing vertical industries we currently serve and in other vertical industries that depend upon high-performance data analysis is an important element of our strategy. We consider the further development of our direct and indirect sales channels in domestic and international markets to be a key to our future revenue growth and the global acceptance of our products. Our future revenue growth will also depend on our ability to sustain the high levels of customer satisfaction generated by providing “high-touch,” high-quality support. In addition, the market for our products is characterized by rapid technological change, frequent new product introductions and evolving industry standards. Our future revenue growth is dependent on the successful development and introduction of new products and enhancements, including the market acceptance of our new generation TwinFin appliance. Such new introductions and enhancements could reduce demand for our existing products and cause customers to delay purchasing decisions until such new products and enhancements are introduced. To address these risks we will seek to expand our sales and marketing efforts, continue to pursue research and development as well as acquisition opportunities to expand and enhance our product offering.
     Services Revenue. We sell product maintenance, installation, training and professional services to our customers. The percentage of our total revenue derived from services for the nine months ended October 31, 2009 and 2008 was 30% and 23%, respectively, and was 24% in fiscal 2009 and 19% in each of fiscal 2008 and 2007.
Cost of Revenue and Gross Profit
     Cost of product revenue consists primarily of amounts paid to our contract manufacturers, in connection with the procurement of hardware components and assembly of those components into our appliance systems. Neither we nor our contract manufacturers enter into long-term supply contracts for our hardware components, which can cause our cost of product revenue to fluctuate. These product costs are recorded when the related product revenue is

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recognized. Cost of revenue also includes shipping, warehousing and logistics expenses, warranty reserves and inventory write-downs to write down the carrying value of inventory to the lower of cost or market. Shipping, warehousing, logistics costs and inventory write-downs are recognized as incurred. Estimated warranty costs are recorded when the related product revenue is recognized.
     Cost of services revenue consists primarily of salaries and employee benefits for our support staff and worldwide installation and technical account management teams and amounts paid to third parties to provide on-site hardware service.
     Our gross profit has been and will continue to be affected by a variety of factors, including the relative mix of product versus services revenue; our mix of direct versus indirect sales (as sales through our indirect channels may have lower average selling prices and gross profit); and changes in the average selling prices of our products and services, which can be adversely affected by competitive pressures. Additional factors affecting gross profit include the timing of new product introductions, which may reduce demand for our existing product as customers await the arrival of new products and could also result in additional reserves against older product inventory; cost reductions through redesign of existing products; and the cost of our systems hardware. The data warehouse market is highly competitive and we expect this competition to intensify in the future, especially as we move into additional vertical industries. If our market share in such industries increases, we expect pricing pressure to increase, which will reduce product gross margins.
     If our customer base continues to grow, it will be necessary for us to continue to make significant upfront investments in our customer service and support infrastructure to support this growth. The rate at which we add new customers will affect the level of these upfront investments. The timing of these additional expenditures could materially affect our cost of revenue, both in absolute dollars and as a percentage of total revenue, in any particular period. This could cause downward pressure on gross margins.
Operating Expenses
     Operating expenses consist of sales and marketing, research and development, and general and administrative expenses. Personnel-related costs are the most significant component of each of these expense categories. Our headcount increased to 408 employees at October 31, 2009 from 381 employees at January 31, 2009.
Sales and Marketing Expenses
     Sales and marketing expenses consist primarily of salaries and employee benefits, sales commissions, marketing program expenses and shared overhead and fringe costs, which consist primarily of allocated facilities expenses and allocated corporate employee benefits. We plan to continue to invest in sales and marketing by increasing the number of our sales personnel worldwide, expanding our domestic and international sales and marketing activities, and further building brand awareness. Accordingly, we expect sales and marketing expenses to continue to increase in total dollars although we expect these expenses to decrease as a percentage of total revenue. Generally, sales personnel are not immediately productive and thus sales and marketing expenses related to new sales hires are not immediately accompanied by higher revenue. Hiring additional sales personnel may reduce short-term operating margins until the sales personnel become productive and generate revenue. Accordingly, the timing of hiring sales personnel and the rate at which they become productive will affect our future performance.
Research and Development Expenses
     Research and development expenses consist primarily of salaries and employee benefits, product prototype expenses, shared overhead and fringe costs, which consist primarily of allocated facilities expenses and allocated corporate employee benefits, and depreciation of equipment used in research and development activities. In addition to our U.S. development teams, we use an offshore development team employed by a contract engineering firm in Pune, India. Research and development expenses are recorded as incurred. We devote substantial resources to the development of additional functionality for existing products and the development of new products. We intend to continue to invest significantly in our research and development efforts because we believe they are essential to maintaining and increasing our competitive position. The timing of these additional investments could materially affect our research and development expenses, both in absolute dollars and as a percentage of total revenue, in any particular period.

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General and Administrative Expenses
     General and administrative expenses consist primarily of salaries and employee benefits, shared overhead and fringe costs, which consist primarily of allocated facilities expenses and allocated corporate employee benefits, fees for professional services such as legal, accounting and compliance, investor relation expenses and insurance premiums, including premiums related to director and officer insurance. We expect general and administrative expenses to continue to increase in total dollars and to increase slightly as a percentage of revenue in fiscal 2010 as we continue to invest in infrastructure to support continued growth.
Other
Interest Income and Interest Expense
     Interest income and interest expense primarily consists of interest income on investments and cash balances and interest expense associated with other long-term liabilities. In addition, interest income includes realized gains and losses on marketable securities.
Other Income (Expense), Net
     Other income (expense), net primarily consists of losses or gains on translation of non-U.S. dollar transactions into U.S. dollars, changes in the fair value of foreign currency forward contracts, changes in the fair value of the auction rate securities put right, unrealized losses or gains on trading securities, gains on bargain purchase resulting from acquisitions and losses or gains on disposal of fixed assets.
Critical Accounting Policies and Use of Estimates
     Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, which we refer to as GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that can affect the reported amounts of assets and liabilities as of the dates of the consolidated financial statements, the disclosure of contingencies as of the dates of the consolidated financial statements, and the reported amounts of revenue and expenses during the periods presented. We evaluate these estimates, judgments and assumptions on an ongoing basis. Although we believe that our estimates, judgments and assumptions are reasonable under the circumstances, actual results may differ from those estimates.
     We believe that of our significant accounting policies, the following accounting policies involve the most judgment and complexity:
    revenue recognition;
 
    stock-based compensation;
 
    inventory valuation;
 
    accounting for income taxes;
 
    valuation of investments; and
 
    valuation of goodwill and acquired intangible assets.
     Accordingly, we believe the policies set forth above are the most critical to aid in fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected. Additional information about these critical accounting policies may be found in the “Managements Discussion and Analysis of Financial Condition and Results of Operations” section included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009. The critical accounting policies described in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 have not materially changed.

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Results of Operations
     The following table sets forth our consolidated results of operations for the periods shown.
                                                 
    Three Months Ended October 31,     Nine Months Ended October 31,     Percentage Change  
    2009     2008     2009     2008     Three Months Ended     Nine Months Ended  
    (in thousands)     (in thousands)     October 31,     October 31,  
Revenue
                                               
Product
  $ 33,342     $ 38,941     $ 96,013     $ 105,401       (14 )%     (9 )%
Services
    14,393       11,638       41,023       31,789       24 %     29 %
 
                                       
Total revenue
    47,735       50,579       137,036       137,190       (6 )%     0 %
 
                                       
 
                                               
Cost of revenue
                                               
Product
    12,302       15,783       35,769       42,382       (22 )%     (16 )%
Services
    3,572       3,549       10,467       8,541       1 %     23 %
 
                                       
Total cost of revenue
    15,874       19,332       46,236       50,923       (18 )%     (9 )%
 
                                       
 
                                               
Gross margin
    31,861       31,247       90,800       86,267       2 %     5 %
 
                                               
Operating expenses
                                               
Sales and marketing
    16,777       14,883       47,182       43,505       13 %     8 %
Research and development
    10,068       8,406       30,985       23,668       20 %     31 %
General and administrative
    3,872       3,985       11,822       10,767       (3 )%     10 %
 
                                       
Total operating expenses
    30,717       27,274       89,989       77,940       13 %     15 %
 
                                       
 
                                               
Operating income
    1,144       3,973       811       8,327       (71 )%     (90 )%
Interest income
    164       845       671       3,625       (81 )%     (81 )%
Interest expense
    24       16       74       16       50 %     363 %
Other income (expense), net
    (8 )     (36 )     370       (256 )     (78 )%     (245 )%
 
                                       
Income before income tax expense
    1,276       4,766       1,778       11,680                  
Income tax expense
    426       1,302       435       2,943                  
 
                                       
Net income
  $ 850     $ 3,464     $ 1,343     $ 8,737                  
 
                                       
Revenue
     Total revenue was $47.7 million and $50.6 million in the three months ended October 31, 2009 and 2008, respectively, representing a decrease of 6%. Total revenue was $137.0 million and $137.2 million in the nine months ended October 31, 2009 and 2008, respectively, representing a decrease of less than 1%.
     Product revenue was $33.3 million and $38.9 million for the three months ended October 31, 2009 and 2008, respectively, representing a decrease of 14%. This decrease was primarily the result of decreased sales volume to existing customers and reflected the overall macroeconomic conditions during the quarter. Product revenue related to existing customer sales decreased to 42% of total product revenue from 60% in the three months ended October 31, 2008. The number of new customers added in the three months ended October 31, 2009, was 11, bringing our total installed base of customers to 316. Product revenue related to new customers increased by $3.8 million in the three months ended October 31, 2009, representing 58% of total product revenue from 40% of total product revenue in the three months ended October 31, 2008. Geographically, 87% of our product revenue was from customers in the United States and 13% was from international customers for the three months ended October 31, 2009, as compared to 93% of our product revenue from customers in the United States and 7% from international customers for the three months ended October 31, 2008.
     Product revenue was $96.0 million and $105.4 million for the nine months ended October 31, 2009 and 2008, respectively, representing a decrease of 9%. This decrease was primarily the result of decreased sales volume to both new and existing customers and reflected the overall macroeconomic conditions during the period. We added 45 new customers during the nine months ended October 31, 2009 compared to 66 new customers during the nine months ended October 31, 2008. Product revenue related to new customers decreased by $4.1 million in the nine months ended October 31, 2009, representing 53% of total product revenue from 52% of total product revenue in the nine months ended October 31, 2008. Product revenue related to existing customer sales decreased by $5.3 million in the nine months ended October 31, 2009, to 47% of total product revenue from 48% in the nine months ended October 31, 2008. Geographically, 83% of our product revenue was from customers in the United States and 17% was from international customers for the nine months ended October 31, 2009, as compared to 79% of our product

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revenue from customers in the United States and 21% from international customers for the nine months ended October 31, 2008.
     Services revenue was $14.4 million and $11.6 million for the three months ended October 31, 2009 and 2008, respectively, representing an increase of 24%. Services revenue was $41.0 million and $31.8 million for the nine months ended October 31, 2009 and 2008, respectively, representing an increase of 29%. This increase for the fiscal year 2010 periods was the result of maintenance and support services for an expanding installed customer base as a result of new product sales during the period, and accompanying sales of new maintenance and support contracts, combined with the renewal of maintenance and support contracts by existing customers. All of our customers to date have purchased first-year annual maintenance and support services and substantially all of our customers renewed their maintenance and support agreements.
Gross Margin
     Total gross margin was 67% and 62% for the three months ended October 31, 2009 and 2008, respectively and 66% and 63% for the nine months ended October 31, 2009 and 2008, respectively. These increases in gross margin were the result of increases in both product gross margin and services gross margin, but are not necessarily sustainable or indicative of any future trends.
     Product gross margin was 63% and 59% for the three months ended October 31, 2009 and 2008, respectively and 63% and 60% for the nine months ended October 31, 2009 and 2008, respectively. These increases for the fiscal year 2010 periods were due primarily to a reduction in the cost of our hardware components, including components for our new appliances, partially offset by an increase in inventory write-downs. Product gross margin was also impacted favorably by sales of previously fully reserved systems not initially anticipated to be saleable inventory due to the timing of our new product introduction, which increased our margin by 2% in both the three and nine months ended October 31, 2009.
     Services gross margin was 75% and 70% for the three months ended October 31, 2009 and 2008, respectively and 75% and 73% for the nine months ended October 31, 2009 and 2008, respectively. The increase in the services gross margin for the three and nine months ended October 31, 2009 was primarily due to increased productivity resulting from improvement in economies of scale.
Sales and Marketing Expenses
     Sales and marketing expenses increased $1.9 million, or 13%, to $16.8 million for the three months ended October 31, 2009 from $14.9 million for the three months ended October 31, 2008. As a percentage of revenue, sales and marketing expenses were 35% and 29% for the three months ended October 31, 2009 and 2008, respectively. The increase in sales and marketing expenses of $1.9 million for the three months ended October 31, 2009 was primarily due to increases of $0.8 million in marketing programs primarily related to our TwinFin appliance, $0.3 million in salaries and employee benefits due to additional headcount, $0.2 million in stock-based compensation expense and$0.2 million in partner referral fees.
     Sales and marketing expenses increased $3.7 million, or 8%, to $47.2 million for the nine months ended October 31, 2009 from $43.5 million for the nine months ended October 31, 2008. As a percentage of revenue, sales and marketing expenses were 34% and 32% for the nine months ended October 31, 2009 and 2008, respectively. The increase in sales and marketing expenses of $3.7 million for the nine months ended October 31, 2009 was primarily due to increases of $2.8 million in salaries and employee benefits due to additional headcount, $1.2 million in marketing programs primarily related to our new generation TwinFin appliance, $0.6 million in stock-based compensation expense, $0.5 million in shared overhead and fringe costs, and $0.3 million in depreciation and amortization expense. These increases were partially offset by a decrease of $1.1 million in sales commissions and $0.6 million in partner referral fees as a result of the decrease in product revenue during the period.
     The number of sales and marketing employees increased to 151 at October 31, 2009, from 142 at October 31, 2008, as we continue to expand our sales force to provide better geographic distribution and market penetration.

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Research and Development Expenses
     Research and development expenses increased $1.7 million, or 20%, to $10.1 million for the three months ended October 31, 2009 from $8.4 million for the three months ended October 31, 2008. As a percentage of revenue, research and development expenses were 21% and 17% for the three months ended October 31, 2009 and 2008, respectively. The increase in research and development expenses of $1.7 million for the three months ended October 31, 2009 was due primarily to increases of $1.2 million in salaries and employee benefits due to additional headcount hired primarily for development of our TwinFin appliance, $0.3 million in depreciation expense, $0.3 million in shared overhead and fringe costs, $0.2 million in stock-based compensation expense and $0.2 million in office rent and office costs, partially offset by a decrease of $0.5 million in prototype expense that resulted from the completion of the initial phase of development of our TwinFin appliance.
     Research and development expenses increased $7.3 million, or 31%, to $31.0 million for the nine months ended October 31, 2009 from $23.7 million for the nine months ended October 31, 2008. As a percentage of revenue, research and development expenses were 23% and 17% for the nine months ended October 31, 2009 and 2008, respectively, primarily as a result of investment in new product development. The increase in research and development expenses of $7.3 million for the nine months ended October 31, 2009 was due primarily to increases of $3.9 million in salaries and employee benefits due to additional headcount, $1.7 million in prototype expense relating to product development for our TwinFin appliance, $0.7 million in shared overhead and fringe costs, $0.7 million in depreciation expense and $0.5 million in stock-based compensation expense, partially offset by a decrease of $0.3 million in offshore consulting costs.
     The number of research and development employees increased to 168 at October 31, 2009 from 110 at October 31, 2008. These investments help us broaden and improve the development of new technology and product enhancements, including the development of our TwinFin appliance. The development team from our contract engineering firm in India also increased to 70 at October 31, 2009 from 67 at October 31, 2008, in order to take advantage of the cost efficiencies associated with offshore research and development resources.
General and Administrative Expenses
     General and administrative expenses decreased $0.1 million, or 3%, to $3.9 million for the three months ended October 31, 2009 from $4.0 million for the three months ended October 31, 2008. As a percentage of revenue, general and administrative expenses were 8% for both the three months ended October 31, 2009 and 2008. The decrease in general and administrative expenses of $0.1 million for the three months ended October 31, 2009 was due primarily to decreases of $0.2 million in salaries and employee benefits and $0.2 million in shared overhead and fringe costs, partially offset by increases of $0.1 million in stock-based compensation expense, $0.1 million in tax consulting, legal, insurance and other consulting costs and $0.1 million in office rent and office costs.
     General and administrative expenses increased $1.0 million, or 10%, to $11.8 million for the nine months ended October 31, 2009 from $10.8 million for the nine months ended October 31, 2008. As a percentage of revenue, general and administrative expenses were 9% and 8% for the nine months ended October 31, 2009 and 2008, respectively. The increase in general and administrative expenses of $1.0 million for the nine months ended October 31, 2009 was due primarily to increases of $0.7 million in tax consulting, legal, insurance and other consulting costs, $0.6 million in salaries and employee benefits, $0.4 million in stock-based compensation expense, $0.2 million in costs associated with an acquisition, $0.2 million in depreciation expense and $0.2 million in office rent and office costs, partially offset by a decrease of $1.2 million in shared overhead and fringe costs.
     The number of general and administrative employees was 31 at October 31, 2009 and 41 at October 31, 2008, and may change from time to time to ensure that we have appropriate infrastructure to support the growth of our organization and to support the demands of public company compliance.
Interest Income and Interest Expense
     We recorded $0.1 million of interest income, net, for the three months ended October 31, 2009 as compared to $0.8 million for the three months ended October 31, 2008. Interest income, net, for the three months ended October 31, 2009 was comprised of interest income of $0.2 million and interest expense of approximately $24,000. Interest income, net, for the three months ended October 31, 2008 was comprised of interest income of $0.8 million and interest expense of $0. Interest income decreased $0.7 million in the three months ended October 31, 2009 as

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compared to the three months ended October 31, 2008, primarily due to lower rates of return on our cash, cash equivalents and investments primarily invested in money market funds and auction rate securities.
     We recorded $0.6 million of interest income, net, for the nine months ended October 31, 2009 as compared to $3.6 million for the nine months ended October 31, 2008. Interest income, net, for the nine months ended October 31, 2009 was comprised of interest income of $0.7 million and interest expense of approximately $74,000. Interest income, net, for the nine months ended October 31, 2008 was comprised of interest income of $3.6 million and interest expense of $0. Interest income decreased $2.9 million in the nine months ended October 31, 2009 as compared to the nine months ended October 31, 2008, primarily due to lower rates of return on our cash, cash equivalents and investments primarily invested in money market funds and auction rate securities.
Other Income (Expense), Net
     We incurred other expense, net, of approximately $8,000 for the three months ended October 31, 2009 as compared to other expense, net, of approximately $36,000 for the three months ended October 31, 2008. The components of other expense, net, for the three months ended October 31, 2009 were a loss on the change in fair value of our auction rate security put right, gains on trading securities, transaction losses for activities in our foreign subsidiaries and losses associated with changes in the fair value of foreign currency forward contracts. The components of other expense, net in the three months ended October 31, 2008 were transaction losses for activities in our foreign subsidiaries and losses associated with changes in the fair value of foreign currency forward contracts.
     We incurred other income, net, of approximately $370,000 for the nine months ended October 31, 2009 as compared to other expense, net, of approximately $256,000 for the nine months ended October 31, 2008. The components of other income, net, for the nine months ended October 31, 2009 were a gain on bargain purchase resulting from an acquisition, gains on trading securities, transaction gains for activities in our foreign subsidiaries, gains associated with changes in the fair value of foreign currency forward contracts and a loss on the change in fair value of our auction rate security put right. The components of other expense, net in the nine months ended October 31, 2008 were transaction losses for activities in our foreign subsidiaries and losses associated with changes in the fair value of foreign currency forward contracts, and a gain on disposal of fixed assets.
Provision for Income Taxes
     We recorded an income tax expense of approximately $0.4 million for the three months ended October 31, 2009, as compared to an income tax expense of approximately $1.3 million for the three months ended October 31, 2008. We recorded an income tax expense of approximately $0.4 million for the nine months ended October 31, 2009, as compared to an income tax expense of approximately $2.9 million for the nine months ended October 31, 2008.
     For the three months ended October 31, 2009, our effective tax rate was 33.4%, compared to an effective tax rate of 27.3% for the three months ended October 31, 2008. For the three months ended October 31, 2009, our effective income tax rate varied from the statutory tax rate of 35%, mainly due to the effects of accounting for share-based compensation, the utilization of federal tax credits and the effects of purchase accounting from our acquisition of Tizor Systems, Inc. Our effective tax rate for the three months ended October 31, 2009 varied from the same period of 2008, primarily due to the reversal of our full valuation allowance recorded against our deferred tax assets in the fourth quarter of 2009.
     For the nine months ended October 31, 2009, our effective tax rate was 24.5%, compared to an effective tax rate of 25.2% for the nine months ended October 31, 2008. For the nine months ended October 31, 2009, our effective income tax rate varied from the statutory tax rate of 35%, mainly due to the effects of accounting for share-based compensation, the utilization of federal tax credits and effects of purchase accounting from our acquisition of Tizor Systems, Inc. Our effective tax rate for the nine months ended October 31, 2009 varied from the same period of 2008, primarily due to the reversal of our full valuation allowance recorded against our deferred tax assets in the fourth quarter of 2009.
     Our income tax expense for the three and nine months ended October 31, 2009 consisted of federal, state and foreign taxes owed on our income generated. Our income tax expense for the three and nine months ended October 31, 2008 consisted primarily of taxes owed in relation to the income generated by our foreign subsidiaries.

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The federal and state provision for that period included amounts in relation to our income generated in the United States, reduced by the utilization of available net operating loss, or NOL, carryforwards and tax credits that were recorded on the balance sheet with a full valuation allowance prior to their utilization.
     We currently expect our annual effective income tax rate, exclusive of discrete items, to be in the range of 28% to 32% for fiscal 2010.
Liquidity and Capital Resources
     As of October 31, 2009, our principal sources of liquidity were cash and cash equivalents of $70.4 million, short-term investments in U.S. treasury and government agency securities of $26.8 million and accounts receivable of $39.1 million.
     Since our inception, we have funded our operations using a combination of issuances of convertible preferred stock, which provided us with aggregate net proceeds of $73.3 million, cash collections from customers and a term loan credit facility and a revolving credit facility with Silicon Valley Bank. In July 2007, we raised $113.0 million of proceeds, net of underwriting discounts and expenses, in our initial public offering. In the future, we anticipate that our primary sources of liquidity will be cash generated from our operating activities.
     Our principal uses of cash historically have consisted of payroll and other operating expenses, repayments of borrowings, our acquisition of NuTech Solutions, Inc. in May 2008 and Tizor Systems, Inc. in February 2009, purchases of property and equipment primarily to support the development of new products, and purchases of inventory to support our sales and the volume of evaluation units located at customer locations that enable our customers and prospective customers to test our equipment prior to purchasing.
     At October 31, 2009, we held auction rate securities, or ARS, with a par value totaling $52.1 million. These ARS, most of which are AAA-rated bonds collateralized by federally guaranteed student loans, are long-term variable rate bonds tied to short-term interest rates that are reset through a “Dutch auction” process that typically occurs every 7 to 35 days. Historically, the carrying value (par value) of the ARS approximated fair market value due to the resetting of variable interest rates. Beginning in late February 2008, the auctions for ARS then held by us were unsuccessful. As a result, the interest rates on the investments reset to the maximum rate per the applicable investment offering statements. We will not be able to liquidate the affected ARS until a future auction on these investments is successful, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the securities mature. Due to these liquidity issues, we performed a discounted cash flow analysis to determine the estimated fair value of these investments. The discounted cash flow analysis performed by us considered the timing of expected future successful auctions, the impact of extended periods of maximum interest rates, collateralization of underlying security investments and the creditworthiness of the issuer. The discounted cash flow analysis at October 31, 2009 assumes a discount rate of 2.33%, expected term of three years and an illiquidity discount of 1.5-1.8%. The discount rate was determined using a proxy based upon the current market rates for successful auctions within the AAA-rated ARS market. The expected term was based on management’s estimate of future liquidity. The illiquidity discount was based on the levels of federal insurance or FFELP backing for each security, with a greater percentage of FFELP backing resulting in a lower illiquidity discount. As a result, we have estimated as of October 31, 2009, an aggregate loss of $2.8 million, of which $1.7 million was related to the impairment of ARS deemed to be temporary and included in accumulated other comprehensive income (loss) within stockholders’ equity and of which $1.1 million was related to impairment of ARS classified as trading securities and included in other income (expense), net in the condensed consolidated statement of operations.
     If we had used a term of one year or five years and a discount rate of 1.44% and 3.37% respectively, the gross unrealized loss would have been $0.6 million or $6.3 million, respectively. If we had used a term of three years and a discount rate of 1.44% or 3.37% the gross unrealized loss would have been $1.5 million or $4.3 million, respectively. If we had used a term of three years and illiquidity discounts of 1.0% or 2.0%, the gross unrealized loss would have been $2.1 million or $3.5 million, respectively. Based on our ability to access our cash and short-term investments and our expected cash flows, we do not anticipate the current lack of liquidity for these ARS will have a material impact on our ability to operate our business.

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          The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods:
                 
    Nine Months Ended October 31,
    2009   2008
    (in thousands)
Net cash provided by (used) in operating activities
  $ (8,677 )   $ 31,061  
Net cash provided by (used in) investing activities
    (34,812 )     25,303  
Net cash provided by financing activities
    1,750       2,579  
     Cash Provided by (Used in) Operating Activities
     Net cash used in operating activities was $8.7 million for the nine months ended October 31, 2009 and primarily consisted of a decrease in deferred revenues of $13.6 million, an increase in inventory of $5.4 million, primarily due to increased production of TwinFin inventory, and an increase in accounts receivable of $4.6 million, primarily due to the timing of billing and collections of customer invoices. These uses of cash were partially offset by an increase in accounts payable of $2.4 million. In addition, for the nine months ended October 31, 2009, we had stock-based compensation expense of $7.2 million and depreciation and amortization expense of $5.6 million, each of which is a non-cash expense.
     Net cash provided by operating activities was $31.1 million for the nine months ended October 31, 2008 and primarily consisted of an increase in deferred revenues of $14.3 million primarily due to increased deferred maintenance revenue which was a result of additional product sales, net income of $8.7 million, a decrease in inventory of $5.9 million, an increase in accounts payable of $2.6 million, and an increase in accrued expenses and accrued compensation and benefits of $1.6 million. These sources of cash were partially offset by an increase in accounts receivable of $10.8 million primarily due to the timing of billing and collections of customer invoices, and an increase in other assets of $0.6 million. In addition, in the nine months ended October 31, 2008 we had stock-based compensation of $5.7 million and depreciation and amortization of $3.6 million, each of which is a non-cash expense.
     Cash Provided by (Used in) Investing Activities
     Net cash used in investing activities was $34.8 million for the nine months ended October 31, 2009, comprised primarily of purchases of short-term and long-term U.S. treasury and government agency securities of $32.2 million, $2.2 million of capital expenditures related primarily to new product development and $2.0 million, net of cash acquired, used to acquire Tizor Systems, Inc. These uses of cash were partially offset by $2.1 million of sales and maturities of our investments.
     Net cash provided by investing activities was $25.3 million for the nine months ended October 31, 2008, which primarily consisted of $43.9 million of sales, redemptions and maturities of our investments. These proceeds were partially offset by $7.4 million used to purchase our investments, $6.2 million used to acquire NuTech Solutions, Inc., $2.6 million of capital expenditures, and $2.3 million used to purchase other assets.
     Cash Provided by Financing Activities
     Net cash provided by financing activities was $1.8 million and $2.6 million for the nine months ended October 31, 2009 and 2008, respectively, each of which consisted of proceeds received from the issuance of common stock upon the exercise of stock options.

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     Contractual Obligations
     The following is a summary of our contractual obligations as of October 31, 2009:
                                         
            Less than                   More than
Contractual Obligations   Total   1 Year   1 - 3 Years   3 - 5 Years   5 Years
    (in thousands)
Operating lease obligations
    11,730       2,654       4,184       3,522       1,370  
Purchase obligations (1)
    17,045       17,045                    
Other long-term obligations including current portion of long-term obligations
    1,000       1,000                    
 
(1)   Purchase obligations primarily represent the value of purchase orders issued to our contract manufacturers for the procurement of assembled appliance systems for the next three months.
     The table above does not reflect unrecognized tax benefits of $3.9 million, the timing of which is uncertain.
          We believe that our cash and cash equivalents of $70.4 million and our short-term marketable securities of $41.3 million, both as of October 31, 2009, will be sufficient to fund our projected operating requirements for at least the next twelve months. Our future operating requirements will depend on many factors, including the rate of revenue growth and the expansion of our sales and marketing and product development activities. However, to the extent that our cash and cash equivalents and our cash flow from operating activities are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or a secondary public offering.
     Off-Balance Sheet Arrangements
     We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules, such as relationships with unconsolidated entities or financial partnerships, which are often referred to as structured finance or special purpose entities, established for the purpose of facilitating financing transactions that do not have to be reflected on our balance sheet.
     Recent Accounting Pronouncements
     In February 2009, we adopted the authoritative guidance for the fair value measurement of all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. This adoption did not have a material impact on our consolidated financial statements.
     In February 2009, we adopted an amendment to the accounting and disclosure requirements for unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid). Under this amendment, these awards are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, a company is required to retrospectively adjust its earnings per share data (including any amounts related to interim periods, summaries of earnings and selected financial data). The adoption did not have a material impact on our consolidated financial statements.
     In February 2009, an amendment to the accounting and disclosure requirements for business combinations became effective for us. This amendment significantly changes the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, in process research and development and restructuring costs. In addition, under this statement, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. Our acquisition of Tizor Systems, Inc. in February 2009 (see Note 5) was accounted for under this amendment. This amendment may have a material impact on our consolidated financial statements if or when we enter into future business combinations.
     In February 2009, a statement that changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity, became effective for us. This new consolidation method significantly changes the accounting for transactions with minority interest holders. As of October 31, 2009, we did not have any minority interests.

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     In June 2009, we adopted pronouncements that require disclosures about fair value of financial instruments in interim as well as in annual financial statements. The adoption of these pronouncements did not have a material impact on our consolidated financial statements.
     In June 2009, a pronouncement that provides guidelines for making fair value measurements became effective for us. The pronouncement provides additional authoritative guidance in determining whether a market is active or inactive and whether a transaction is distressed, is applicable to all assets and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures. The pronouncement did not have a material impact on our consolidated financial statements.
     In June 2009, amendments to the accounting and disclosure requirements for other-than-temporary impairment for debt and equity securities became effective for us. These amendments did not have a material impact on our consolidated financial statements.
     In June 2009, the Financial Accounting Standards Board, or FASB, issued the FASB Accounting Standards Codification, or the Codification. The Codification is the single source for all authoritative GAAP recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The Codification does not change GAAP and will not have an effect on our financial position, results of operations or liquidity.
     In October 2009, the FASB issued an accounting standard for multiple-deliverable revenue arrangements, which amends previously issued guidance to require an entity to use an estimated selling price when vendor-specific objective evidence or acceptable third-party evidence does not exist for any products or services included in a multiple element arrangement. The arrangement consideration should be allocated among the products and services based upon their relative selling prices, thus eliminating the use of the residual method of allocation. This standard also requires expanded qualitative and quantitative disclosures regarding significant judgments made and changes in applying this guidance. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. We are currently evaluating the impact of adopting the provisions of this standard.
     In October 2009, the FASB issued an accounting standard for certain revenue arrangements that include software elements. This standard amends previously issued guidance to exclude tangible products containing software components and non-software components that function together to deliver the product’s essential functionality. Entities that sell joint hardware and software products that meet this scope exception will be required to follow the guidance for multiple-deliverable revenue arrangements. This standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption and retrospective application are also permitted. We are currently evaluating the impact of adopting the provisions of this standard.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
     Foreign Currency Risk
          Our international sales and marketing operations incur expenses that are denominated in foreign currencies. These expenses could be materially affected by currency fluctuations. Our exposures are to fluctuations in exchange rates for the U.S. dollar versus the British pound, Australian dollar, the euro, the Canadian dollar, the Polish zloty, the Korean won and the Japanese yen. Changes in currency exchange rates could adversely affect our consolidated results of operations or financial position. Additionally, our international sales and marketing operations maintain cash balances denominated in foreign currencies. In order to decrease the inherent risk associated with translation of foreign cash balances into our reporting currency, we have not maintained excess cash balances in foreign currencies. As of October 31, 2009, we had $5.8 million of cash in foreign accounts. We enter into derivative transactions, specifically foreign currency forward contracts, to manage our exposure to fluctuations in foreign exchange rates that arise, primarily from our foreign currency-denominated receivables and payables. The contracts are in British pounds, Australian dollars, Japanese yen and euros, typically have maturities of one month and require an exchange of foreign currencies for U.S. dollars at maturity of the contracts at rates agreed to at inception of the contracts. We do not enter into or hold derivatives for trading or speculative purposes. Generally, we do not designate foreign currency forward contracts as hedges for accounting purposes, and changes in the fair value of

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these instruments are recognized immediately in current earnings. Because we enter into forward contracts only as an economic hedge, any gain or loss on the underlying foreign-denominated balance would be offset by the loss or gain on the forward contract. Gains and losses on forward contracts and foreign denominated receivables and payables are included in other income (expense), net.
          At October 31, 2009, we had outstanding foreign currency forward contracts with an aggregate notional value of $9.8 million, denominated in British pounds, Australian dollars, euros and Japanese yen. The mark-to-market effect associated with these contracts was a net unrealized loss of approximately $113,000 at October 31, 2009. Net realized gains and losses associated with exchange rate fluctuations on forward contracts and the underlying foreign currency exposure being hedged were immaterial for all periods presented.
     Interest Rate Risk
          We had an unrestricted cash and cash equivalents balance of $70.4 million at October 31, 2009, which was held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.
          Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We place our investments with high quality issuers and, by policy, limit the amount of risk by investing primarily in money market funds, high-quality corporate obligations and certificates of deposit.
          At October 31, 2009, we held ARS with a par value of $52.1 million that have experienced failed auctions, which has prevented us from liquidating those investments. As a result, we have classified these investments as long-term assets in our consolidated balance sheet as of October 31, 2009. On November 7, 2008, we accepted an offer from UBS AG (“UBS”), one of our brokers, which provided us with rights to sell UBS $15.8 million of our ARS investments at par, which were purchased through UBS, at any time during a two-year period beginning June 30, 2010. As a result of accepting this offer, we have classified our ARS position with UBS, totaling $15.7 million at October 31, 2009, as short-term assets in our consolidated balance sheet. We have recorded a gross unrealized loss of $2.8 million related to the impairment of our entire ARS position. See Note 3 to the accompanying financial statements for a description of how we value these ARS and the UBS offer. Our valuation of the ARS is sensitive to market conditions and management’s judgment and could change significantly based on the assumptions used. If we had used a term of one year or five years and a discount rate of 1.44% and 3.37% respectively, the gross unrealized loss would have been $0.6 million or $6.3 million, respectively. If we had used a term of three years and a discount rate of 1.44% or 3.37% the gross unrealized loss would have been $1.5 million or $4.3 million, respectively. If we had used a term of three years and illiquidity discounts of 1.0% or 2.0%, the gross unrealized loss would have been $2.1 million or $3.5 million, respectively. Based on our ability to access our cash and short-term investments and our expected cash flows, we do not anticipate the current lack of liquidity on these ARS will have a material impact on our ability to operate our business.
Item 4.   Controls and Procedures
     Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of October 31, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of October 31, 2009, our chief executive officer and chief financial officer

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concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
     No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended October 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A.   Risk Factors
There are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the these factors, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. These risks are not the only ones facing us. Please also see “Cautionary Statement” in Part I, Item 2 of this Quarterly Report on Form 10-Q. The following discussion highlights certain risks which may affect future operating results. These are the risks and uncertainties we believe are most important for our existing and potential stockholders to consider. Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer.
Risks Related to Our Business and Industry
Adverse changes in economic conditions and reduced information technology spending may continue to negatively impact our business.
     Our business depends on the overall demand for information technology and on the economic health of our current and prospective customers and the geographic regions in which we operate. In addition, the purchase of our products is often discretionary and may involve a significant commitment of capital and other resources. Over the past year, there has been a significant deterioration in economic conditions in many of the countries and regions in which we do business. These economic conditions have caused some of our current or prospective customers to reduce their information technology spending, causing them to modify, delay or cancel plans to purchase our products. If our customers continue to reduce their information technology spending, or otherwise modify, delay or cancel plans to purchase our products, our operating results will be adversely affected.
We have a history of losses, and we may not maintain profitability in the future.
     We have been profitable for the last two fiscal years, generating net income of $31.5 million in fiscal 2009 and $2.0 million in fiscal 2008, but we had not been profitable in any prior fiscal period. Although we reported net income of $1.3 million for the nine months ended October 31, 2009, we experienced a net loss of $0.2 million for the first quarter of fiscal 2010. As of October 31, 2009, our accumulated deficit was $46.3 million. We expect to make significant additional expenditures to facilitate the expansion of our business, including expenditures in the areas of sales, research and development, and customer service and support. Furthermore, we may encounter unforeseen issues that require us to incur additional costs. As a result of these increased expenditures, we will have to generate and sustain increased revenue to maintain profitability. Accordingly, we may not be able to maintain profitability and we may incur significant losses in the future.
Our operating results may fluctuate significantly from quarter to quarter and may fall below expectations in any particular fiscal quarter, which could adversely affect the market price of our common stock.
     Our operating results are difficult to predict and may fluctuate from quarter to quarter due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. If

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our revenue or operating results fall below the expectations of investors or any securities analysts that follow our company in any period, the price of our common stock would likely decline.
     In addition to other risk factors listed in this “Risk Factors” section, factors that may cause our operating results to fluctuate include:
    the impact of the recent economic downturn on customer purchases;
 
    the impact of new competitors or new competitive offerings;
 
    the typical recording of a significant portion of our quarterly sales in the final month of the quarter, whereby small delays in completion of sales transactions could have a significant impact on our operating results for that quarter;
 
    the relatively high average selling price of our products and our dependence on a limited number of customers for a substantial portion of our revenue in any quarterly period, whereby the loss of or delay in a customer order could significantly reduce our revenue for that quarter; for instance, one customer accounted for 16% of our total revenues during fiscal 2009 and our ten largest customers accounted for approximately 39% of our revenues in fiscal 2009;
 
    the possibility of seasonality in demand for our products;
 
    the addition of new customers or the loss of existing customers;
 
    the rates at which customers purchase additional products or additional capacity for existing products from us;
 
    changes in the mix of products and services sold;
 
    the rates at which customers renew their maintenance and support contracts with us;
 
    our ability to enhance our products with new and better functionality that meet customer requirements;
 
    the timing of recognizing revenue as a result of revenue recognition rules, including due to the timing of delivery and receipt of our products;
 
    the length of our product sales cycle;
 
    the productivity and growth of our sales force;
 
    service interruptions with any of our single source suppliers or manufacturing partners;
 
    changes in pricing by us or our competitors, or the need to provide discounts to win business;
 
    the timing of our product releases or upgrades or similar announcements by us or our competitors;
 
    the timing of investments in research and development related to new product releases or upgrades;
 
    our ability to control costs, including operating expenses and the costs of the components used in our products;
 
    volatility in our stock price, which may lead to higher stock compensation expenses ;
 
    future accounting pronouncements and changes in accounting policies;
 
    costs related to the acquisition and integration of companies, assets or technologies;
 
    technology and intellectual property issues associated with our products; and
 
    general economic trends, including changes in information technology spending or geopolitical events such as war or incidents of terrorism.
     Most of our operating expenses do not vary directly with revenue and are difficult to adjust in the short term. As a result, if revenue for a particular quarter is below our expectations, we could not proportionately reduce operating expenses for that quarter, and therefore this revenue shortfall would have a disproportionate effect on our expected operating results for that quarter.
Our limited operating history and the rapid development of the data warehouse market make it difficult to evaluate our current business and future prospects, and may increase the risk of your investment.
     Our company has only been in existence since August 2000. We first began shipping products in February 2003 and much of our growth has occurred in the past five fiscal years. Our limited operating history and the rapid development of the data warehouse market in which we operate makes it difficult to evaluate our current business and our future prospects. As a result, we cannot be certain that we will sustain our growth or maintain profitability. We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly-evolving industries. These risks include the need to:
    attract new customers and maintain current customer relationships;

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    continue to develop and upgrade our data warehouse solutions;
 
    respond quickly and effectively to competitive pressures;
 
    offer competitive pricing or provide discounts to customers in order to win business;
 
    manage our expanding operations, including internationally;
 
    maintain adequate control over our expenses;
 
    maintain adequate internal controls and procedures;
 
    maintain our reputation, build trust with our customers and further establish our brand; and
 
    identify, attract, retain and motivate qualified personnel.
     If we fail to successfully address these needs, our business, operating results and financial condition may be adversely affected.
We depend on a single product family, our data warehouse appliance family, for nearly all of our revenue, so we are particularly vulnerable to any factors adversely affecting the sale of that product family.
     Nearly all of our revenue is derived from sales and service of our data warehouse appliance product family, and we expect that this product family will account for substantially all of our revenue for the foreseeable future. If the data warehouse market declines or our data warehouse appliance products fail to maintain or achieve greater market acceptance, we will not be able to grow our revenues sufficiently to maintain profitability.
If our new data warehouse appliance, the TwinFin™ appliance, does not achieve widespread market acceptance, our operating results will suffer.
          In August 2009, we announced the general availability of our next generation TwinFin appliance, which is the first in a family of new blade server-based appliances. We expect that sales of our new family of blade server-based data warehouse appliances, of which the TwinFin appliance is the first member, will generate the substantial majority of our anticipated product revenues in the fourth quarter of fiscal 2010 and in fiscal 2011. Our future sales and operating results will depend, to a significant extent, on the successful deployment and marketing of the TwinFin appliance. In order to achieve market penetration for the TwinFin appliance, we may be required to incur additional expenses in marketing and sales in advance of the realization of expected sales. There can be no assurance that the TwinFin appliance will achieve widespread acceptance in the market. If we incur delays in the manufacture and shipment of the TwinFin appliance or customer testing and verification takes longer than anticipated, or the TwinFin appliance does not achieve our planned levels of sales or the TwinFin appliance does not achieve performance specifications, our operating results will suffer and our competitive position could be impaired.
If we lose key personnel, or if we are unable to attract and retain highly-qualified personnel on a cost-effective basis, it will be more difficult for us to manage our business and to identify and pursue growth opportunities.
     Our success depends substantially on the performance of our key senior management, technical, and sales and marketing personnel. Each of our employees may terminate his or her relationship with us at any time and the loss of the services of such persons could have an adverse effect on our business.
     There may be departures of our key management personnel from time to time and our continued success will depend on our ability to attract or develop highly qualified managerial personnel and fully integrate them into our business, which may be time-consuming and may result in additional disruptions to our operations. In addition, our success depends in significant part on our ability to develop and enhance our products, which requires talented hardware and software engineers with specialized skills, and on our ability to maintain and grow an effective sales force. We experience intense competition for highly qualified managerial, technical, and sales and marketing personnel and we cannot ensure that we will be able to successfully attract, assimilate, or retain such personnel in the future.

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If we are unable to develop and introduce new products and enhancements to existing products, if our new products and enhancements to existing products do not achieve market acceptance, or if we fail to manage product transitions, we may fail to increase, or may lose, market share.
     The market for our products is characterized by rapid technological change, frequent new product introductions and evolving industry standards. Our future growth depends on our successful development and introduction of new products, such as our recently announced TwinFin appliance, and enhancements to existing products that achieve acceptance in the market. Due to the complexity of our products, which include integrated hardware and software components, any new products and product enhancements would be subject to significant technical risks that could impact our ability to introduce those products and enhancements in a timely manner. In addition, such new products or product enhancements may not achieve market acceptance despite our expending significant resources to develop them. If we are unable, for technological or other reasons, to develop, introduce and enhance our products in a timely manner in response to changing market conditions or evolving customer requirements, or if these new products and product enhancements do not achieve market acceptance due to competitive or other factors, our operating results and financial condition could be adversely affected.
     Product introductions and certain enhancements of existing products by us in future periods may also reduce demand for our existing products or could delay purchases by customers awaiting arrival of our new products. As new or enhanced products are introduced, we must successfully manage the transition from older products in order to minimize disruption in customers’ ordering patterns, avoid excessive levels of older product inventories and ensure that sufficient supplies of new products can be delivered in a timely manner to meet customer demand.
We face intense and growing competition from leading technology companies as well as from emerging companies. Our inability to compete effectively with any or all of these competitors could impact our ability to achieve our anticipated market penetration and achieve or sustain profitability.
     The data warehouse market is highly competitive and we expect competition to intensify in the future. This competition may make it more difficult for us to sell our products, and may result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results and financial condition.
     Currently, our most significant competition includes companies which typically sell several if not all elements of a data warehouse environment as individual products, including database software, servers, storage and professional services. These competitors are often leaders in many of these segments including EMC Corporation, Hewlett-Packard Company, IBM, Oracle, Sun Microsystems, Inc., Sybase, Inc. and Teradata Corporation. In addition, a large number of fast growing companies have recently entered the market, many of them selling integrated appliance offerings similar to our products. Additionally, as the benefits of an appliance solution have become evident in the marketplace, many of our competitors have also begun to bundle their products into appliance-like offerings that more directly compete with our products. We also expect additional competition in the future from new and existing companies with whom we do not currently compete directly. As our industry evolves, our current and potential competitors may establish cooperative relationships among themselves or with third parties, including software and hardware companies with whom we have partnerships and whose products interoperate with our own, that could acquire significant market share, which could adversely affect our business. We also face competition from internally developed systems. Any of these competitive threats, alone or in combination with others, could seriously harm our business, operating results and financial condition.
     Many of our competitors have greater market presence, longer operating histories, stronger name recognition, larger customer bases and significantly greater financial, technical, sales and marketing, manufacturing, distribution and other resources than we have. In addition, many of our competitors have broader product and service offerings than we do. These companies may attempt to use their greater resources to better position themselves in the data warehouse market including by pricing their products at a discount or bundling them with other products and services in an attempt to rapidly gain market share. Moreover, many of our competitors have more extensive customer and partner relationships than we do, and may therefore be in a better position to identify and respond to market developments or changes in customer demands. Potential customers may also prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. We cannot assure you that we will be able to compete successfully against existing or new competitors.
     In addition, some of our traditional competitors have introduced their own integrated data warehousing solutions which may cause our sales cycles to be delayed and may have an adverse impact on our business, operating results and financial condition.

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Our success depends on the continued recognition of the need for business intelligence in the marketplace and on the adoption by our customers of data warehouse appliances, often as replacements for existing systems, to enable business intelligence. If we fail to improve our products to further drive this market migration as well as to successfully compete with alternative approaches and products, our business would suffer.
     Due to the innovative nature of our products and the new approaches to business intelligence that our products enable, purchases of our products often involve the adoption of new methods of database access and utilization on the part of our customers. This may entail the acknowledgement of the benefits conferred by business intelligence and the customer-wide adoption of business intelligence analysis that makes the benefits of our system particularly relevant. Business intelligence solutions are still in their early stages of growth and their continued adoption and growth in the marketplace remain uncertain. Additionally, our appliance approach requires our customers to run their data warehouses in new and innovative ways and often requires our customers to replace their existing equipment and supplier relationships, which they may be unwilling to do, especially in light of the often critical nature of the components and systems involved and the significant capital and other resources they may have previously invested. Furthermore, purchases of our products involve material changes to established purchasing patterns and policies. Even if prospective customers recognize the need for our products, they may not select our data warehouse appliance solutions because they choose to wait for the introduction of products and technologies that serve as a replacement or substitute for, or represent an improvement over, our data warehouse appliance solutions. Therefore, our future success also depends on our ability to maintain our leadership position in the data warehouse market and to proactively address the needs of the market and our customers to further drive the adoption of business intelligence and to sustain our competitive advantage versus competing approaches to business intelligence and alternate product offerings.
Claims that we infringe or otherwise misuse the intellectual property of others could subject us to significant liability and disrupt our business, which could have a material adverse effect on our business and operating results.
     Our competitors protect their intellectual property rights by means such as trade secrets, patents, copyrights and trademarks. We have not conducted an independent review of patents issued to third parties. Although we have not been involved in any litigation related to intellectual property rights of others, from time to time we receive letters from other parties alleging, or inquiring about, breaches of their intellectual property rights. We may in the future be sued for violations of other parties’ intellectual property rights, and the risk of such a lawsuit will likely increase as our size and the number and scope of our products increase, as our geographic presence and market share expand and as the number of competitors in our market increases. Any such claims or litigation could:
    be time-consuming and expensive to defend, whether meritorious or not;
 
    cause shipment delays;
 
    divert the attention of our technical and managerial resources;
 
    require us to enter into royalty or licensing agreements with third parties, which may not be available on terms that we deem acceptable, if at all;
 
    prevent us from operating all or a portion of our business or force us to redesign our products, which could be difficult and expensive and may degrade the performance of our products;
 
    subject us to significant liability for damages or result in significant settlement payments; and/or
 
    require us to indemnify our customers, distribution partners or suppliers.
     Any of the foregoing could disrupt our business and have a material adverse effect on our operating results and financial condition.
Our products must interoperate with our customers’ information technology infrastructure, including customers’ software applications, networks, servers and data-access protocols, and if our products do not do so successfully, we may experience a weakening demand for our products.
     To be competitive in the market, our products must interoperate with our customers’ information technology infrastructure, including software applications, network infrastructure and servers supplied by a variety of other vendors, many of whom are competitors of ours. Our products currently interoperate with a number of business intelligence and data-integration applications provided by vendors including IBM and Oracle, among others. When new or updated versions of these software applications are introduced, we must sometimes develop updated versions

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of our software that may require assistance from these vendors to ensure that our products effectively interoperate with these applications. If these vendors do not provide us with assistance on a timely basis, or decide not to work with us for competitive or other reasons, including due to consolidation with our competitors, we may be unable to ensure such interoperability. Additionally, our products interoperate with servers, network infrastructure and software applications predominantly through the use of data-access protocols. While many of these protocols are created and maintained by independent standards organizations, some of these protocols that exist today or that may be created in the future are, or could be, proprietary technology and therefore require licensing the proprietary protocol’s specifications from a third party or implementing the protocol without specifications. Our development efforts to provide interoperability with our customers’ information technology infrastructures require substantial capital investment and the devotion of substantial employee resources. We may not accomplish these development efforts quickly, cost-effectively or at all. If we fail for any reason to maintain interoperability, we may experience a weakening in demand for our products, which would adversely affect our business, operating results and financial condition.
If we fail to enhance our brand, our ability to expand our customer base will be impaired and our operating results may suffer.
     We believe that developing and maintaining awareness of the Netezza brand is critical to achieving widespread acceptance of our products and is an important element in attracting new customers and shortening our sales cycle. We expect the importance of brand recognition to increase as competition further develops in our market. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and our ability to provide customers with reliable and technically sophisticated products at competitive prices. If customers do not perceive our products and services to be of high value, our brand and reputation could be harmed, which could adversely impact our financial results. Despite our best efforts, our brand promotion efforts may not yield increased revenue sufficient to offset the additional expenses incurred in our brand-building efforts.
We may not receive significant revenues from our current research and development efforts for several years, if at all.
     Investment in product development often involves a long payback cycle. We have made and expect to continue making significant investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years, if at all.
Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense, which contribute to the unpredictability and variability of our financial performance and may adversely affect our profitability.
     The timing of our revenue is difficult to predict as we experience extended sales cycles, due in part to our need to educate our customers about our products and participate in extended product evaluations and the high purchase price of our products. In addition, product purchases are often subject to a variety of customer considerations that may extend the length of our sales cycle, including customers’ acceptance of our approach to data warehouse management and their willingness to replace their existing solutions and supplier relationships, timing of their budget cycles and approval processes, budget constraints, extended negotiations, and administrative, processing and other delays, including those due to general economic factors. As a result, our sales cycle extends to more than nine months in some cases and it is difficult to predict when or if a sale to a potential customer will occur. Furthermore, the introduction of new products, such as the recent introduction of our TwinFin appliance, may further extend the length of our sales cycle because of additional customer testing, verification and acceptance criteria for the new product. All of these factors can contribute to fluctuations in our quarterly financial performance and increase the likelihood that our operating results in a particular quarter will fall below investor expectations. In addition, the provision of evaluation units to customers may require significant investment in inventory in advance of sales of these units, which sales may not ultimately transpire. If we are unsuccessful in closing sales after expending significant resources, or if we experience delays for any of the reasons discussed above, our future revenues and operating expenses may be materially adversely affected.

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Our company has grown rapidly and we may be unable to manage our growth effectively.
     Between January 31, 2005 and October 31, 2009, the number of our employees increased from 140 to 408 and our installed base of customers grew from 15 to 316. In addition, during that time period our number of office locations has increased from 3 to 18. We anticipate that further expansion of our organization and operations will be required to achieve our growth targets. Our rapid growth has placed, and is expected to continue to place, a significant strain on our management and operational infrastructure. Our failure to continue to enhance our management personnel and policies and our operational and financial systems and controls in response to our growth could result in operating inefficiencies that could impair our competitive position and would increase our costs more than we had planned. If we are unable to manage our growth effectively, our business, our reputation and our operating results and financial condition will be adversely affected.
Our ability to sell to U.S. federal government agencies is subject to evolving laws and policies that could have a material adverse effect on our growth prospects and operating results, and our contracts with the U.S. federal government may impose requirements that are unfavorable to us.
     In the nine months ended October 31, 2009, and the fiscal years ended January 31, 2009 and 2008, we derived approximately 14%, 3% and 3%, respectively, of our revenue from sales made by resellers and various integrators to U.S. federal government agencies, and which amount may increase substantially in future periods. The demand for data warehouse products and services by federal government agencies may be affected by laws and policies that might restrict agencies’ collection, processing, and sharing of certain categories of information. Our ability to profitably sell products to government agencies is also subject to changes in agency funding priorities and contracting procedures and our ability to comply with applicable government regulations and other requirements.
     The restrictions on federal government data management include, for example, the Privacy Act, which requires agencies to publicize their collection and use of personal data and implement procedures to provide individuals with access to that information; the Federal Information Security Management Act, which requires agencies to develop comprehensive data privacy and security measures that may increase the cost of maintaining certain data; and the E-government Act, which requires agencies to conduct privacy assessments before acquiring certain information technology products or services and before initiating the collection of personal information or the aggregation of existing databases of personal information. These restrictions, any future restrictions, and public or political pressure to constrain the government’s collection and processing of personal information may adversely affect the government’s demand for our products and services and could have a material adverse effect on our growth prospects and operating results.
     Federal agency funding for information technology programs is subject to annual appropriations established by Congress and spending plans adopted by individual agencies. Accordingly, government purchasing commitments normally last no longer than one year. The amounts of available funding in any year may be reduced to reflect budgetary constraints, economic conditions, or competing priorities for federal funding. Constraints on federal funding for information technology could harm our ability to sell products to government agencies, causing fluctuations in our revenues from this segment from period to period and resulting in a weakening of our growth prospects, operating results and financial condition.
     Our contracts with government agencies may subject us to certain risks and give the government rights and remedies not typically found in commercial contracts, including rights that allow the government to, for example:
    terminate contracts for convenience at any time without cause;
 
    obtain detailed cost or pricing information;
 
    receive “most favored customer” pricing;
 
    perform routine audits;
 
    impose equal employment and hiring standards;
 
    require products to be manufactured in specified countries;
 
    restrict non-U.S. ownership or investment in our company; and
 
    pursue administrative, civil or criminal remedies for contractual violations.
     Moreover, some of our contracts allow the government to use, or permit others to use, patented inventions that we developed under those contracts, and to place conditions on our right to retain title to such inventions. Likewise, some of our government contracts allow the government to use or disclose software or technical data that we

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develop or deliver under the contract without constraining subsequent uses of those data. Third parties authorized by the government to use our patents, software and technical data may emerge as alternative sources for the products and services we offer to the government and may enable the government to negotiate lower prices for our products and services. If we fail to assert available protections for our patents, software, and technical data, our ability to control the use of our intellectual property may be compromised, which may benefit our competitors, reduce the prices we can obtain for our products and services, and harm our financial condition.
Our international operations are subject to additional risks that we do not face in the United States, which could have an adverse effect on our operating results.
     In the nine months ended October 31, 2009, and the fiscal years ended January 31, 2009 and 2008, we derived approximately 20%, 26% and 20%, respectively, of our revenue from customers based outside the United States, and we currently have sales personnel in ten different foreign countries. We expect our revenue and operations outside the United States will expand in the future. Our international operations are subject to a variety of risks that we do not face in the United States, including:
    difficulties in staffing and managing our foreign offices and the increased travel, infrastructure and legal and compliance costs associated with multiple international locations;
 
    general economic conditions in the countries in which we operate, including seasonal reductions in business activity in the summer months in Europe, during Lunar New Year in parts of Asia and in other periods in various individual countries;
 
    longer payment cycles for sales in foreign countries and difficulties in enforcing contracts and collecting accounts receivable;
 
    additional withholding taxes or other taxes on our foreign income, and tariffs or other restrictions on foreign trade or investment;
 
    imposition of, or unexpected adverse changes in, foreign laws or regulatory requirements, many of which differ from those in the United States;
 
    increased length of time for shipping and acceptance of our products;
 
    difficulties in repatriating overseas earnings;
 
    increased exposure to foreign currency exchange rate risk;
 
    tariffs and trade barriers, import/export controls, and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;
 
    reduced protection for intellectual property rights in some countries;
 
    costs and delays associated with developing products in multiple languages; and
 
    political unrest, war, incidents of terrorism, or responses to such events.
     Our overall success in international markets depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be successful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business. Our failure to manage these risks successfully could harm our international operations, reduce our international sales and increase our costs, thus adversely affecting our business, operating results and financial condition.
Our future revenue growth will depend in part on our ability to further develop our indirect sales channel, and our inability to effectively do so will impair our ability to grow our revenues.
     Our future revenue growth will depend in part on the continued development of our indirect sales channel to complement our direct sales force. Our indirect sales channel includes resellers, systems integration firms and analytic service providers. In the nine months ended October 31, 2009, and the fiscal years ended January 31, 2009 and 2008, we derived approximately 15%, 21% and 14%, respectively, of our revenue from our indirect sales channel. We plan to continue to invest in our indirect sales channel by expanding upon and developing new relationships with resellers, systems integration firms and analytic service providers. While the development of our indirect sales channel is a priority for us, we cannot predict the extent to which we will be able to attract and retain financially stable, motivated indirect channel partners. Additionally, due in part to the complexity and innovative nature of our products, our channel partners may not be successful in marketing and selling our products. Our indirect sales channel may be adversely affected by disruptions in relationships between our channel partners and their customers, as well as by competition between our channel partners or between our channel partners and our

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direct sales force. In addition our reputation could suffer as a result of the conduct and manner of marketing and sales by our channel partners. Our agreements with our channel partners are generally not exclusive and may be terminated without cause. If we fail to effectively develop and manage our indirect channel for any of these reasons, we may have difficulty attaining our growth targets.
Our ability to sell our products and retain customers is highly dependent on the quality of our maintenance and support services offerings, and our failure to offer high-quality maintenance and support could have a material adverse effect on our operating results.
     Most of our customers purchase maintenance and support services from us, which represents a significant portion of our revenue (approximately 30% of our revenue for the nine months ended October 31, 2009, 24% of our revenue in the fiscal year ended January 31, 2009 and 19% of our revenue in the fiscal year ended January 31, 2008). Customer satisfaction with our maintenance and support services is critical for the successful marketing and sale of our products and the success of our business. In addition to our support staff and installation and technical account management teams, we have developed service relationships with third parties to provide on-site hardware service to our customers. Although we believe these third parties and any other third-party service provider we utilize in the future will offer a high level of service consistent with our internal customer support services, we cannot assure you that they will continue to devote the resources necessary to provide our customers with effective technical support. In addition, if we are unable to renew our service agreements with these third parties we utilize in the future or such agreements are terminated, we may be unable to establish alternative relationships on a timely basis or on terms acceptable to us, if at all. If we or our service partners are unable to provide effective maintenance and support services, it could adversely affect our ability to sell our products and harm our reputation with current and potential customers.
Our products are highly technical and may contain undetected software or hardware defects, which could cause data unavailability, loss or corruption that might result in liability to our customers and harm to our reputation and business.
     Our products are highly technical and complex and are often used to store and manage data critical to our customers’ business operations. Our products may contain undetected errors, defects or security vulnerabilities that could result in data unavailability, loss or corruption or other harm to our customers. Some errors in our products may only be discovered after the products have been installed and used by customers. Any errors, defects or security vulnerabilities discovered in our products after commercial release or that are caused by another vendor’s products with which we interoperate but are nevertheless attributed to us by our customers, as well as any computer virus or human error on the part of our customer support or other personnel, that result in a customer’s data being misappropriated, unavailable, lost or corrupted could have significant adverse consequences, including:
    loss of customers;
 
    negative publicity and damage to our reputation;
 
    diversion of our engineering, customer service and other resources;
 
    increased service and warranty costs; and
 
    loss or delay in revenue or market acceptance of our products.
     Any of these events could adversely affect our business, operating results and financial condition. In addition, there is a possibility that we could face claims for product liability, tort or breach of warranty, including claims from both our customers and our distribution partners. The cost of defending such a lawsuit, regardless of its merit, could be substantial and could divert management’s attention from ongoing operations of the company. In addition, if our business liability insurance coverage proves inadequate with respect to a claim or future coverage is unavailable on acceptable terms or at all we may be liable for payment of substantial damages. Any or all of these potential consequences could have an adverse impact on our operating results and financial condition.
It is difficult to predict our future capital needs and we may be unable to obtain additional financing that we may need, which could have a material adverse effect on our business, operating results and financial condition.
     We believe that our current balance of cash, cash equivalents and investments, together with cash expected to be generated from operations, will be sufficient to fund our projected operating requirements, including anticipated capital expenditures, for at least the next twelve months. However, we may need to raise additional funds if we are presented with unforeseen circumstances or opportunities in order to, among other things:

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    develop or enhance our products;
 
    support additional capital expenditures;
 
    respond to competitive pressures;
 
    fund operating losses in future periods; or
 
    take advantage of acquisition or expansion opportunities.
     Any required additional financing may not be available on terms acceptable to us, or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest, and the newly issued securities may have rights senior to those of the holders of our common stock. 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, which would harm our profitability. Holders of debt would also have rights, preferences or privileges senior to those of holders of our common stock.
A substantial portion of our marketable securities is invested in highly rated auction rate securities. Failures in these auctions may affect our liquidity.
     A substantial percentage of our marketable securities portfolio is invested in highly rated auction rate securities collateralized by student loans with the majority of such collateral being guaranteed by the United States government. Auction rate securities are securities that are structured to allow for short-term interest rate resets but with contractual maturities that can be well in excess of ten years. At the end of each reset period, which typically occurs every 7 to 35 days, investors can sell or continue to hold the securities at par. Beginning in late February 2008, due to market conditions, the auction process for our auction rate securities failed. Such failures resulted in the interest rate on these investments resetting to predetermined rates in accordance with their underlying loan agreements which are, in some instances, lower than the current market rate of interest. In the event we need to liquidate our investments in these types of securities, we will not be able to do so until a future auction on these investments is successful, the issuer redeems the outstanding securities, a buyer is found outside the auction process, the securities mature, or there is a default requiring immediate repayment from the issuer. In the future, should the auction rate securities we hold be subject to additional auction failures and/or we determine that the decline in value of auction rate securities are other than temporary, we would recognize a loss in our consolidated statement of operations, which could be material. In addition, any future failed auctions may adversely impact the liquidity of our investments. Furthermore, if one or more issuers of the auction rate securities held in our portfolio are unable to successfully close future auctions and their credit ratings deteriorate, we may be required to adjust the carrying value of these investments through an impairment charge, which could be material.
     Due to our inability to sell these securities at auction since late February 2008, on November 7, 2008, we accepted an offer from UBS AG, an investment broker through which we hold par value $15.7 million of auction rate securities, that grants us the right to sell to UBS $15.7 million of our total $52.1 million auction rate securities position, at par, at any time during a two-year period beginning June 30, 2010, which we refer to as the put right. Nevertheless, the put right only provides us with the opportunity to liquidate a portion of our auction rate securities position and to the extent we are not able to liquidate the remainder of our auction rate securities, our lack of access to the underlying value of such securities could have a material impact on our income and results in operations.
If we are unable to protect our intellectual property rights, our competitive position could be harmed or we could be required to incur significant expenses to enforce our rights.
     Our success is dependent in part on obtaining, maintaining and enforcing our intellectual property and other proprietary rights. We rely on a combination of trade secret, patent, copyright and trademark laws and contractual provisions with employees and third parties, all of which offer only limited protection. Despite our efforts to protect our intellectual property and proprietary information, we may not be successful in doing so, for several reasons. We cannot be certain that our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims. Even if patents are issued to us, they may be contested, or our competitors may be able to develop similar or superior technologies without infringing our patents.
     Although we enter into confidentiality, assignments of proprietary rights and license agreements, as appropriate, with our employees and third parties, including our contract engineering firm, and generally control access to and distribution of our technologies, documentation and other proprietary information, we cannot be certain that the

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steps we take to prevent unauthorized use of our intellectual property rights are sufficient to prevent their misappropriation, particularly in foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States.
     Even in those instances where we have determined that another party is breaching our intellectual property and other proprietary rights, enforcing our legal rights with respect to such breach may be expensive and difficult. We may need to engage in litigation to enforce or defend our intellectual property and other proprietary rights, which could result in substantial costs and diversion of management resources. Further, many of our current and potential competitors are substantially larger than we are and have the ability to dedicate substantially greater resources to defending any claims by us that they have breached our intellectual property rights.
Our products may be subject to open source licenses, which may restrict how we use or distribute our solutions or require that we release the source code of certain technologies subject to those licenses.
     Some of our proprietary technologies incorporate open source software. For example, the open source database drivers that we use may be subject to an open source license. The GNU General Public License and other open source licenses typically require that source code subject to the license be released or made available to the public. Such open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. We take steps to ensure that our proprietary software is not combined with, or does not incorporate, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted the open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to uncertainty. If these licenses were to be interpreted in a manner different than we interpret them, we may find ourselves in violation of such licenses. While our customer contracts prohibit the use of our technology in any way that would cause it to violate an open source license, our customers could, in violation of our agreement, use our technology in a manner prohibited by an open source license.
     In addition, we rely on multiple software engineers to design our proprietary products and technologies. Although we take steps to ensure that our engineers do not include open source software in the products and technologies they design, we may not exercise complete control over the development efforts of our engineers and we cannot be certain that they have not incorporated open source software into our proprietary technologies. In the event that portions of our proprietary technology are determined to be subject to an open source license, we might be required to publicly release the affected portions of our source code, which could reduce or eliminate our ability to commercialize our products.
As part of our business strategy, we engage in acquisitions, which could disrupt our business, cause dilution to our stockholders, reduce our financial resources and result in increased expenses.
     We acquired NuTech Solutions, Inc. in May 2008 and Tizor Systems, Inc. in February 2009 (see Note 5 to our accompanying financial statements). In the future, we may acquire additional companies, assets or technologies in an effort to complement our existing offerings or enhance our market position. Any acquisitions we make could subject us to a number of risks, including:
    the purchase price we pay could significantly deplete our cash reserves, impair our future operating flexibility or result in dilution to our existing stockholders;
 
    we may find that the acquired company, assets or technology do not further improve our financial and strategic position as planned;
 
    we may find that we overpaid for the company, asset or technology, or that the economic conditions underlying our acquisition have changed;
 
    we may have difficulty integrating the operations and personnel of the acquired company;
 
    we may have difficulty retaining the employees with the technical skills needed to enhance and provide services with respect to the acquired assets or technologies;
 
    the acquisition may be viewed negatively by customers, financial markets or investors;
 
    we may have difficulty incorporating the acquired technologies or products with our existing product lines;
 
    we may encounter difficulty entering and competing in new product or geographic markets;
 
    we may encounter a competitive response, including price competition or intellectual property litigation;

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    we may have product liability, customer liability or intellectual property liability associated with the sale of the acquired company’s products;
 
    we may be subject to litigation by terminated employees or third parties;
 
    we may incur debt, one-time write-offs, such as acquired in-process research and development costs, and restructuring charges;
 
    we may acquire goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges;
 
    our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; and
 
    our due diligence process may fail to identify significant existing issues with the target company’s product quality, product architecture, financial disclosures, accounting practices, internal controls, legal contingencies, intellectual property and other matters.
     These factors could have a material adverse effect on our business, operating results and financial condition.
     In addition, from time to time we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as substantial out-of-pocket costs, any of which could have a material adverse effect on our business, operating results and financial condition.
We are subject to governmental export controls that could impair our ability to compete in international markets.
     Our products are subject to U.S. export control laws and regulations and their distribution outside the United States may be subject to export licensing or the conditions of a regulatory exception to an export licensing requirement. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers’ ability to deploy our products in those countries. The introduction of new products, such as our new TwinFin appliance, changes in our products or changes in export regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their global systems or, in some cases, prevent the export of our products to certain countries altogether. Any change in export regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. It may be costly to implement systems and procedures to comply with these restrictions, and we may incur penalties, including limits on foreign distribution, for any transactions that we conduct in violation of these regulations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, operating results and financial condition.
We rely on contract manufacturers to assemble our products, and our failure to manage our relationship with our contract manufacturers successfully could negatively impact our ability to sell our products.
     We currently rely on a single contract manufacturer to assemble our Netezza Performance Server, or NPS products, manage our NPS product supply chain and participate in negotiations regarding NPS component costs and we rely on a different contract manufacturer to assemble our new TwinFin appliance, manage our TwinFin appliance supply chain and participate in negotiations regarding TwinFin appliance costs. While we believe that our use of these contract manufacturers provides benefits to our business, our reliance on them reduces our control over the assembly process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. These risks could become more acute if we are successful in our efforts to increase revenue. If we fail to manage our relationships with these contract manufacturers effectively, or if the contract manufacturers experience delays, disruptions, capacity constraints or quality control problems in its operations, our ability to ship products to our customers could be impaired and our competitive position and reputation could be harmed. In addition, we are required to provide forecasts to the contract manufacturers regarding product demand and production levels. If we inaccurately forecast demand for our products, we may have excess or inadequate inventory or incur cancellation charges or penalties, which could adversely impact our operating results and financial condition.

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     Additionally, the contract manufacturer for our NPS products can terminate our agreement for any reason upon 90 days’ notice or for cause upon 30 days’ notice, and the contract manufacturer for our TwinFin appliance can terminate our agreement for any reason upon 60 days’ notice. If we are required to change contract manufacturers or assume internal manufacturing operations due to any termination of the agreements with our contract manufacturers, we may lose revenue, experience manufacturing delays, incur increased costs or otherwise damage our customer relationships. We cannot guarantee that we will be able to establish alternative manufacturing relationships on acceptable terms or at all.
We depend on a continued supply of components for our products from third-party suppliers, and if shortages of these components arise, we may not be able to secure enough components to build new products to meet customer demand or we may be forced to pay higher prices for these components.
     We rely on a limited number of suppliers for several key components utilized in the assembly of our products, including disk drives and microprocessors. Although in many cases we use standard components for our products, some of these components may only be purchased or may only be available from a single supplier. In addition, we maintain relatively low inventory and acquire components only as needed, and neither we nor our contract manufacturers enter into long-term supply contracts for these components and none of our third-party suppliers is obligated to supply products to us for any specific period or in any specific quantities, except as may be provided in a particular purchase order. Our industry has experienced component shortages and delivery delays in the past, and we may experience shortages or delays of critical components in the future as a result of strong demand in the industry or other factors. If shortages or delays arise, we may be unable to ship our products to our customers on time, or at all, and increased costs for these components that we could not pass on to our customers would negatively impact our operating margins. For example, new generations of disk drives are often in short supply, which may limit our ability to procure these disk drives. In addition, disk drives represent a significant portion of our cost of revenue, and the price of various kinds of disk drives is subject to substantial volatility in the market. Many of the other components required to build our systems are also occasionally in short supply. Therefore, we may not be able to secure enough components at reasonable prices or of acceptable quality to build new products, resulting in an inability to meet customer demand or our own operating goals, which could adversely affect our customer relationships, business, operating results and financial condition.
We currently rely on a contract engineering firm for quality assurance and product integration engineering.
     In addition to our internal research and development staff, we have contracted with Persistent Systems Pvt. Ltd. located in Pune, India, to employ a dedicated team of over 72 engineers focused on certain aspects of our product development. Persistent Systems can terminate our agreement for any reason upon 15 days’ notice. If we were required to change our contract engineering firm, including due to a termination of the agreement with Persistent Systems, we may experience delays, incur increased costs or otherwise damage our customer relationships. We cannot assure you that we will be able to establish an alternative contract engineering firm relationship on acceptable terms or at all.
Future interpretations of existing accounting standards could adversely affect our operating results.
     Generally Accepted Accounting Principles in the United States, or GAAP, are subject to interpretation by the Financial Accounting Standards Board, or FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC and various other bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported operating results, and they could affect the reporting of transactions completed before the announcement of a change. For example, the AICPA and the Emerging Issues Task Force continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements and arrangements for the sale of hardware products that contain more than an insignificant amount of software. Future interpretations of existing accounting standards or changes in our business practices could result in delays in our recognition of revenue that may have a material adverse effect on our operating results. For example, we may in the future have to defer recognition of revenue for a transaction that involves:
    undelivered elements for which we do not have vendor-specific objective evidence of fair value;

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    requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer; or
 
    material acceptance criteria.
     Because of these factors and other specific requirements under GAAP for recognition of software revenue, we must include specific terms in customer contracts in order to recognize revenue when we initially deliver products or perform services. Negotiation of such terms could extend our sales cycle, and, under some circumstances, we may accept terms and conditions that do not permit revenue recognition at the time of delivery.
If we fail to maintain an effective system of internal controls, we might not be able to report our financial results accurately or prevent fraud; in that case, our stockholders could lose confidence in our financial reporting, which could negatively impact the price of our stock.
     Effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. SEC rules require that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for the fiscal year ended January 31, 2009, we performed system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act and SEC rules. Our compliance with these rules will continue to require that we incur substantial expense and expend significant management time on compliance-related issues. Even if we conclude, and our independent registered public accounting firm concurs, that our internal control over financial reporting provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, because of its inherent limitations, internal control over financial reporting may not prevent or detect fraud or misstatements. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness in our internal control, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with these rules could subject us to a variety of administrative sanctions, including ineligibility for short form registration, action by the SEC, the suspension or delisting of our common stock from the NYSE and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price and could harm our business.
Risks Related to our Common Stock
The trading price of our common stock is likely to be volatile.
     The trading price of our common stock will be susceptible to fluctuations in the market due to numerous factors, many of which may be beyond our control, including:
    changes in operating performance and stock market valuations of other technology companies generally or those that sell data warehouse solutions in particular;
 
    actual or anticipated fluctuations in our operating results;
 
    the financial guidance that we may provide to the public, any changes in such guidance, or our failure to meet such guidance;
 
    changes in financial estimates by securities analysts, our failure to meet such estimates, or failure of analysts to initiate or maintain coverage of our stock;
 
    the public’s response to our press releases or other public announcements by us, including our filings with the SEC;
 
    announcements by us or our competitors of significant technical innovations, customer wins or losses, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
    introduction of technologies or product enhancements that reduce the need for our products;
 
    the loss of key personnel;
 
    the development and sustainability of an active trading market for our common stock;

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    lawsuits threatened or filed against us;
 
    future sales of our common stock by our officers or directors; and
 
    other events or factors affecting the economy generally, including those resulting from political unrest, war, incidents of terrorism or responses to such events.
     The trading price of our common stock might also decline in reaction to events that affect other companies in our industry even if these events do not directly affect us.
     Some companies that have had volatile market prices for their securities have had securities class actions filed against them. If a suit were filed against us, regardless of its merits or outcome, it would likely result in substantial costs and divert management’s attention and resources. This could have a material adverse effect on our business, operating results and financial condition.
If securities or industry analysts do not publish research or publish unfavorable research about our business, our stock price and trading volume could decline.
     The trading market for our common stock depends in part on any research reports that securities or industry analysts publish about us or our business. In the event securities or industry analysts cover our company and one or more of these analysts downgrade our stock or publish unfavorable reports about our business, our stock price would likely decline. In addition, if any securities or industry analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
Provisions in our certificate of incorporation and by-laws and Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, may negatively impact the trading price of our common stock.
     Provisions of our certificate of incorporation and our by-laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:
    establish a classified board of directors so that not all members of our board are elected at one time;
 
    provide that directors may only be removed “for cause;”
 
    authorize the issuance of “blank check” preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;
 
    eliminate the ability of our stockholders to call special meetings of stockholders;
 
    prohibit stockholder action by written consent, which has the effect of requiring all stockholder actions to be taken at a meeting of stockholders;
 
    provide that the board of directors is expressly authorized to make, alter or repeal our by-laws; and
 
    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
     In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us during a specified period unless certain approvals are obtained.
Insiders own a significant portion of our outstanding common stock and will therefore have substantial control over us and will be able to influence corporate matters.
     Our executive officers, directors and their affiliates beneficially own, in the aggregate, approximately 20% of our outstanding common stock. As a result, our executive officers, directors and their affiliates are able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing another party from acquiring control over us.

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Item 6.   Exhibits
See the Exhibit Index attached hereto following the signature page which is herein incorporated by reference.

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Netezza Corporation
(Registrant)
 
 
Date: December 9, 2009  By:   /s/ Patrick J. Scannell, Jr.    
    Patrick J. Scannell, Jr.   
    Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)   

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EXHIBIT INDEX
     
Exhibit No.   Description
 
   
31.1
  Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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