2. Subscription fees: revenues arising from agreements that provide for the ongoing delivery over a period of time of services, generally delivered over the Internet. Primary

subscription fee sources include fees charged for security, maintenance, back-up, recovery and device management services.

3. Service fees: revenues arising from agreements that provide for the delivery of professional engineering services. Primary service fee sources include software deployment, software support, software development and technical training.

Fiscal Year 2009 Second Quarter Overview The quarter ended March 31, 2009 represents the second quarter of the third year of the Company's execution of new strategic and operational plans developed by the Company's new management team, led by President and Chief Executive Officer Woody Hobbs. These plans, as discussed regularly by us in various public statements, called for restoring the Company's core business to positive cash flow within the first year and announcing major new products early in the second year. Having achieved these objectives, we informed investors in various public statements that we would now focus on building out industry partnerships to integrate our new products with the offerings of other hardware and software vendors and on expanding our research and development efforts to assist in these integration initiatives.
Our second quarter of fiscal year 2009 results were negatively affected by the recent crisis in domestic and international financial markets and the resulting dramatic slowdown in global economic activity. Among the effects of the crisis was a substantial reduction in the overall business conducted by our OEM and ODM customers that contribute the majority of our traditional CSS license business. Our revenues declined by $1.2 million, or 7%, during the current quarter as compared to those that we had reported for the corresponding quarter of our preceding fiscal year 2008. This reduction was largely driven by a decline in our traditional CSS license business partially offset by the growth in our new and emerging products and services. We believe that the decline in our revenues is a reflection of the continued slowdown of the global economy and the adverse effect of the global credit crisis on our customers. Specifically, we experienced a decline in our license revenue as a result of cautious spending by our large OEM and ODM customers, resellers and system integrators, which we believe to have reflected both reduced end user demand for personal computers (PC) and inventory reductions in the global PC supply chain.
In response to the challenging global economic environment, we announced two restructuring plans during the current quarter. In February 2009, a restructuring plan was approved to reduce expenses, eliminate overlapping functions and eliminate employees not meeting Company performance expectations. In March 2009, another restructuring plan was approved for the purpose of reducing future operating expenses by eliminating positions and closing the Company's facility in Tel Aviv, Israel. As a result of these restructuring activities, we reduced our global workforce by 96 employees, representing approximately 17% of our global workforce at December 31, 2008, although as stated below, these reductions were partially offset by other workforce additions during the quarter. We recorded approximately $1.0 million in charges associated with our restructuring plans during the second quarter of fiscal 2009.
While the longer term impacts of the current economic uncertainty are hard to predict, we remain committed to our product strategies, which are designed to enable us to exceed the growth rate of the PC industry in future periods. Our new product strategy has already begun to produce results as we started recognizing revenue from the sale of our FailSafe products and signed several new customer agreements related to both our HyperSpace and FailSafe products. During the current quarter, in January 2009, we also launched the consumer version of our HyperSpace products. Encouraged by the favorable reaction of our major customers to our PC 3.0 vision, which includes ease-of-use, virtualization and mobile data

security as key features, we continued to invest heavily during the current quarter in our new product initiatives and businesses despite the market slowdown. As a result of these investments and including the charges of $45.2 million associated with the impairment of goodwill and other long-lived assets, our total expenditure (including operating expenses and cost of revenues) for the current quarter increased by approximately $54.3 million, or 324%, as compared to the same period of the preceding fiscal year. During the first six months of fiscal year 2009, we used net cash of $14.0 million in operating activities as compared to positive net cash flow from operations of $13.4 million during the six months of fiscal year 2008.
During the current quarter ended March 31, 2009, based on a combination of factors, including the recent and rapid deterioration of global economic conditions, our operating results including the reduction in force discussed in Note 4 - Restructuring Charges, a substantial and sustained decline in our market capitalization and management's decisions to prioritize allocation of resources and to discontinue investments in certain products and services, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis and to also assess the impairment of other long-lived assets. Based on the analysis performed, we recorded an impairment charge of approximately $33.2 million for goodwill and $11.9 million with respect to other long-lived intangible assets during the quarter ended March 31, 2009. In addition, we recorded amortization on intangible assets, to the extent not considered impaired, amounting to $0.9 million. There were no such impairment or amortization charges recorded in the corresponding quarter of fiscal year 2008.
During the quarter ended March 31, 2009, we recorded stock compensation expense under SFAS No. 123(R) which included stock options granted to our four most senior executives as approved by the Company's stockholders on January 2, 2008 (the "Performance Options"). Total expense recognized in the quarter ended March 31, 2009 from the Performance Options was $1.0 million (Of this total, $0.7 million is classified as general and administrative expense, $0.2 million is classified as research and development expense and $0.1 million is classified as sales and marketing expense) as compared to $2.0 million recorded during the quarter ended March 31, 2008 (Of which $1.4 million was classified as general and administrative expense, $0.4 million was classified as research and development expense and $0.2 million was classified as sales and marketing expense.)
During the second quarter of fiscal year 2009, we executed additional significant long term volume purchase agreements ("VPAs") with several of our major customers. We consider these unbilled VPA commitments, along with deferred revenues, as order backlog. Our total order backlog at March 31, 2009 was $41.0 million, which represents a decrease of $7.0 million, or 15%, from $48.0 million at December 31, 2008 and a decrease of $13.8 million, or 34%, from $54.8 million at March 31, 2008. This decline principally related to the fact that during the December 2007 period, we had executed a number of VPA's with terms which extended for periods of up to 24 months. We expect that approximately 89% of our order backlog will be recognized as revenue within the next 12 months; however, uncertainties such as the timing of customer utilization of our products may impact the timing of recognition of these revenues.
Primarily as a result of restructuring activities carried out during the current quarter, we reduced our total workforce from 562 employees at December 31, 2008 to 518 employees at March 31, 2009. Our total workforce at the end of the current quarter is approximately 40% higher than our total workforce at March 31, 2008 of 371 employees due to active recruitment of additional personnel throughout calendar year 2008 and the additional personnel acquired from the three acquisitions completed in the second half of fiscal year 2008 partially offset by the restructuring adjustments described above.
Gross margins for the quarter ended March 31, 2009 were $0.3 million, a $ 14.9 million or 98% decrease, from gross margins of $15.3 million for the same period in fiscal year 2008. The overall decrease in gross margin resulted primarily from the amortization and impairment charges of purchased

intangible assets described above and partially from direct costs associated with subscription fees revenue. There were no subscription fee revenues or associated costs recorded during the quarter ended March 31, 2008. Further, gross margins related to license revenue declined to 98% in the quarter ended March 31, 2009 from 99% in the corresponding quarter of the previous fiscal year principally due to decrease in overall license revenues and the increased cost of intellectual property licensed from third parties and other personnel costs associated with servicing new product customers. The decline in gross margins associated with service fees revenues from 23% in the quarter ended March 31, 2008 to 19% in the quarter ended March 31, 2009 was principally due to higher headcount, which resulted in higher payroll and related benefit expenses.
Operating expenses for the quarter ended March 31, 2009 were $55.6 million, an increase of $40.6 million or 271%, from $15.0 million for the same period in fiscal year 2008. Of the $40.6 million increase, $33.2 million was due to the impairment charge for goodwill, $1.0 million was due to higher restructuring costs associated with the closure of the Company's facility in Tel Aviv, Israel and reduction of headcount by 96 employees, $3.2 million was due to higher salary and benefits, principally as a result of the increased headcount, $1.3 million was due to higher marketing costs primarily related to costs associated with the launch of new products, $0.6 million was due to higher consulting costs related mainly to the use of additional consultants for recruiting and new product development and $2.5 million was due to increased administration and other expenses (due in part to the three acquisitions completed in the second half of fiscal year 2008). The above increase was partially offset by $1.2 million decrease in stock based compensation expense due to ratable reduction in the charges associated with the Performance Options approved by the Company's stockholders on January 2, 2008.
During the second fiscal quarter of 2009, we earned higher interest and other income of $0.7 million and experienced a $1.0 million decrease in tax expense as compared to the same period in fiscal year 2008. Despite the reduction in net interest income by $0.6 million due to reduction in both interest rates and invested cash balances, the increase in interest and other income primarily resulted from $1.3 million change in net foreign exchange gains related mainly to appreciation of the New Taiwan Dollar to the U.S. Dollar. The decrease of $1.0 million in tax expense is related to a reduction in foreign tax accrual for Taiwan and the removal of the deferred tax liabilities associated with the impairment of goodwill.
We incurred a net loss of $55.1 million for the quarter ended March 31, 2009, compared to a net loss of $1.4 million for the same period in fiscal year 2008. As described above, this $53.8 million increase in net loss was principally the result of the $1.2 million reduction in revenue, a $13.7 million increase in cost of revenues, which was mainly due to the amortization and impairment of purchased intangible assets aggregating to $12.9 million, a $40.6 million increase in operating expenses, which was mainly due to the impairment of goodwill of $33.2 million, and a $0.7 million increase in interest and other income which was partially offset by a $1.0 million reduction in income tax expense.
Critical Accounting Policies and Estimates There have been no significant changes during the three months ended March 31, 2009 to the items that we disclosed as our critical accounting polices and estimates in our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2008, except as noted below:
Fair Value Accounting
Effective October 1, 2008 we adopted the provisions of the Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS No. 157") and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands fair value measurement disclosures. SFAS No. 157 defines fair value as the price that

would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date.
The fair value of our Level 1 financial assets, which represents our investments in money market funds, is based on quoted market prices of the identical underlying security in active markets. Determining fair value for Level 1 instruments generally does not require significant management judgment, and the estimation is not difficult. As of March 31, 2009, we did not have any Level 2 or Level 3 financial assets and liabilities. The adoption of SFAS No. 157 did not have a significant impact on our Condensed Consolidated Financial Statements, and the resulting fair values calculated under SFAS No. 157 after adoption were not different than the fair values that would have been calculated under previous accounting guidance.
SFAS No. 159 allows companies to choose to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. We did not make any elections for fair value accounting under SFAS No. 159 and accordingly, there was no impact on our Condensed Consolidated Financial Statements for the quarter ended March 31, 2009.
See Note 2 - Fair Values in the Notes to Condensed Consolidated Financial Statements for more information.
Goodwill and Other Long-Lived Assets
We account for business acquisitions in accordance with SFAS No. 141, "Business Combinations"(SFAS No. 141) and the subsequent accounting for goodwill and other long-lived assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142) and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques in the technology industry. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable tangible and intangible assets acquired less liabilities assumed. We review goodwill for impairment on an annual basis on September 30 and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The impairment analysis is performed at one level below the operating segment level as defined in SFAS No. 142.
In testing for a potential impairment of goodwill, we: (1) allocate goodwill to our various reporting units to which the acquired goodwill relates;
(2) estimate the fair value of our reporting units to which goodwill relates based on a combination of the income approach, which estimates the fair value of our reporting units based on future discounted cash flows, and the market approach, which estimates the fair value of our reporting units based on comparable market prices; and (3) determine the carrying value (book value) of those reporting units, as some of the assets and liabilities related to those reporting units, such as cash, are not held by those reporting units but by the corporate departments. Prior to this allocation of the assets to the reporting units, we are required to assess long-lived assets for impairment in accordance with SFAS No. 144. Furthermore, if the estimated fair value is less than the carrying value for a particular reporting unit, then we are required to estimate the fair value of all identifiable assets and liabilities of the reporting unit, in a manner similar to a purchase price allocation for an acquired business. Only after this process is completed is the amount of any goodwill impairment determined. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. In estimating the fair value of the reporting units with recognized goodwill for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of these reporting units, including estimated growth rates and assumptions about the economic environment. Although our cash flow forecasts are based on

assumptions that are consistent with the plans and estimates we are using to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units over their estimated remaining useful lives. We also consider our market capitalization on the date we perform the analysis.
SFAS No. 144 is the authoritative standard on the accounting for the impairment of other long-lived assets. In accordance with SFAS No. 144 and our internal accounting policy, we perform tests for impairment of tangible and intangible long-lived assets on a quarterly basis and whenever events or circumstances suggest that other long-lived assets may be impaired. This analysis differs from our goodwill analysis in that an impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the asset (or assets) are less than the carrying value of the asset (or assets) we are testing for impairment. If the forecasted cash flows are less than the carrying value, then we write down the carrying value to its estimated fair value. We typically estimate the fair value of long-lived assets using the income approach.
Based on a combination of factors, including the recent and rapid deterioration of global economic conditions, our operating results including the reduction in force discussed in Note 4 - Restructuring Charges, a substantial and sustained decline in the our market capitalization and management's decisions to prioritize allocation of resources and to discontinue investments in certain products and services, we concluded that there were sufficient indicators to require us to perform an interim impairment analysis in respect of goodwill and other long-lived assets as of February 28, 2009. As a result, during the second quarter of fiscal 2009, we recorded an impairment charge of $33.2 million and $11.9 million in respect of goodwill and other long-lived intangible assets, respectively.
As of March 31, 2009, the remaining carrying value of goodwill and other long-lived assets (including both tangible and intangible assets) subject to amortization are $21.9 million and $13.5 million, respectively. Performing impairment analysis and measurement is a process that requires significant judgment and the use of significant estimates related to valuation such as discount rates, long term growth rates and the level and timing of future cash flows. As a result, several factors could result in further impairment of our goodwill and other intangible assets balance in future periods, including, but not limited to:
(i) a decline in our stock price and resulting market capitalization (such as the decline which occurred subsequent to September 2008), if we determine that the decline is sustained and is indicative of a reduction in the fair value of our reporting units below their carrying values; and

(ii) further weakening of the global economy, continued weakness in the PC industry, or failure of the Company to reach its internal forecasts could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow value of our reporting units.

It is not possible at this time to determine if any such future impairment charge would result from these factors, or, if it does, whether such charge would be material. We will continue to review our goodwill and other long-lived assets for possible impairment. We cannot be certain that a future downturn in our business, changes in market conditions or a longer-term decline in the quoted market price of our stock will not result in an impairment of goodwill or other long-lived assets and the recognition of resulting expenses in future periods, which could adversely affect our results of operations for those periods.

Recent Accounting Pronouncements
   For a description of recent accounting pronouncements, see Note 1 - Summary
of Significant Accounting Policies in the Notes to Condensed Consolidated
Financial Statements.
Results of Operations
   The following table includes Consolidated Statements of Operations data as a
percentage of total revenues:

                                                     Three months ended March 31,              Six months ended March 31,
                                                       2009                 2008                 2009                2008
Revenues:
License fees                                              80 %                87 %                  82 %                88 %
Subscription fees                                          5 %                 -                     4 %                 -
Service fees                                              15 %                13 %                  15 %                12 %

Total revenues                                           100 %               100 %                 100 %               100 %

Cost of revenues:
License fees                                               1 %                 1 %                   1 %                 1 %
Subscription fees                                          3 %                 -                     2 %                 -
Service fees                                              13 %                10 %                  12 %                10 %
Amortization of purchased intangible assets                6 %                 -                     6 %                 -
Impairment of purchased intangible assets                 76 %                 -                    36 %                 -

Total cost of revenues                                    98 %                11 %                  57 %                11 %

Gross margin                                               2 %                89 %                  43 %                89 %

Operating expenses:
Research and development                                  67 %                39 %                  65 %                34 %
Sales and marketing                                       36 %                16 %                  34 %                16 %
General and administrative                                32 %                33 %                  32 %                28 %
Restructuring                                              7 %                 -                     3 %                 -
Impairment of goodwill                                   210 %                 -                   100 %                 -

Total operating expenses                                 351 %                88 %                 234 %                78 %


Income (loss) from operations                           (349 %)                2 %                (191 %)               11 %

Interest and other income, net                             2 %                (2 %)                  2 %                 1 %

Income (loss) before income taxes                       (347 %)               (1 %)               (189 %)               11 %
. . .