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, Desktop Solutions, Datacenter and Cloud Solutions, Application Virtualization, Desktop Virtualization, Server Virtualization, Subscription Advantage, XenApp, NetScaler, XenServer and XenDesktop, 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, general and administrative 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, fair value measurements, 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, including costs associated with the consolidation of excess facilities, 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, transfer pricing, our pending tax appeal, acquisitions, including XenSource and Vapps, 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 and nine months ended September 30, 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 virtualization, networking and software-as-a-service solutions to improve customers IT capabilities and cost structure. 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, marketed as our Desktop Solutions, and server virtualization and application networking, marketed as our Datacenter and Cloud Solutions, to deliver the most comprehensive end-to-end application delivery solution, one that, when considered as a whole, is competitively differentiated by its interoperability and feature set.

The recent crisis in the credit markets, difficulties in the financial services sector and the overall weakness in the global economy, is impacting IT spending. Although during the third quarter of 2009 we saw improvement in our Americas segment, which includes the United States, Canada and Latin America, our overseas business, especially in our EMEA segment, which includes Europe, the Middle East and Africa, is still being impacted by the ongoing weakness in the global economy. We are continuing to see 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 products and services that can reduce cost and deliver 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. XenServer and NetScaler can alter the traditional economies of the datacenter by providing much greater levels of flexibility of computing resources, especially with respect to servers, by improving application performance and thereby reducing the amount of processing power involved, and allowing easy reconfiguration of servers for multiple purposes. Our real-time collaboration products offer secure and cost-effective solutions that allow users to host and actively participate in online meetings, webinars and training sessions remotely and reduce costs associated with business travel.

Further, we will endeavor to sustain the long-term growth of our businesses and enhance our current solutions 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 invest in research and development of advanced technologies for future application. We believe that delivering innovative and high-value solutions through our Desktop Solutions and Datacenter and Cloud Solutions is the key to meeting customer and partner needs and achieving our future growth.

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 2009, we incurred a pre-tax charge of $22.8 million related to employee severance and related costs and non-cancelable lease costs related to the consolidation of certain of our facilities. 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.

Summary of Results

For the three months ended September 30, 2009 compared to the three months ended September 30, 2008, a summary of our results is as follows:

• Product License revenue decreased 18.1% to $129.1 million;

• License Updates revenue increased 6.9% to $151.0 million;

• Online Services revenue increased 21.4% to $78.9 million;

• Technical Services revenue increased 19.6% to $42.1 million;

• Operating income increased 17.6% to $56.1 million; and

• Diluted earnings per share increased 8.3% to $0.29.

The decrease in our Product License revenue was primarily driven by decreased sales of our Application Virtualization products, mainly in our EMEA segment. As expected, we saw many customers continue to delay or reduce planned IT projects in response to current macro economic conditions. However, we are seeing signs of potential improvement, including improving dynamics in certain markets and a high level of interest in desktop virtualization. The increase in License Updates revenue was driven by renewals of our Subscription Advantage product over a larger subscriber base. Our Online Services revenue increased due to increased sales of our real-time collaboration services. We currently expect that total revenue will increase modestly when comparing the fourth quarter of 2009 to the fourth quarter of 2008, as well as when comparing the 2009 fiscal year to the 2008 fiscal year. In addition, we currently expect that total revenue will increase modestly during the 2010 fiscal year as compared to our expected total revenue for fiscal 2009. The increase in operating income is primarily due to a reduction in compensation and employee related costs of $19.7 million primarily due to the Strategic Restructuring Program partially offset by increases in professional and IT support fees of $5.0 million and an increase in depreciation expense of $4.2 million.

In addition, the crisis in the credit markets has caused some of our investments to experience 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 $26.6 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 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        Nine Months Ended
                                         Three Months Ended                 Nine Months Ended             September 30, 2009        September 30, 2009
                                            September 30,                     September 30,               vs. September 30,         vs. September 30,
                                        2009            2008             2009              2008                  2008                      2008
Revenues:
Product licenses                      $ 129,060       $ 157,537       $   370,652       $   457,955                    (18.1 )%                  (19.1 )%
License updates                         151,041         141,251           448,573           412,464                      6.9                       8.8
Online services                          78,878          64,949           226,208           190,621                     21.4                      18.7
Technical services                       42,063          35,156           117,495           106,617                     19.6                      10.2

Total net revenues                      401,042         398,893         1,162,928         1,167,657                      0.5                      (0.4 )

Cost of net revenues:
Cost of product license revenues         13,191          10,555            36,191            34,477                     25.0                       5.0
Cost of services revenues                20,685          19,785            63,440            58,582                      4.5                       8.3
Amortization of product related
intangible assets                        11,542          11,948            35,064            35,517                     (3.4 )                    (1.3 )

Total cost of net revenues               45,418          42,288           134,695           128,576                      7.4                       4.8

Gross margin                            355,624         356,605         1,028,233         1,039,081                     (0.3 )                    (1.0 )

Operating expenses:
Research and development                 68,865          72,500           215,062           217,995                     (5.0 )                    (1.3 )
Sales, marketing and services           168,233         169,072           498,952           504,761                     (0.5 )                    (1.2 )
General and administrative               57,254          61,866           175,295           192,570                     (7.5 )                    (9.0 )
Restructuring                                61              -             22,827                -                     100.0                     100.0
Amortization of other intangible
assets                                    5,111           5,468            15,268            16,875                     (6.5 )                    (9.5 )

Total operating expenses                299,524         308,906           927,404           932,201                     (3.0 )                    (0.5 )

Income from operations                   56,100          47,699           100,829           106,880                     17.6                      (5.7 )
Interest income                           4,059           7,316            11,167            25,232                    (44.5 )                   (55.7 )
Interest expense                            (85 )          (143 )            (243 )            (253 )                  (40.6 )                    (4.0 )
Other income (expense), net               1,651          (3,992 )             939            (7,005 )                      *                         *

Income before income taxes               61,725          50,880           112,692           124,854                     21.3                      (9.7 )
Income taxes                              8,302           1,731             9,823             6,678                    379.6                      47.1

Net income                            $  53,423       $  49,149       $   102,869       $   118,176                      8.7 %                   (13.0 )%

* 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:

Desktop Solutions products including:

• Our Application Virtualization products, including our XenApp product family; and

• Our Desktop Virtualization product, including our XenDesktop product family.

Datacenter and Cloud products including:

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

• Our Server Virtualization products, 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                    Nine Months
                                Three Months Ended             Nine Months Ended            Ended September 30,             Ended September 30,
                                  September 30,                  September 30,             2009 vs. September 30,          2009 vs. September 30,
                                2009          2008           2009            2008                   2008                            2008
                                                                                (In thousands)
Product Licenses             $  129,060     $ 157,537     $   370,652     $   457,955     $                (28,477 )      $                (87,303 )
License Updates                 151,041       141,251         448,573         412,464                        9,790                          36,109
Online Services                  78,878        64,949         226,208         190,621                       13,929                          35,587
Technical Services               42,063        35,156         117,495         106,617                        6,907                          10,878

Total net revenues           $  401,042     $ 398,893     $ 1,162,928     $ 1,167,657     $                  2,149        $                 (4,729 )

Product Licenses

Product License revenue decreased for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily due to a decrease in sales of our Application Virtualization products of $32.8 million partially offset by increased sales of our XenDesktop product of $5.8 million and sales decreased for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 due to decreased sales of our Application Virtualization products of $98.3 million partially offset by increased sales of our XenDesktop product of $13.7 million. The decreases in our Application Virtualization product sales continue to be driven by weakness in the global economy as discussed in the Executive Summary above. We currently expect Product License revenue to decrease when comparing the fourth quarter of 2009 to the fourth quarter of 2008.

License Updates

License Updates revenue increased for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 and for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to renewals related to our Subscription Advantage program over a larger base of subscribers. We currently anticipate that License Updates revenue will increase when comparing the fourth quarter of 2009 to the fourth quarter of 2008 primarily due to expected renewals from our installed customer base.

Online Services

Online Services revenue increased for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 and for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to increased sales of our real time application collaboration products. We currently expect Online Services revenues to continue to increase when comparing the fourth quarter of 2009 to the fourth quarter of 2008.

Technical Services

Technical Services revenue increased for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 primarily due to increased sales of support services related to our Application Networking products. Technical Services revenue increased for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 primarily due to increased sales of support services related to our Application Networking products of $15.5 million. This increase was partially offset by a decrease in sales of consulting and education services related to our Application Virtualization products of $5.5 million. We currently expect Technical Services sales to increase when comparing the fourth quarter of 2009 to the fourth quarter of 2008.

Deferred Revenue

Deferred revenues are primarily comprised of 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 $22.5 million as of September 30, 2009 compared to December 31, 2008 primarily due to increased sales of our support services of $13.9 million, increased sales of our online service agreements of $6.4 million and new sales of our Subscription Advantage product of $4.0 million. We currently expect deferred revenues to increase for the remainder of 2009 consistent with the anticipated increase in sales of multi-year Subscription Advantage contracts.

International Revenues

International revenues (sales outside the United States) accounted for approximately 42.1% of our net revenues for the three months ended September 30, 2009 and 45.9% of our net revenues for the three months ended September 30, 2008. International revenues accounted for approximately 42.6% of our net revenues for the nine months ended September 30, 2009 and 45.6% of our net revenues for the nine months ended September 30, 2008. The decrease in international revenues as a percent of our total revenues is primarily due to the continued weakness in EMEA's economy. See discussion below and Note 9 to our . . .