Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain "forward-looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to statements concerning new products, development and offerings of products and services, market positioning, Product Licenses, License Updates, Online Services, Technical Services, Application Networking, Citrix Delivery Center, Application Virtualization, Desktop Virtualization, Server Virtualization, Subscription Advantage, XenApp, NetScaler, XenServer and XenDesktop, Citrix Repeater and Access Gateway, legal proceedings, corporate bonds, competition and strategy, deferred revenues, stock-based compensation, licensing and subscription renewal programs, intellectual property, international operations, government regulation, seasonal factors, sales and sales cycle, revenue recognition, profitability, growth of revenues, composition of revenues, cost of revenues, operating expenses, sales, marketing and services expenses, research and development, valuations of investments and derivative instruments, reinvestment or repatriation of foreign earnings, gross margins, amortization expense, interest income, foreign currency expense, impairment charges, investment transactions (including the AIG Capped Floater, our Settlement with UBS and investments in auction rate and available-for-sale securities), changes in domestic and foreign economic conditions and credit markets, the Strategic Restructuring Program and related restructuring charges, customer delays or reductions in technology purchases, anticipated operating and capital expenditure requirements, our cash inflows, cash and non-cash charges, contractual obligations, our Credit Facility, in-process research and development, tax rates, estimates and deductions, FASB Staff Positions and Interpretations, accounting standards, including SFAS No. 157, SFAS No . 159, and SFAS No. 190, acquisitions, stock repurchases, liquidity, payment of dividends and third party licenses, constitute forward-looking statements and are made under the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary significantly from those stated in any forward-looking statements. The factors described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2008, as updated in Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition.

Executive Summary

Overview

Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2009. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.

We design, develop and market technology solutions that allow applications to be delivered, supported, and shared on-demand with high performance, enhanced security, and improved total cost of ownership, or TCO. We market and license our products through multiple channels such as value-added resellers, or VARS, channel distributors, system integrators, independent software vendors, our Websites and original equipment manufacturers.

Our solutions can fundamentally change an information technology organization's approach and strategic value, transforming information technology, or IT, into an on-demand service by centralizing the delivery of applications and desktops. Further, this approach to IT transforms datacenters, making them far more flexible to adapt to the changing needs of an enterprise.

We believe our approach is unique in the market because we have combined innovative technologies in the areas of application virtualization, desktop virtualization, server virtualization and application networking, to deliver the most comprehensive end-to-end application delivery solution-marketed as Citrix Delivery Center-one that, when considered as a whole, is competitively differentiated by its interoperability and feature set.

The ongoing crisis in the credit markets, difficulties in the financial services sector and the overall weakness in the global economy, is impacting IT spending. We are seeing IT projects delayed and in many cases re-evaluated altogether. This environment has caused our current and potential customers to further delay or reduce technology purchases, which has reduced sales of our products and may result in longer sales cycles, slower adoption of new technologies and increased price competition.

At the same time, however, this environment puts a much sharper focus on IT that can reduce cost and delivers quick, tangible return on investment, or ROI. With our customers focused on economic value in technology solutions, we intend to continue highlighting our solutions' abilities to reduce IT costs, increase business flexibility, and deliver ROI.

XenApp and XenDesktop, for example, can reduce the cost of traditional desktop management by virtualizing the desktop and applications in a customer's datacenter, where they are more easily and efficiently maintained and altered. XenServer and NetScaler can alter the traditional economies of the datacenter by providing much greater levels of flexibility of computing resources, especially servers, by improving application performance and thereby reducing the amount of processing power involved, and allowing easy reconfiguration of servers to use for multiple purposes.

Further, we will endeavor to sustain the long-term growth of our businesses and enhance our current solution set through technological innovation, engineering excellence, selective and strategic acquisition of technology, talent and/or companies, and through a commitment to delivering high-quality products and services to customers and partners. We expect to continue to make strategic investments in research and development of existing and new products and we will also invest in research and development of advanced technologies for future application, including server and desktop delivery infrastructure products. We believe that delivering innovative and high-value solutions through our Citrix Delivery Center is the key to meeting customer and partner needs and achieving our future growth.

Further, from an operations standpoint, in order to operate more efficiently and to drive long-term changes in our cost model, on January 28, 2009, we announced the implementation of a strategic restructuring program, or the Strategic Restructuring Program. The Strategic Restructuring Program included reducing our headcount by approximately 450 full-time positions. In addition, we have implemented cost savings measures including the postponement of merit increases that would have normally occurred in the second quarter of 2009 until the fourth quarter of 2009, and the 2009 merit increases for all vice presidents and company officers have been eliminated. In the first quarter of 2009, we incurred a pre-tax charge of $20.7 million related to employee severance and related costs. In addition to the Strategic Restructuring Program, we are continuing to take steps to reduce operating costs that include but are not limited to reprioritizing internal projects, reducing contract workers and limiting travel spending. In addition, we are in the process of assessing the consolidation of facilities.

Summary of Results

For the three months ended March 31, 2009 compared to the three months ended March 31, 2008, a summary of our results included:

• Product License revenue decreased 23.9% to $111.9 million;

• License Updates revenue increased 10.7% to $148.2 million;

• Online Services revenue increased 16.1% to $72.0 million;

• Technical Services revenue, which is comprised of consulting, education and technical support, increased 8.3% to $37.0 million;

• Operating income decreased 83.5% to $5.0 million; and

• Diluted earnings per share decreased 77.8% to $0.04.

The decrease in our Product License revenue was primarily driven by decreased sales of our Application Virtualization products. As expected, we saw many customers delay or reduce planned IT projects during the first quarter in response to current macro economic conditions. We currently expect Product License sales to decrease when comparing the second quarter of 2009 to the second quarter of 2008 primarily due to anticipated continued weakness in the global economy and its anticipated impact on our customers IT spending, as described above. The increase in License Updates revenue was driven by increased renewals of our Subscription Advantage product over a larger subscriber base. Our Online Services revenue increased due to continued sales strength of our real-time collaboration services. We currently expect our Online Services revenue to increase slightly when comparing the second quarter of 2009 to the first quarter of 2009; however, we anticipate the overall rate of growth for this group to be slower than experienced in 2008. The decrease in operating income is primarily due to costs related to the Strategic Restructuring Program.

In addition, the financial crisis in the credit markets has caused some of our investments to experience other-than-temporary declines in fair value, which have resulted in impairment charges and unrealized losses in our investment portfolio. We do not currently anticipate that the lack of liquidity caused by holding these investments will have a material adverse effect on our operating cashflows or financial position. We continue to monitor our overall investment portfolio and if the credit ratings of the issuers of our investments deteriorate or if the issuers experience financial difficulty, including bankruptcy, we may be required to make additional adjustments to the carrying value of the securities in our investment portfolio and recognize additional impairment charges for declines in fair value which are determined to be other-than-temporary. See "- Liquidity and Capital Resources" below.

2008 Acquisition

In October 2008, we acquired all of the issued and outstanding securities of Vapps, Inc., or Vapps, a privately held Delaware corporation headquartered in Hoboken, New Jersey. Vapps offers high quality audio conferencing solutions to small and medium sized businesses and enterprise and service provider markets that complement our online services products. The total consideration for this transaction was approximately $26.4 million in cash, including $1.0 million in transaction costs. In addition, if certain financial and operational milestones are achieved by the Vapps business, contingent consideration of up to approximately $4.4 million may be earned. The sources of funds for this transaction consisted of available cash and investments. In addition, we assumed approximately 0.1 million unvested stock options upon the closing of the transaction.

Revenues from Vapps are included in our Online Services revenue. The Vapps results of operations have been included in our consolidated results of operations beginning after the date of its acquisition.

In-process Research and Development for Acquisitions

The fair values used in determining the purchase price allocation for certain intangible assets for our acquisitions were based on estimated discounted future cash flows, royalty rates and historical data, among other information. Purchased in-process research and development, or IPR&D, was expensed immediately upon the closing of our 2008 acquisition of Vapps in the amount of $1.1 million. Such IPR&D was expensed in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, because it pertained to technology that was not currently technologically feasible, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, was not ready for initial customer testing and had no alternative future use. The fair value assigned to in-process research and development was determined using the income approach, which includes estimating the revenue and expenses associated with a project's sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 21%-25%. The rate of return determination included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year ended December 31, 2008 and Note 2 to our condensed consolidated financial statements. There have been no material changes to the critical accounting policies previously disclosed in that report.

Results of Operations

The following table sets forth our condensed consolidated statements of income
data and presentation of that data as a percentage of change from
period-to-period (in thousands).




                                  Three Months Ended     Three Months Ended
                                      March 31,            March 31, 2009
                                   2009        2008      vs. March 31, 2008
           Revenues:
           Product Licenses     $  111,900   $ 146,960                (23.9 )%
           License Updates         148,198     133,934                 10.7
           Online Services          71,980      61,985                 16.1
           Technical Services       36,980      34,155                  8.3

           Total net revenues      369,058     377,034                 (2.1 )

                                                  Three Months Ended           Three Months Ended
                                                       March 31,                 March 31, 2009
                                                 2009            2008          vs. March 31, 2008
Cost of net revenues:
Cost of product license revenues                  11,494          11,141                      3.2
Cost of services revenues                         21,623          18,697                     15.6
Amortization of product related intangible
assets                                            12,099          10,593                     14.2

Total cost of net revenues                        45,216          40,431                     11.8

Gross margin                                     323,842         336,603                     (3.8 )

Operating expenses:
Research and development                          71,037          71,530                     (0.7 )
Sales, marketing and services                    163,589         166,445                     (1.7 )
General and administrative                        58,489          62,637                     (6.6 )
Restructuring                                     20,730              -                         *
Amortization of other intangible assets            4,994           5,700                    (12.4 )

Total operating expenses                         318,839         306,312                      4.1

Income from operations                             5,003          30,291                    (83.5 )
Interest income                                    2,715          10,317                    (73.7 )
Interest expense                                    (124 )           (55 )                      *
Other expense, net                                (1,422 )        (1,791 )                  (20.6 )

Income before income taxes                         6,172          38,762                    (84.1 )
Income taxes                                        (755 )         4,384                   (117.3 )

Net income                                     $   6,927       $  34,378                    (79.9 )%

* not meaningful

Revenues

Net revenues include the following categories: Product Licenses, License Updates, Online Services and Technical Services. Product Licenses primarily represent fees related to the licensing of the following major products:

• Our Application Virtualization products, including XenApp;

• Our Application Networking products, including NetScaler, Citrix Repeater and Access Gateway;

• Our Desktop Virtualization product, including XenDesktop; and

• Our Server Virtualization product, including XenServer.

In addition, we offer incentive programs to our channel distributors and VARs to stimulate demand for our products. Revenues associated with these programs are partially offset by these incentives to our channel distributors and VARs.

License Updates consist of fees related to our Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Subscription Advantage is an annual renewable program that provides subscribers with automatic delivery of unspecified software upgrades, enhancements and maintenance releases when and if they become available during the term of the subscription. Online Services revenues consist primarily of fees related to online service agreements and are recognized ratably over the contract term. Technical Services revenues are comprised of fees from technical support services which are recognized ratably over the contract term, as well as revenues from product training and certification, and consulting services revenue related to implementation of our products, which is recognized as the services are provided.

                                   Three Months Ended
                                        March 31,                   2009
                                 2009            2008         Compared to 2008
                                            (In thousands)
         Product Licenses     $  111,900   $        146,960   $         (35,060 )
         License Updates         148,198            133,934              14,264
         Online Services          71,980             61,985               9,995
         Technical Services       36,980             34,155               2,825

         Total net revenues      369,058   $        377,034   $          (7,976 )

Product Licenses

Product License revenue decreased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to decreased sales of our Application Virtualization products driven by the weakness in the global economy as discussed in the Executive Summary, above. We currently expect Product License revenue to decrease when comparing the second quarter of 2009 to the second quarter of 2008 due to continued weakness in the global economy and its anticipated impact on our customers IT spending.

License Updates

License Updates revenue increased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to renewals related to our Subscription Advantage program. We currently anticipate that License Updates revenue will increase when comparing the second quarter of 2009 to the second quarter of 2008 primarily due to expected renewals over our installed customer base; however, these increases will be at a slower rate than experienced in 2008.

Online Services

Online Services revenue increased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to increased sales of our real time application collaboration services. We currently expect Online Services revenues to continue to increase when comparing the second quarter of 2009 to the second quarter of 2008 but at a slower rate than experienced in 2008.

Technical Services

Technical Services revenue increased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to increased sales of support services related to our Application Networking products partially offset by decreases in sales of services related to the implementation of our Application Virtualization products. We currently expect Technical Services sales to decrease when comparing the second quarter of 2009 to the second quarter of 2008 consistent with the decrease in Product License revenue described above.

Deferred Revenue

Deferred revenues are primarily comprised of License Updates revenue from our Subscription Advantage product, Online Services revenues from annual service agreements for our online services products and Technical Services revenues related to our support services and consulting contracts. Deferred revenues increased approximately $1.7 million as of March 31, 2009 compared to December 31, 2008 primarily due to increased renewals of our Subscription Advantage product and increased sales of our online service agreements partially offset by a decrease in sales of new Subscription Advantage product. We currently expect deferred revenues to increase in 2009 although at a slower rate when compared to 2008.

International Revenues

International revenues (sales outside the United States) accounted for approximately 43.7% of our net revenues for the three months ended March 31, 2009 and 46.4% of our net revenues for the three months ended March 31, 2008. See Note 6 to our condensed consolidated financial statements for detailed information on segment revenues.

Segment Revenues

An analysis of our reportable segment net revenue is presented below:




                                                           Increase (decrease)
                                    Three Months Ended        for the Three
                                        March 31,             Months Ended
                                                             March 31, 2009
                                     2009        2008      vs. March 31, 2008
                                                 (In thousands)
       Americas (1)               $  155,790   $ 156,823                  (0.7 )%
       EMEA (2)                      112,718     126,922                 (11.2 )
       Asia-Pacific                   28,570      31,304                  (8.7 )
       Online Services division       71,980      61,985                  16.1

       Net revenues               $  369,058   $ 377,034                  (2.1 )

(1) Our Americas segment is comprised of the United States, Canada and Latin America.

(2) Defined as Europe, Middle East and Africa.

With respect to our segment revenues, the decrease in net revenues for the comparative periods presented was due primarily to the factors previously discussed across our reportable segments. See Note 6 of our condensed consolidated financial statements for additional information on our segment revenues.

Cost of Net Revenues




                                                   Three Months Ended        Three Months Ended
                                                       March 31,               March 31, 2009
                                                   2009           2008       vs. March 31, 2008
                                                                 (In thousands)
Cost of license revenues                        $    11,494     $ 11,141     $               353
Cost of services revenues                            21,623       18,697                   2,926
Amortization of product related intangible
assets                                               12,099       10,593                   1,506

Total cost of net revenues                      $    45,216     $ 40,431     $             4,785

Cost of product license revenues consists primarily of hardware, product media and duplication, manuals, packaging materials, shipping expense, server capacity costs and royalties. Cost of services revenues consists primarily of compensation and other personnel-related costs of providing technical support and consulting, as well as the costs related to our Online Services products. Also included in cost of net revenues is amortization of product related intangible assets.

Cost of product licenses revenues increased for the three months ended March 31, 2009 compared to the three months ended March 31, 2008 primarily due to costs associated with inventory obsolescence reserves related to older platforms of our Application Networking products which contain hardware components partially offset by a decrease in costs associated with our Application Virtualization products as a result of lower sales. Cost of services revenues increased for the three months ended March 31, 2009 compared to the three months ended March 31, . . .