UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549






Form 10-K






ANNUAL
REPORT


PURSUANT
TO SECTIONS 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934






(Mark
      One)þ
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the fiscal year ended December 31, 2008ORo
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934For
      the transition period
      from          to









Commission
file number: 001-33184


Double-Take
Software, Inc.


(Exact
name of registrant as specified in its charter)






Delaware
            
            20-0230046(State
      or other jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or organization)
            
            Identification
      No.)257
      Turnpike Road, Suite 210
            
            01772Southborough,
      Massachusetts
            
            (Zip
      Code)(Address
      of principal executive offices)









(877) 335-5674


(Registrant’s
telephone number, including area code)






Securities
registered pursuant to Section 12(b) of the Act:






Title of Each Class
            
            Name of Each Exchange on Which
      RegisteredCommon
      Stock, $0.001 par value
            
            The
      NASDAQ Global Market









Securities
registered pursuant to Section 12(g) of the Act: None






Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  YES  o
     NO  þ






Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  YES  o
     NO  þ






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.  YES  þ
     NO  o






Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   þ






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






Large
      accelerated filer  o
            
            Accelerated
      filer  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)  YES  o  NO  þ






As of
June 30, 2008, the last business day of the Registrant’s most recently
completed second fiscal quarter, the aggregate market value of the Registrant’s
Common Stock held by nonaffiliates was approximately
$301.9 million.






The
number of shares of Registrant’s Common Stock outstanding as of
February 27, 2009 was 22,022,250.






DOCUMENTS
INCORPORATED BY REFERENCE






Part III
of this Form 10-K incorporates by reference certain portions of the
Registrant’s proxy statement for its 2009 Annual Meeting of Shareholders to be
filed with the Commission not later than 120 days after the end of the
fiscal year covered by this report.








CAUTIONARY
ADVICE REGARDING FORWARD-LOOKING STATEMENT






Statements
contained in this Form 10-K that are not historical facts may be
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the “Exchange Act”). We intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in Section 21E of the Exchange Act.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date this Form 10-K is filed with
the Securities and Exchange Commission (“SEC”).






We may,
in some cases, use words such as “project,” “believe,” “anticipate,” “plan,”
“expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,”
“will,” or “may,” or other words that convey uncertainty of future events or
outcomes to identify these forward-looking statements. Forward-looking
statements in this annual report include statements about:






•
                competition
      and competitive factors in the markets in which we
  operate;•
                demand
      for replication software;•
                our
      ability to transition to a broader focus on software for dynamic
      infrastructure;•
                the
      advantages of our technology as compared to others;•
                changes
      in customer preferences and our ability to adapt our product and services
      offerings;•
                our
      ability to obtain and maintain distribution partners and the terms of
      these arrangements;•
                our
      plans for future product development;•
                the
      integration of TimeSpring Software Corporation (“TimeSpring”), known as
      Double-Take Software Canada, Inc. (“Double-Take Canada”) and the TimeData
      products into our business;•
                the
      integration emBoot, Inc. (“emBoot”) and its products into our
      business;•
                our
      ability to develop and maintain positive relationships with our
      customers;•
                our
      ability to maintain and establish intellectual property
      rights;•
                our
      ability to retain and hire necessary employees and appropriately staff our
      development, marketing, sales and distribution efforts;•
                our
      cash needs and expectations regarding cash flow from
      operations;•
                our
      ability to manage and grow our business and execution of our business
      strategy;•
                our
      expectations for future revenue;•
                our
      the impact of macro-economic trends on our business;
and•
                our
      financial performance.





1


The
forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us or are within our control. If a change occurs, our business,
financial condition and results of operations may vary materially from those
expressed in our forward-looking statements. There are a number of important
factors that could cause actual results to differ materially from the results
anticipated by these forward-looking statements. These important factors include
those that we discuss in “Risk Factors,” Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” Business and elsewhere in this
annual report. You should read these factors and the other cautionary statements
made in this annual report as being applicable to all related forward-looking
statements wherever they appear in this annual report. If one or more of these
factors materialize, or if any underlying assumptions prove incorrect, our
actual results, performance or achievements may vary materially from any future
results, performance or achievements expressed or implied by these
forward-looking statements. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by law.





PART I






Item 1.
            Business.






Overview






Double-Take
Software develops, sells and supports affordable software that allows IT
organizations of all sizes to dynamically move, manage, protect and recover
workloads across any distance and any combination of physical and virtual server
environments. As enterprise IT systems evolve the ability to move information
freely, intelligently and securely becomes critical.  Our hardware-
and application-independent software enables a dynamic infrastructure by
efficiently protecting, moving and recovering data created by any application on
almost any type or brand of disk storage on any brand of server running on
Microsoft Windows operating systems as well many versions of the Linux operating
system. In particular, we believe that through our flagship “Double-Take”
software that we are the leading supplier of replication software for Microsoft
server environments and that our business is distinguished by our focus on
software license and recurring maintenance sales, our productive distribution
network and our efficient services infrastructure.





Our
success has been driven in large part by our flagship “Double-Take” software
technology, which was first released in 1995 and has been enhanced by years of
customer feedback. Residing on the server operating system, our Double-Take
technology continuously monitors and captures system activity and replicates
only the changes written by the OS or applications. Our Double-Take technology
continuously replicates software and data changes made on a primary operating
server to a duplicate server at a different location. Because the duplicate
server can commence operating in place of the primary server at almost any time,
our software facilitates rapid failover and application recovery in the event of
a disaster or other service interruption.





The
disaster recovery market has been our primary historical focus, but as a result
of recent acquisitions and internal development, we are expanding into adjacent
markets for system migrations, back-up and network booting, which is part of our
business model of offering products that optimize workloads for dynamic
infrastructure. With our acquisition of TimeSpring Software Corporation in
December 2007, now known as Double-Take Canada, and its TimeData products, we
can also recover data from almost any point in time from a repository located
on- or off-site.  In July 2008, we acquired emBoot which is now a part
of Double-Take Canada, and


2


which
specializes in network booting technology.  The technology acquired
with emBoot allows organizations to easily assign and re-assign computing
workloads to any available physical or virtual machine in their environment. IT
organizations can now move those workloads around in a matter of minutes,
whether it is because a disaster has occurred, a data center is moving, the
company has decided to virtualize its infrastructure or an application needs
more capacity.






We sell
our software through multiple channels, including a global distribution network
that is supported by an experienced direct sales force. Our distribution
partners include leading server manufacturers, such as Dell Computer Corporation
and Hewlett-Packard Company, leading distributors, such as Bell Microproducts
Inc. and Tech Data Corporation, and over 700 value-added resellers that we
believe are generally well-connected with small- and medium-sized enterprises.
Our direct sales force augments the revenue generated by our distribution
partners and actively supports them in their third-party sales
efforts.






Our broad
distribution network, coupled with affordable price points, feature-rich proven
software, modest implementation costs and dependable support, makes our software
accessible and scalable from small enterprises of 20 people to Fortune
500 companies. As of December 31, 2008, our customer base of more than
19,000 organizations includes a large number of law firms, financial
institutions, hospitals, school districts and government entities. We believe
that we have a highly satisfied customer base. Many of our customers provide
references that help us to generate new sales opportunities and to shorten sales
cycles. Our sales personnel often enlist the assistance of satisfied customers
to recommend our software to potential customers in similar industries or that
have similar applications or server configurations. The breadth and diversity of
our customers frequently allows us to refer to a similar configuration when
making a new sale. The satisfaction of our customer base also contributes to
reduced support costs.






We
believe that the markets we are pursuing are large. We expect that growth in our
market will be driven by a number of factors, including the
following:






•
              an
      increased focus on protecting a growing number of business-critical
      applications, such as email applications, particularly in service-oriented
      industries;•
              a
      heightened awareness of the potential for natural and man-made
      disasters;•
              increased
      reliance on virtualized servers, which result in the concentration of
      multiple critical systems and a “single point of failure” for these
      systems;•
              a
      need to move information rapidly within an IT infrastructure for
      efficiency, virtualization, data center changes, hardware and software
      upgrades;•
              the
      rapid growth in digital data, driven by increased usage of automated
      systems; and•
              government
      and industry regulations, such as the Health Insurance Portability and
      Accountability Act of 1996 and the Sarbanes-Oxley Act of 2002, which
      require data protection and recovery.






For our
fiscal year ended December 31, 2008, we had revenue of $96.3 million,
an increase of 16% from fiscal 2007 revenue of $82.8 million. The matters
discussed in this “Business” section should be read in conjunction with the
Consolidated Financial Statements found under Item 8 of Part II of
this annual report, which include additional financial information about our
total assets, revenue and measures of profits and loss and financial information
about geographic areas.


3


Organization;
Principal Executive Offices






We were
organized as a New Jersey corporation in 1991, and we reincorporated in Delaware
in 2003. In July 2006 we changed our name to Double-Take Software, Inc. from NSI
Software, Inc.  Our principal executive offices are located at 257
Turnpike Road, Suite 210, Southborough, Massachusetts 01772, and our main
telephone number at that address is (877) 335-5674. We maintain our general
corporate website at www.doubletake.com. The contents of our website, however,
are not a part of this annual report.




Our
Strategy






Our goal is to
provide affordable software that will enable our customers to dynamically move,
protect and recover workloads across any distance and any combination of
physical and virtual server environments, while building on our historical goal
of reducing our customers’ downtime for business-critical systems to as close to
zero as possible and offering effective protection and recovery for less
critical systems. In striving for this goal, we seek to be the leading provider
of software for software to support a dynamic infrastructure. We are pursuing
the following key initiatives:





•
            Expand our Customer Base
      within our Current Markets.   We plan to gain additional
      customers in the markets we currently serve by expanding our distribution
      network to reach more customers and by leveraging our existing customer
      base. We believe our customers are very satisfied and will continue to
      provide references across multiple industries, multiple configurations and
      multiple applications. In addition, we plan to continue to offer
      enhancements to our current software to broaden its
  appeal.




•
            Cross-sell Existing and New
      Software to our Customer Base.  We plan to sell software
      for additional applications to our current customers and believe that many
      of our existing customers will acquire more licenses to the software that
      they are already using. We also believe that a large majority of our
      customers will renew maintenance in the future because of their
      satisfaction with our software and customer support. We plan to offer new
      software that complements our existing software and applications and
      achieves additional customer objectives. We expect that our new offerings
      will be developed internally, or we may in some instances hire third-party
      developers to develop software on our behalf or acquire new offerings
      through strategic transactions. For example, in December 2007 we acquired
      Montreal-based TimeSpring Software, and in July of 2008 we acquired
      Toronto based emBoot now both known as Double-Take Software
      Canada.




•
            Enter New Markets.
        We plan to enter into new markets and grow our presence in
      markets where we currently have a small presence. We expect to do this
      through expansion of our channel by creating or expanding relationships
      with partners that serve different markets. We also plan to continue to
      grow our presence in the larger enterprise market by leveraging our
      supportive customer base. We believe that small- and medium-sized
      enterprises frequently lead in the adoption of cost effective technology
      solutions out of necessity and that large institutions follow by replacing
      more expensive solutions with cost effective solutions. We have seen
      organizations in the larger enterprise market adopt our software, and we
      expect this trend to continue.  We have developed and acquired
      new products which we believe will allow us to enter new
      markets.  For example, the combination of our Livewire product
      (released in late 2008), and our Timedata product allow us to compete more
      effectively in the backup market.•
            Expand Globally.
        We believe that the market potential outside the United States
      is at least as large as the market within and offers us significant growth
      potential. We plan to extend our global reach though the expansion of our
      direct and channel sales efforts and through strategic acquisitions. For
      example, in May 2006 we acquired our main European distributor, now known
      as Double-Take Software S.A.S., or Double-Take EMEA, with offices in
      France, the United Kingdom and Belgium. We also work closely with
      Hewlett-Packard, which has a strong international presence and is our
      largest OEM, and we plan to continue our increased focus and sales support
      on international sales. In August 2006, we established a full time
      presence in Asia and we opened an office in Dubai in the fourth quarter of
      2008.


4





•
            Continue to Innovate.
        We plan to continue to focus on enhancing our existing
      software and to develop new, innovative software, in line with our shift
      from our historical offerings of products focused on the disaster recovery
      market to our current offerings of products that optimize workloads for
      dynamic infrastructure. For example, in 2007 we introduced new software
      products and features that protect the full system state of a server,
      including operating system and application configuration, and in 2008 we
      introduced  new software products to provision virtual machines.
      We believe that software innovations will also help us to expand our
      addressable market, and we have software in the development pipeline that
      we expect will help us to scale up to serve larger entities and to scale
      down to serve even smaller
enterprises.







Our
Software and Services


In 2008, all of our total
software revenue came from sales of our software applications, compared to 98%
of our total software revenue in 2007 and 96% of our total software revenue in
2006. Similarly, we derive substantially all of our maintenance and professional
services revenue from associated maintenance and customer support of our
applications.  In addition to our flagship Double-Take software, we
offer software products based on technologies that we acquired from TimeSpring
and from emBoot.  In 2009, we plan to continue to integrate our
software offerings under the Double-Take brand, as we focus on a broader
approach to address dynamic infrastructures by expanding beyond disaster
recovery into adjacent markets for system migrations, provisioning between and
among virtual and nonvirtual servers, back-up and network
booting,





Double-Take Software.
  Our flagship Double-Take software provides continuous protection of
data to reduce or eliminate data loss, as well as the ability to recover rapidly
the application and server needed to utilize that data through automatic or
manually initiated failover. This combination of data protection with high
availability failover provides significantly higher levels of availability than
solutions that address only data protection or that provide local failover
clustering but that do not provide data redundancy or protection across multiple
locations.




Our
Double-Take software is easily installed on each protected “source” server as
well as on each “target” server that will store copies of the protected data and
be prepared to take over for the protected server and its applications. This
software-based approach provides several important features and
benefits:






•
            Real-time Byte
      Level Change Capture.   Our file system filtering
      technology monitors all file input and output (I/O) to files selected
      for protection and captures changes as they occur, without the overhead of
      additional disk reads to compare file content. This approach captures only
      the bytes written to the file system, rather than full files or disk
      blocks, and allows Double-Take to replicate any application data,
      including open files such as databases, messaging systems or other
      transactional applications. As a result, data can be protected
      continuously with very little system impact or
overhead.•
            Storage Architecture
      Independence.   Double-Take can replicate to or from
      almost any storage type supported by the host operating system. Not only
      can replication occur between storage types such as Fibre Channel or iSCSI
      Storage Area Networks and directly attached disks, but source and target
      disks that have completely different geometries or multiple source volumes
      can be consolidated onto a single large capacity target volume. As a
      result, customers can use their existing storage systems and even
      replicate between storage systems of different types. Only solutions that
      run along with the applications and replicate logical file system
      structures can provide this level of flexibility and
      performance.


5





•
                Integrated Application and
      Server Availability.   Software replicating between
      servers can easily monitor and failover other functions such as server
      name, IP addresses or integrated applications between servers. As a
      result, not only is data protected, but the operating system and
      applications that use that data to provide services to users can be
      replicated and activated quickly and automatically, even on different
      hardware or virtual servers. Double-Take provides application managers for
      a variety of the business-critical applications that companies rely on to
      run their businesses.•
                Standards-Based IP Networking
      Support.   Double-Take utilizes standard IP networking
      for data replication, monitoring and failover, allowing data to be
      protected and servers to be managed remotely over great distances. In
      addition to capturing the smallest byte level changes possible, our
      software is optimized for long-distance, wide-area network communications
      providing built-in data compression and flow control capabilities, as well
      as leveraging advanced functionality such as encryption, wide area network
      optimizations and quality of service controls provided by existing IP
      infrastructure.






Double-Take
Features and Benefits






Feature
            
            Description
            
            Customer
      BenefitContinuous,
      Real-time Data Replication
            
            File
      system changes are captured as they are made on the source server(s) and
      transmitted immediately according to system policies.
            
            Potential
      for data loss is reduced and sometimes eliminated.Delta
      File Replication
            
            Only
      file changes or “deltas” are captured and transmitted across the
      network.
            
            The
      amount of network bandwidth required to keep a secondary copy of data
      synchronized is minimized, and data can be replicated to a remote target
      server across any IP connection.Replicates
      Open Files
            
            Even
      open files can be mirrored and changes replicated almost
      immediately.
            
            Applications
      can be protected while they are in use providing increased availability
      and reducing potential for data loss.Many
      to One Replication
            
            Data
      from many source servers may be replicated to a single target
      server.
            
            Shares
      the cost of a target server among many source machines, and allows
      centralized data protection.Automatic
      Failover
            
            Can
      stand in for multiple servers simultaneously; the target server assumes
      the IP addresses and names of failed servers and restarts
      applications.
            
            Users
      can automatically access data on the target server, reducing down-time
      associated with a source (production) server failure.Hardware
      Independent Failover and Recovery
            
            Failover
      and recovery of entire systems can be done between dissimilar
      hardware.
            
            Enables
      flexible failover and recovery, without the need for similar
      hardware.


6





Virtual
      Server Provisioning
            
            Can
      automatically provision virtual machines on popular virtualization
      platforms, for the purpose of failover, recovery and
      migration.
            
            Allows
      users to easily leverage virtualization for high availability and disaster
      recovery purposes.  Also allows users to migrate from physical
      to virtual platforms in real-time, with minimal
  downtime.System
      State Recovery
            
            Replicates
      changes, such as patches to operating systems and
      applications.
            
            Enables
      full server recovery to most recent state, including files, operating
      systems and applications.File
      Selection
            
            Users
      can define which files are to be replicated at a volume, directory, file
      and wildcard level. The location of data on the target can also be
      specified.
            
            Allows
      exact control of which files are replicated and where they are stored for
      maximum flexibility.Flow
      Control
            
            Automatically
      queues transactions on the source server if network resources are not
      available or are restricted by policy.
            
            Runs
      reliably in spite of network disruptions or peak loads, without severely
      affecting the performance of the source server.Transmission
      Limiting
            
            The
      amount of bandwidth available for replication, as well as start and stop
      conditions, may be defined by the network administrator.
            
            Allows
      replication to share a network link with other applications, preserving
      bandwidth for other applications.Data
      Compression
            
            Data
      transmitted between the source and target may be compressed, using various
      industry-standard algorithms.
            
            Allows
      user to minimize the amount of network bandwidth used to protect data,
      especially in wide area network configurations.Centralized Enterprise
      Management
            
            A
      graphical management interface is provided which can be run from anywhere
      on the network and allows the user to control all of the servers running
      our software in their environment.
            
            Allows
      user to monitor a large number of servers running our software from a
      single central location, minimizing management costs.Extensive
      Reporting/ Verification
            
            An
      extensive collection of events, alerts and statistics are made available
      through standard mechanisms, including SNMP, Log Files and
      Windows NT/ 2000 Event Viewer/ Performance Monitor.
            
            Prevents
      silent failures by confirming that your data protection systems are
      working properly.







TimeData Software.
  In December 2007, we completed the acquisition of TimeSpring
Software Corporation, now Double-Take Canada, which was a Montreal-based
software company with software that provided the ability to recover copies of
protected data from any point-in-time. This software named “TimeData”, allows
customers to recover from operational problems such as files or e-mails that
were erroneously deleted, file corruption due to viruses or other malfunctions,
or malicious attacks on data files. This software allows customers to protect
and recover data in an application-specific manner for Microsoft Exchange and
SQL. In the second quarter of 2008 we began to market this software under the
Double-Take company name to our new and existing customers.






7




TimeData
Features and Benefits






Feature
            
            Description
            
            Customer
      BenefitContinuous,
      Real-time Data Protection
            
            File
      system changes are captured as they are made on the data server(s) and
      transmitted immediately according to system policies.
            
            Potential
      for data loss is reduced and sometimes eliminated.Delta
      File Replication
            
            Only
      file changes or “deltas” are captured and transmitted across the
      network.
            
            The
      amount of network bandwidth required to keep a secondary copy of data
      synchronized is minimized.Replicates
      Open Files
            
            Even
      open files can be mirrored and changes replicated almost
      immediately.
            
            Applications
      can be protected while they are in use providing increased availability
      and reducing potential for data loss.Many
      to One Replication
            
            Data
      from many source servers may be replicated to a single target
      server.
            
            Shares
      the cost of a target server among many source machines, and allows
      centralized data protection.Any
      point-in-time Recovery
            
            File
      changes are maintained in time sequence order, and can be replayed on the
      repository server to give the user a view of any file at any
      point-in-time.
            
            Users
      can rollback to previous versions of files in the event of an operational
      error such as a deleted file, virus, or other file system
      error.Consistency
      Points
            
            Software
      detects when protected data is in a good state, and allows users to select
      those points in time when recovering data.
            
            Allows
      user to easily recover to a point-in-time at which the protected data is
      in a known, good state.Application
      Awareness
            
            Setup
      of protection for key applications such as Exchange and SQL are automated
      for the user.
            
            Eases
      the process of configuring protection for critical application, and
      minimizes configuration errors.







emBoot Inc.   In
July 2008, through Double-Take Canada, we completed the acquisition of emBoot
Inc., a Mississauga, Ontario -based software company. The technology acquired
provides the ability to boot servers, workstations and virtual machines from
iSCSI storage using standard Ethernet technologies.  netBoot/i enables
organizations to utilize their iSCSI based storage area networks, or SANs, to
rapidly and cost effectively launch virtual and physical servers and desktops
for workload management tasks including provisioning, migration and
recovery.





netBoot/i  Features
and Benefits






Feature
            
            Description
            
            Customer
      BenefitHardware
      Independent
            
            The
      same iSCSI OS boot image can be booted from any x86/64 systems, physical
      or virtual servers, and virtually any storage hardware.
            
            There
      are fewer images to maintain, and it allows for the flexible use of
      infrastructure.


8





Enterprise
      Management Console
            
            One
      console allows you to centrally and easily manage network boot
      configurations for machines throughout an enterprise. You can also easily
      browse the network and add new boot from SAN clients.
            
            Managing
      operating system boot images is simpler and users have centralized
      administration and control of workloads and hardware
      infrastructure.Rapid
      Provisioning
            
            Client
      and iSCSI Target configurations can be cloned for rapid setup of similar
      client configurations.
            
            Allows
      users to quickly re-purpose existing infrastructure and optimize
      workloads.Shared
      Boot Images
            
            Single
      boot images can be shared among multiple clients, in
read-only
              or
      read/write states.
            
            Ensures
      standard environment, avoid storing duplicate boot image
    data.





Software Editions.
  Our suite of software has the features and benefits that are
described above and is offered in versions that are aligned to operating system
capabilities. Additional versions include those that have been specifically
crafted to run within virtual systems and to perform replication only, as well
as versions designed to run within Microsoft Cluster Services called GeoCluster.
Some versions are also available from OEM partners under different brand
names.







Customer Support Services.
  We provide comprehensive customer support, which we consider to be
both a critical asset and a source of competitive advantage. We have developed
our support organization to be a key differentiator for our company and our
customers. Unlike the increasing number of software companies that seek to cut
costs attributable to customer support, we have chosen to invest in the customer
support experience and take pride in our personal interaction with our
customers. We view our customer support function as a means to drive renewals,
increase licenses with existing customers and acquire new customers. As part of
our focus on customer support, we staff our front line support team with senior
technicians with the goal of solving customer issues within the first call. We
aim to provide an exceptional post-sales product experience for each customer.
We believe this support effort will be scalable as our customer base continues
to grow.






Product
support is offered on an annual basis and can be either purchased in advance or
at annual renewal points based on the date of initial software purchase. We have
support centers in Bracknell, United Kingdom, Worcester, United Kingdom,
Montreal, Canada and Indianapolis, Indiana. In addition to our support
organization, primary product support for channel and OEM customers is sometimes
provided directly by our partners, and we provide escalated engineering support
for those partners when needed.






Deployment Services.
  We have a professional services organization to help our customers
with deployments. These offerings give our customers access to our
best-practices and knowledge of the surrounding infrastructure to ensure a clean
implementation. However, we do not consider our professional services to be
strategic to our overall direction, and we try to design and build our software
with the idea that it should besimple to install and operate
without the need for extensive training or associated services. For those
clients that meet the scale and complexity requirements, our professional
services offerings consist of assessment and design services and implementation
and deployment services.


9


Training.   We
provide a series of training courses. Training is provided both on-site and
off-site to fit the wide variety of needs of our customers and partners. The
training courses include both instructor-led as well as computer-based class
formats.






Our
Customers






As of
December 31, 2008, we had more than 19,000 customers in a variety of
industries. Our customers use our software for a variety of purposes in terms of
the applications they protect and the configuration of their servers. Our
customers deploy our software in installations ranging from two servers to
several hundred servers. Our customers include Bank of Montreal, the Boston
Celtics, Brattleboro Memorial Hospital, Chickasaw Nation, Hershey
Entertainment & Resorts Company, infoUSA Inc., Littelfuse,
Inc.,  McGuireWoods LLP, Morgan Stanley, National Center for Missing
Children, Osler Hoskins & Harcourt, LLP., The E.W. Scripps Company, The
Pentagon, The United States Securities and Exchange Commission, United States
Department of Defense and the United States Department of State. Our customers
include over half of the Fortune 500 companies, over half of the 25 largest
U.S. law firms in the 2007 The American Lawyer
AmLaw 100, over 1,000 financial institutions, over 1,100 hospitals and
healthcare service providers and over 1,000 school districts and educational
institutions.






Our
Technology






Our
flagship Double-Take software is based on flexible and efficient file system
replication technology and advanced server and application failover technology.
Most client/server applications have not been designed to provide for data
redundancy or application failover to a different server or a different
geographic location. Consequently, we had to develop solutions outside of
standard application frameworks, utilizing different approaches to ensure that
business-critical applications can be moved and restarted in different locations
in a way that is as fast and transparent to users as possible. Many years of
experience across a large installed base have given us a mature base of data
protection and availability technologies that we believe represent a significant
competitive advantage.






The
software’s functionality is built into the user-mode components (source and
target) of the software, which remain largely consistent across operating
systems.  The driver component is responsible for intercepting file
system modifications, determining if the modifications are selected for
replication and passing this information to the source component. The driver has
been optimized to produce high-throughput with minimal resource requirements and
to minimize file system latency to the end user.






The
source component packages these transactions and transmits them to one or more
target machines. The source component queues transactions when the target server
or network is either slow or unavailable and uses patented compression
techniques to minimize the system overhead required for this queueing. The
source component also controls transmission and initial mirroring, as well as
verification, replication set maintenance and connection
management.






File
system transactions are transmitted to the target machine using standard
networking mechanisms to provide high-throughput. The target component then
receives replication transactions from the source component and applies these
transactions to the target file system. The target component is multi-threaded
to handle efficiently simultaneous transactions from multiple source servers to
multiple target files. The target component also monitors the source server’s
health and performs server failover (via name, network address and share/mount
point aliasing) when the source is unavailable.


10


Our full
server failover technology applies the system state from a protected system to
the backup system during the failover process, allowing the backup system to
take over the full identity of the protected system.  This includes
operating system and application configuration, which is maintained on the
backup system in real-time as changes are made on the protected
system.  This failover process takes into account hardware differences
between the protected and backup systems, and allows failover to occur even if
the systems have different processors, network interface cards, memory, or other
hardware.





Management
of our software is supported through various client interfaces, including
graphical interfaces, a COM_based application programming interface (API), and a
command-line interface. All client platforms are based on the same set of common
application interface commands, and these functions are available to third-party
developers.Our GeoCluster software combines our
core replication technology with the application failover capabilities of
Microsoft Cluster Services (MSCS). GeoCluster eliminates the need for clustered
nodes to share access to the same physical disk, providing data redundancy and
allowing cluster nodes to be placed at different locations, providing geographic
redundancy for the cluster nodes as well as the data. With GeoCluster, mission
critical data is stored on each cluster node’s local drives and then replicated
to the other nodes in the cluster using our patented real-time replication.
GeoCluster can also provide quorum capability, acting as an arbitrator for the
cluster in the event that the cluster nodes are running but cannot
communicate.






Our
TimeData technology, which is based on a different platform than our Double-Take
software, captures file system changes on a production server and transmits
those changes to a repository server where they are stored in a database in time
sequence. The source file system driver intercepts file system changes and
stores them in a local file to be transmitted to the repository server. Like the
Double-Take file system filter, this driver has been optimized to have a minimal
impact on production server performance.






The
TimeData repository component reads file system change logs from the production
server, and stores those in time sequence order within a database. A target file
system interface allows other applications to access the protected file system
data at various points in time by presenting a view of the file system at that
time. The repository component also tracks file system changes from the
production server to determine when application consistency points have been
reached.






Management
of the TimeData technology is done via a management console that currently runs
on the repository server. This interface allows the user to configure and manage
protection of multiple production servers to the repository server from a
central location.





Our
netBoot/i technology leverages the iSCSI storage standard and standard Ethernet
network interface cards that support PXE (Preboot Execution Environment) to
allow physical and virtual servers and workstations to boot directly
from iSCSI storage systems.  In addition, netBoot/i allows the
assignment of boot images to physical and virtual systems to be centrally
controlled and changed in order to simplify provisioning, migration and system
re-purposing.  To allow the greatest flexibility, netBoot/i makes the
boot images for most current operating systems hardware independent, allowing a
workload to be moved from one brand of server hardware to another or between
physical and virtual systems and back.  For customers that do not have
existing iSCSI storage, we also offer Sanfly iSCSI target software that turns
any windows server into an iSCSI SAN.





Our Livewire
software is a streamlined, full server data protection solution built on
Double-Take technology.   It continuously replicates changes to
data, applications, and the source server’s operating system, protecting the
entire server.  At the time of recovery, Livewire allows the end user
to configure and perform full-server recovery quickly to physically dissimilar
hardware or virtual servers, with added validation steps.  Validation
compares the


11


image of
the source server to the actual recovery server then alerts the end user of
potential problems. Livewire can also be used to migrate a server to different
hardware, allowing the end user to use licenses for disaster
recovery.  When recovering to a virtual platform, Livewire
automatically provisions virtual machines to match the original source
machine.





Marketing
and Sales






We market
and sell our software primarily to or through distributors, value-added
resellers and OEMs, supported by an inside and field-based direct sales force
located in the United States and Europe. Our selling model is based on building
a strong distribution network through which customers can purchase the software.
To date, we believe that this selling model has created an advantage for us. We
currently have more than 700 selling partners within our distribution and
value-added reseller program, and we are adding more to this group to meet
regional and technology related needs. To support our partners in our sales
channels, our sales group has been organized in an overlay format so that our
sales teams are working with our partners within any geography to pursue sales
jointly.






In
addition, our marketing partners complement our sales campaigns through
seminars, trade shows and joint advertising. We leverage our customers and
partners to provide references and recommendations that we use in our various
promotional and sales activities. These partners include Dell Computer
Corporation, , Microsoft Corporation, Hewlett-Packard Company and VMware,
Inc.






The goal
of our marketing effort is to develop sales opportunities by increasing the
awareness of our software’s functionality and business need within our target
markets and segments. We plan to continue to invest in building greater
Double-Take brand recognition in the United States and internationally through
expansion of the use of our brand, public relations programs, interactions with
industry analysts, trade shows, web search optimization, regional seminars and
speaking engagements.






In 2008,
we received approximately 17% of our total sales from sales of software and
services to Dell Computer Corporation, which is the largest reseller of our
software and services and approximately 11% of our total sales from sales of
software and services through Sunbelt Software Distribution, Inc., which is a
reseller of our software and services. No other resellers or distributors and no
customer accounted for 10% or more of our total sales in
2008.





Our
software revenue generally experiences some seasonality.  Many
organizations make the bulk of their information technology purchases, including
software in the third and fourth quarters of the year.  We believe
this generally has resulted in higher revenue generated by software sales during
these quarters.  During 2007, software revenue increased each
consecutive quarter.  In 2008, software revenue increased from the
first quarter to the second quarter. Software revenue decreased from the second
quarter to the third quarter, which we believe was due to the timing of the
current global economic downturn, and then increased from the third quarter to
the fourth quarter.  Due to the effects of the economic downturn, our
quarterly revenue predictability has decreased significantly.  As a
result, future quarterly revenue may trend differently than it has
historically.  Currently we have no way to predict the quarterly
revenue trending, but believe that in line with our historical seasonality, the
first quarter of 2009 should be the weakest quarter of the
year.


12





Competition






The
markets in which we compete are competitive and rapidly changing. Our primary
competitors for our flagship product include EMC (Legato), Neverfail, Symantec
(Veritas) and CA, Inc. (XOsoft). All of our competitors offer a variety of data
protection and recovery solutions, some of which may offer features that we do
not offer or have more attractive pricing.  Some of the competitors
for our Double-Take product are also focused on, or beginning to focus on, the
broader dynamic infrastructure market.  Our primary competitors for
our TimeData product include Symantec (Revivio CPS), Mendocino Software
RecoveryONE,, EMC (KASHYA KBX5000 Data Protection Platform) and Microsoft Data
Protection Manager.  Our primary competitors for our netBoot/i product
include Citrix (Citrix Provisioning Server) and Hewlett Packard (Neoware Image
Manager).






The
principal competitive factors in our industry include:






•
            technology;•
            price;•
            product
      functionality and effectiveness;•
            product
      reliability;•
            product
      integration;•
            sales
      support;•
            scope
      and quality of customer support;•
            relationships
      with OEMs; and•
            reputation.






Our
Double-Take software products also compete with alternative approaches for data
protection and recovery. Alternative approaches include the following
technologies:






•
            Tape Backup.
        Tape backup solutions run on a scheduled basis, usually
      nightly or weekly, backing up all files to tape or scanning for files that
      have changed since the last backup and copying those files to tape. Full
      recovery from tape usually requires that the operating system and recovery
      software first be re-installed and re-configured on identical hardware
      before the data recovery component can begin. Examples of companies and
      products in this category include Symantec NetBackup and Backup Exec, IBM
      Tivoli Storage Manager, CA Brightstor Enterprise Backup, Legato Networker
      and CommVault Galaxy.•
            Snapshots.
        Hardware array based and operating system provided snapshots
      are tools that can reduce the time for recovering data, applications and
      servers. Snapshots operate on a disk volume basis by copying disk blocks
      that are about to be overwritten by changes before allowing new blocks to
      be written to disk. Because many snapshots are just differences from one
      point in time to another and not full copies of the volume, they are
      dependent on the survival of the original volume and exist in the same
      geographic location as the original volume. Therefore snapshots alone do
      not provide a complete solution, but can be used in conjunction with
      continuous data replication solutions like Double-Take to address many of
      the above limitations. Snapshot functionality is usually specific to a
      particular operating system volume manager or disk storage array. Examples
      of companies and products in this category include Microsoft Volume Shadow
      Copy Service, EMC TimeFinder and
Snapview.


13





•
                  Clustering.
        Server clustering can improve the availability of data by
      providing one or more additional servers to resume processing in the event
      of a hardware or software failure. These systems are expensive, requiring
      matched server hardware and certified shared disk subsystems. In addition,
      server clusters are generally restricted to very short distances, making
      offsite disaster protection difficult. Shared disk clustering systems
      continue to have a single point of failure in the shared disk subsystem.
      Examples of companies and products in this category include Microsoft
      Cluster Service, Symantec Cluster Server, Steeleye LifeKeeper and Legato
      AutoStart.•
                  Remote Disk Mirroring.
        Disk mirroring is typically implemented as software within a
      proprietary storage array or as a software driver or appliance between the
      server and the primary data storage. Changes are captured at the disk
      block level, with entire blocks of data being mirrored for any size change
      and any physical changes to the disk such as temporary files or
      defragmentation causing replication traffic. Typically, an operating
      system must boot and then “mount” the remotely mirrored drive in order to
      make the data accessible, which requires the operating system and
      applications to be installed and correctly configured to use the
      replicated volume, as well as extensive integrity checks. Examples of
      companies and products in this category include EMC SRDF and Mirrorview,
      Symantec Volume Replicator, FalconStorIPStor, DataCore SANmelody and
      Hitachi TrueCopy.






In
addition, our Double-Take software competes with companies that also use
host-based asynchronous replication, which relies on software running on the
host operating system to intercept small changes being made to files as those
changes are made. In addition to our products, examples of products that use
host-based asynchronous replication include Symantec Replication Exec, Legato
Replistor, Neverfail and XOsoft WANSync.






Some of
our competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger overall
customer base for their products. Additionally, some of these competitors have
research and development capabilities that may allow them to develop new or
improved products that may compete with our software. As this market continues
to develop, a number of companies with greater resources than ours could attempt
to enter the market or increase their presence in this market by acquiring or
forming strategic alliances with our competitors or business partners or by
introducing their own competing products.






Our
success will depend on our ability to adapt to these competing forces, to
develop more advanced products more rapidly and less expensively than our
competitors, to continue to develop a global sales and support network and to
educate potential customers about the benefits of using our software rather than
our competitors’ products. Our competitors could introduce products with
superior features, scalability and functionality at lower prices than our
software. In addition, some of our customers and potential customers may buy
other software or services from our competitors, and to the extent that they
prefer to consolidate their software purchasing from fewer vendors, may choose
not to continue to purchase our software and support
services.






We expect
additional competition from other established and emerging companies. Increased
competition could result in price reductions, reduced gross margins and loss of
market share, any of which could harm our business.






14




Research
and Development






We have
made a significant investment in developing and improving our software. Our
research and development expenditures were $10.7 million, or approximately
18% of our total revenue, for 2006, $11.9 million, or approximately 14% of
our total revenue, for 2007 and $16.5 million, or approximately 17% of our
total revenue, for 2008. Our development team has specific core competencies in
Windows development including drivers, file systems, storage, clustering,
networking and applications such as Exchange, SQL Server, Oracle Database and
SharePoint server. Our engineering organization, located in Indianapolis,
Montreal, and Toronto is responsible for product development, quality assurance,
product management and documentation.






Intellectual
Property






Our
success as a company depends upon our ability to protect our core technology and
intellectual property. To accomplish this, we rely on a combination of
intellectual property rights, including patents, trade secrets, copyrights and
trademarks, as well as customary contractual protections.






We have
been granted two United States patents relating to our Real Time Backup System
which is a component of all of our Double-Take products. The granted United
States patents will expire in October 2015. As part of our acquisition of
TimeSpring, we acquired seven United States patents which will expire at various
dates from 2015 to 2020. These patents and, to the extent any future patents are
issued, may be contested, circumvented or invalidated over the course of our
business, and we may not be able to prevent third-parties from infringing these
patents. Therefore, the exact effect of having patents cannot be predicted with
certainty.





Furthermore, we have registered the
Double-Take®, GeoCluster®, Double-Take SahdowCaster®, TimeData®, and netBoot/i®
product trademarks in the United States and have applied for registration for a
variety of other trademarks including Double-Take for Virtual Systemstm,TimeStortm, Zero Data Losstm,winBoot/itm, Double-Take Cargo TM, and sanFlytm.. A third party may
contest the registration of our trademark applications or may bring a claim for
infringement of any of our registered or non-registered
trademarks.





Employees






As of
February 27, 2009, we had 392 employees in offices across the United
States, Europe, Canada and Asia. None of our employees are represented by labor
unions, and we consider our current employee relations to be
good.






15


Executive
Officers of Double-Take Software






The
following table sets forth information with respect to our executive
officers:






Name
              
              
              Age
              
              
              PositionDean
      Goodermote
              
              
              55
              
              
              President,
      Chief Executive Officer and Chairman of the Board of
    DirectorsRobert
      L. Beeler
              
              
              43
              
              
              Vice
      President of EngineeringDavid
      J. Demlow
              
              
              41
              
              
              Chief
      Technology OfficerS.
      Craig Huke
              
              
              47
              
              
              Chief
      Financial OfficerDaniel
      M. Jones
              
              
              41
              
              
              Vice
      President of Sales and MarketingMichael
      Lesh
              
              
              64
              
              
              Vice
      President of Professional Services and SupportJo
      Murciano
              
              
              57
              
              
              Vice
      President of International







Dean Goodermote joined
Double-Take Software in March 2005 as President, Chief Executive Officer and
Chairman of the board of directors. Since July 2004 he has also served as Chief
Executive Officer of Grid-Analytics LLC, a concept-stage company he founded
focused on aggregated research. From September 2001 to March 2005,
Mr. Goodermote served as a Venture Partner of ABS Capital Partners. From
September 2000 to August 2001, Mr. Goodermote was Chairman and Chief
Executive Officer of Clinsoft Corporation, a developer of software for clinical
research. From 1997 to August 2001, Mr. Goodermote was Chairman and
President of Domain Solutions Corporation, a software developer for enterprise
applications and the parent of Clinsoft. From May 2000 until December 2001,
Mr. Goodermote founded and was Chief Executive Officer and then the
Chairman of IPWorks, Inc., a developer of internet address management software.
From August 1996 to May 2000, Mr. Goodermote was Chief Executive Officer
and President of Process Software Corporation, a developer of Internetworking
software. From August 1986 to February 1997, Mr. Goodermote served in
various positions, including eventually President and Chairman, of Project
Software and Development Corporation, later known as MRO Software, Inc., a
provider of software-based asset and service management
solutions.






Robert L. Beeler joined
Double-Take Software in July 1995 as Vice President of Engineering. From 1996 to
2001, Mr. Beeler served as a member of our board of directors. From July
1991 to July 1995, Mr. Beeler served as Project Manager, Project Engineer
and System/Software Engineer at the Naval Air Warfare Center, where he
supervised and provided technical leadership to a development team in support of
the Navy Airborne Electronic Warfare Platform. From 1988 to 1991,
Mr. Beeler served as a Software Developer for National Field Service
Inc.






David J. Demlow joined
Double-Take Software in 1997 as Vice President of Product Management and, since
January 2005, has served as our Chief Technology Officer. From 1991 to 1997,
Mr. Demlow held the following positions at Seagate Software: 1994 to 1997,
Senior Product Manager, Enterprise Storage Management; 1993 to 1994, Systems
Engineer, Sales and Channel Support; 1991 to 1993, Account Rep, Direct and
Channel Sales. From 1990 to 1991, Mr. Demlow served as a Sales Manager at
Business Technology Associates, Inc.






S. Craig Huke joined
Double-Take Software in June 2003 as Chief Financial Officer. From May 2001 to
May 2003, Mr. Huke served as Chief Financial Officer for Apogee Networks
Systems and Consulting LLC, Inc., a privately held software company specializing
in network cost visibility and containment. From April 1999 to May 2001,
Mr. Huke served as Chief Financial Officer at Bluestone Software, Inc., an
Internet infrastructure software company. From


16


April
1998 to April 1999, Mr. Huke served as Vice President, Finance at Metronet
Communications Corp., a communications company. From November 1994 to April
1998, Mr. Huke held the following positions at Seer Technologies, Inc., a
software development company: September 1997 to April 1998, Vice
President & Corporate Controller; November 1996 to September 1997,
Corporate Controller; November 1995 to November 1996, Director of Financial
Reporting and Analysis; and November 1994 to November 1995, Manager of Financial
Reporting and Analysis.






Daniel M. Jones joined
Double-Take Software in October 2001 as Eastern Region Sales Director and, since
May 2005, has served as our Vice President of Sales and Marketing. From January
2000 to October 2001, Mr. Jones served as National Director of Sales at
StorageNetworks, a provider of data storage software services to major and
global businesses. From January 1998 to January 2000, Mr. Jones served as
Vice President of North American Sales of Net-tel Inc., a provider of internet
protocol data and voice services. From June 1996 to December 1997,
Mr. Jones served as Director of Sales at MidCom Communications Inc., a
facility-based telecommunications company. From February 1991 to June 1996,
Mr. Jones held the following positions at ALLNET/Frontier Communications:
May 1993 to June 1996, Area Manager, July 1992 to May 1993, District Manager;
and July 1991 to July 1992, Sales Representative.






Michael Lesh joined
Double-Take Software in June 2001 as Vice President of Professional Services and
Support. From October 2000 to June 2001, Mr. Lesh served as Director,
Professional Services at Openpages, Inc., a provider of enterprise compliance
management software. From February 1973 to October 2000, Mr. Lesh held the
following positions at Data General, a division of EMC Corporation: January 1998
to October 2000, Director, Professional Services; February 1996 to January 1998,
Director, Eastern Operations Professional Services; March 1995 to February 1996,
Director, Technology Deployment Services; March 1990 to March 1995, Manager,
Northeast Professional Services; and May 1984 to March 1990, Manager, Regional
Systems Engineering.






Jo Murciano joined
Double-Take Software in May 2006 as Vice President of EMEA and President of
Double-Take EMEA, and in January 2008 became our Vice President of
International. Mr. Murciano is also Chief Executive Officer and a director
of Sunbelt Software Distribution, Inc., one of our resellers, which he joined in
1994. From October 1983 to May 2006, Mr. Murciano served as Chairman of
Sunbelt System Software S.A.S., a software distributor that he founded in 1983
and which we acquired in May 2006. From September 1982 to October 2000,
Mr. Murciano served as Chief Executive Officer of RMH Group, a provider of
development and communication tools for the IBM AS/400 market that
Mr. Murciano founded in 1982.






Available
Information






For more
information about us, visit our web site at www.doubletake.com. Our electronic
filings with the SEC (including our annual report on Form 10-K, quarterly
reports on Form 10-Q and current reports on Form 8-K, and any
amendments to these reports) are available free of charge through our web site
as soon as reasonably practicable after we electronically file with or furnish
them to the SEC.






17




Item 1A.
            Risk
      Factors.






An investment in our stock involves
a high degree of risk. You should carefully consider the following risks and all
of the other information set forth in this annual report before deciding to
invest in shares of our common stock. If any of the events or
developments described below
occur, our business, financial condition or results of operations could be
negatively affected. In that case, the trading price of our common stock could
decline, and you could lose all or part of your investment in our common
stock.


Risks
Related to Our Business






A
continued downturn in the global economy could adversely impact our continued
growth, results of operations and our ability to forecast future
business.





In 2008,
there has been a downturn in the global economy, slower economic activity,
decreased consumer confidence, reduced corporate profits and capital spending,
adverse business conditions and liquidity concerns. There has also been
increased volatility in foreign exchange markets. We believe that our sales and
results of operations were impacted by these economic factors. These factors
make it difficult for our customers, our vendors and us to accurately forecast
and plan future business activities, and they could cause customers to slow or
defer spending on our products, which would delay and lengthen sales cycles,
hurt our growth and negatively affect our results of operations. We cannot
predict the timing or duration of any economic slowdown or the timing or
strength of a subsequent economic recovery, worldwide or in our
industry.





Intense
competition in our industry may hinder our ability to generate revenue and may
adversely affect our margins.






The
market for our software is intensely competitive. Our primary competitors for
our flagship product include EMC Corporation (Legato), Neverfail Group, Ltd.,
Symantec Corporation (Veritas) and CA, Inc. (XOsoft Inc.). We also have
competitors for our other products.  Some of the companies we have
identified and many of our other current and potential competitors have longer
operating histories and substantially greater financial, technical, sales,
marketing and other resources than we do, as well as larger installed customer
bases and greater name recognition. Our competitors may be able to devote
greater resources to the development, marketing, distribution, sale and support
of their products than we can and some may have the ability to bundle their data
replication offerings with their other products. The extensive relationships
that these competitors have with existing customers may make it increasingly
difficult for us to increase our market share. The resources of these
competitors also may enable them to respond more rapidly to new or emerging
technologies and changes in customer requirements and to reduce prices to win
new customers.






As this
market continues to develop, a number of other companies with greater resources
than ours, including Microsoft and VMware, could attempt to enter the market or
increase their presence by acquiring or forming strategic alliances with our
competitors or business partners or by introducing their own competing products.
And as our market grows new or existing smaller competitors could emerge as
significant competitive threats.






Our
success will depend on our ability to adapt to these competitive forces, to
develop more advanced products more rapidly and less expensively than our
competitors, to continue to develop a global sales and support network, and to
educate potential customers about the benefits of using our software rather than
our competitors’ products. Existing or new competitors could introduce products
with superior features, scalability and functionality at lower prices. This
could


18


dramatically
affect our ability to sell our software. In addition, some of our customers and
potential customers may buy other software, other competing products and related
services from our competitors, and to the extent that they prefer to consolidate
their software purchasing from fewer vendors, they may choose not to continue to
purchase our software and support services.






We expect
additional competition from other established and emerging companies. Increased
competition could result in reduced revenue, price reductions, reduced gross
margins and loss of market share, any of which would harm our results of
operations.






Because
a large majority of our sales are made to or through distributors, value-added
resellers and original equipment manufacturers, none of which have any
obligation to sell our software applications, the failure of this distribution
network to sell our software effectively could materially adversely affect our
revenue and results of operations.






We rely
on distributors, value-added resellers and original equipment manufacturers, or
OEMs, together with our inside and field-based direct sales force, to sell our
products. These distributors, resellers and OEMs sell our software applications
and, in some cases, incorporate our software into systems that they sell. We
expect that these arrangements will continue to generate a large majority of our
total revenue. Sales to or through our distributors, resellers and OEMs
accounted for approximately 90% of our sales for the year ended
December 31, 2008 and 91% for the year ended December 31, 2007. Sales
to or through our top five distributors, resellers and OEMs accounted for
approximately 50% of our sales for 2008 and 45% of our sales for
2007.






We have
limited control over the amount of software that these businesses purchase from
us or sell on our behalf, we do not have long term contracts with any of them,
and they have limited obligations to recommend, offer or sell our software
applications. Thus there is no guarantee that this source of revenue will
continue at the same level as it has in the past. Any material decrease in the
volume of sales generated by our larger distributors, resellers and OEMs could
materially adversely affect our revenue and results of operations in future
periods.


We
depend on growth in the storage replication market, and lack of growth or
contraction in this market could materially adversely affect our sales and
financial condition.






Demand
for data replication software is driven by several factors, including an
increased focus on protecting business-critical applications, government and
industry regulations requiring data protection and recovery, a heightened
awareness of the potential for natural and man-made disasters and the growth in
stored data from the increased use of automated systems. Segments of the
computer and software industry have in the past experienced significant economic
downturns and decreases in demand as a result of changing market factors. A
change in the market factors that are driving demand for data replication
software could adversely affect our sales, profitability and financial
condition.






Our
current products are primarily designed for the Microsoft and VMware server
environments, which expose us to risks if Microsoft or VMware products are not
compatible with our software or if Microsoft, VMware or other open source
vendors choose to compete more substantially with us in the
future.






We
currently depend primarily on customers that deploy Microsoft products within
their organizations. Microsoft could make changes to its software that render
our software incompatible or less effective. Furthermore, Microsoft may choose
to focus increased resources on applications that compete with our applications,
including competing applications that Microsoft bundles with its operating
platform. These actions could materially adversely affect
our


19


ability
to generate revenue and maintain acceptable profit margins. We have less
dependence on VMware deployments, but similar VMware and open source vendor’s
actions could also materially adversely affect our ability to generate revenue
and maintain acceptable profit margins.





We
may not be able to respond to technological changes with new software
applications, which could materially adversely affect our sales and
profitability.






The
markets for our software applications are characterized by rapid technological
changes, changing customer needs, frequent introduction of new software
applications and evolving industry standards. The introduction of software
applications that embody new technologies or the emergence of new industry
standards could make our software applications obsolete or otherwise
unmarketable. As a result, we may not be able to accurately predict the
lifecycle of our software applications, which may become obsolete before we
receive any revenue or the amount of revenue that we anticipate from them. If
any of the foregoing events were to occur, our ability to retain or increase
market share in the storage replication market could be materially adversely
affected.






To be
successful, we need to anticipate, develop and introduce new software
applications on a timely and cost-effective basis that keep pace with
technological developments and emerging industry standards and that address the
increasingly sophisticated needs of our customers and their budgets. We may fail
to develop or sell software applications that respond to technological changes
or evolving industry standards, experience difficulties that could delay or
prevent the successful development, introduction or sale of these applications
or fail to develop applications that adequately meet the requirements of the
marketplace or achieve market acceptance. Our failure to develop and market such
applications and services on a timely basis, or at all, could materially
adversely affect our sales and profitability.





Our
transition to a broader suite of product focusing on optimizing workloads for
dynamic infrastructure may not be successful, which could hamper our growth
prospects and over time could lead to a decline in revenues.





We have
historically focused on the disaster recovery market, but as a result of recent
acquisitions and internal development, we are expanding into adjacent markets
for system migrations, back-up and network booting, which is part of our
business model of offering products that optimize workloads for dynamic
infrastructure.  We believe that over time the focus on enabling
dynamic infrastructure will be necessary to maintain and grow our revenue and
business, particularly as customers more often look for disaster recovery
solutions that are part of a broader approach to dynamic
infrastructure.  If we are not able to successfully manage the
transition to software and marketing that addresses this focus, we may not be
able to grow our revenues and business and over time our revenues may
decline.


The
development and adoption of cloud computing could lead to declines in the demand
for our software and services.






Many of
the world’s leading technology companies are working on developing a new
generation of enterprise computing in which substantial components of
information technology infrastructure can be provisioned and delivered over the
Internet on an outsourced basis. This new computing paradigm is sometimes
referred to as “cloud computing,” and may result in companies requiring fewer of
their own servers and computer systems or backing up their own servers and
systems through cloud computing providers. The adoption of the cloud computing
paradigm by our customers or potential customers could result in a decline for
demand of our software and services. If we are unable to adapt our software,
services and business model to the cloud computing paradigm, the demand for our
software and services could decline, which would negatively impact our results
of operations.






20







Our
failure to offer high quality customer support services could harm our
reputation and could materially adversely affect our sales of software
applications and results of operations.






Our
customers depend on us, and, to some extent, our distribution partners, to
resolve implementation, technical or other issues relating to our software. A
high level of service is critical for the successful marketing and sale of our
software. If we or our distribution partners do not succeed in helping our
customers quickly resolve post-deployment issues, our reputation could be harmed
and our ability to make new sales or increase sales to existing customers could
be damaged.






Defects
or errors in our software could adversely affect our reputation, result in
significant costs to us and impair our ability to sell our
software.






If our
software is determined to contain defects or errors our reputation could be
materially adversely affected, which could result in significant costs to us and
impair our ability to sell our software in the future. The costs we would incur
to correct product defects or errors may be substantial and would adversely
affect our operating results. After the release of our software, defects or
errors have been identified from time to time by our internal team and by our
clients. Such defects or errors may occur in the future. Any defects that cause
interruptions to the data recovery functions of our applications, or that cause
other applications on the operating system to malfunction or fail, could result
in:






•
            lost
      or delayed market acceptance and sales of our software;•
            loss
      of clients;•
            product
      liability suits against us;•
            diversion
      of development resources;•
            injury
      to our reputation; and•
            increased
      maintenance and warranty costs.






We
may fail to realize the anticipated benefits of our acquisitions of Double-Take
EMEA, TimeSpring Software Corporation and emBoot, Inc.






Our
future success will depend in significant part on our ability to realize the
operating efficiencies, new revenue opportunities and cost savings we expect to
result from the integration of Double-Take Canada, which includes both
TimeSpring and emBoot, and Double-Take EMEA. Our operating results and financial
condition may be adversely affected if we are unable to integrate successfully
the operations of Double-Take Canada and to a lesser extent finalize the
integration of Double-Take EMEA.  We could incur unforeseen costs and
expenses or experience unexpected operating difficulties that offset anticipated
cost savings. In particular, the integration may involve, among other items,
integration of sales, marketing, billing, accounting, management, personnel,
payroll, network infrastructure and other systems and operating hardware and
software, some of which may be incompatible with our existing systems and
therefore may need to be replaced. The integration may place significant strain
on our management, financial and other resources.


21


We
may not receive significant revenue from our research and development efforts
for several years, if at all.






We have
made a significant investment in developing and improving our software. Our
research and development expenditures were $10.7 million, or approximately
18% of our total revenue, for 2006, $11.9 million, or approximately 14% of
our total revenue, for 2007 and $16.5 million, or approximately 17% of our
total revenue, for 2008. We believe that we must continue to dedicate a
significant amount of our resources to our research and development efforts to
maintain our competitive position, and we plan to do so. However, we may not
receive significant revenue from these investments for several years following
each investment, if ever.






We
may engage in future acquisitions or investments that present many risks, and we
may not realize the anticipated financial and strategic goals for any of these
transactions.






We do not
have significant experience acquiring companies. Since our inception, we have
acquired three entities: Double-Take EMEA, Double-Take Canada, and emBoot, Inc
(now part of Double-Take Canada). We may acquire or make investments in
additional companies. Acquisitions and investments involve a number of
difficulties that present risks to our business, including the
following:






•
            we
      may be unable to achieve the anticipated benefits from the acquisition or
      investment;•
            we
      may have difficulty integrating the operations and personnel of the
      acquired business, and may have difficulty retaining the key personnel of
      the acquired business;•
            we
      may have difficulty incorporating the acquired technologies or products
      with our existing software and technology;•
            our
      ongoing business and management’s attention may be disrupted or diverted
      by transition or integration issues and the complexity of managing
      geographically and culturally diverse locations;•
            we
      may have difficulty maintaining uniform standards, controls, procedures
      and policies across locations; and•
            we
      may experience significant problems or liabilities associated with product
      quality, technology and legal
contingencies.






These
factors could materially adversely affect our business, results of operations
and financial condition or cash flow, particularly in the case of a larger
acquisition or multiple acquisitions in a short period of time. From time to
time, we may enter into negotiations for acquisitions or investments that are
not ultimately consummated. These negotiations could result in significant
diversion of management time, as well as expense.






The
consideration paid for an investment or acquisition may also affect our
financial results. If we were to proceed with one or more significant
acquisitions in which the consideration included cash, we could be required to
use a substantial portion of our available cash. To the extent we issue shares
of our capital stock or other rights to purchase shares of our capital stock as
consideration for the acquisitions, including options or other rights, our
existing stockholders may be diluted, and our earnings per share may decrease.
In addition, acquisitions may result in the incurrence of debt, write-offs and
restructuring charges. They may also result in goodwill and other intangible
assets that are subject to an impairment test, which could result in future
impairment charges.


22


The
loss of key personnel or the failure to attract and retain highly qualified
personnel could adversely affect our business.






Our
future performance depends on the continued service of our key technical, sales,
services and management personnel. We rely on our executive officers and senior
management to execute our existing business plans and to identify and pursue new
opportunities. The loss of key employees could result in significant disruptions
to our business, and the integration of replacement personnel could be time
consuming, cause additional disruptions to our business and be unsuccessful. We
do not carry key person life insurance covering any of our
employees.


Our
future success also depends on our continued ability to attract and retain
highly qualified technical, services and management personnel. Competition for
such personnel is intense, and we may fail to retain our key technical, services
and management employees or attract or retain other highly qualified technical,
services and management personnel in the future. Conversely, if we fail to
manage employee performance or reduce staffing levels when required by market
conditions, our personnel costs would be excessive and our business and
profitability could be adversely affected.






We
will not be able to grow our sales if we do not retain or attract and train
qualified sales personnel.






A portion
of our revenue is generated by our direct sales force, and our future success
will depend in part upon its continued productivity and expansion, as necessary.
To the extent we experience attrition in our direct sales force, we will need to
hire replacements. We face intense competition for sales personnel in the
software industry, and we may not be successful in retaining, hiring or training
our sales personnel in accordance with our plans. If we fail to retain the
experienced members of our sales force, or maintain and expand our sales force
as needed, our future sales and profitability could be adversely
affected.






Changes
in the regulatory environment and general economic condition and other factors
in countries in which we have international sales and operations could adversely
affect our operations.






We
derived approximately 32% of our revenue from sales outside the United States in
2006, approximately 38% of our revenue from sales outside the United States in
2007 and 36% of our revenue from sales outside the United Stated in 2008. We
anticipate that our acquisition of Double-Take EMEA in May 2006 will continue to
maintain and possibly increase the percentage of our revenue generated from
sales outside the United States in future periods. Our international operations
are subject to risks related to the differing legal, political, social and
regulatory requirements and economic conditions of many countries,
including:






•
            difficulties
      in staffing and managing our international operations;•
            costs
      and delays in downsizing non-United States workforces, if necessary, as a
      result of applicable non-United States employment and other
      laws;•
            the
      adoption or imposition by foreign countries of additional withholding
      taxes, other taxes on our income, or tariffs or other restrictions on
      foreign trade or investment, including currency exchange
      controls;•
            general
      economic conditions in the countries in which we operate could adversely
      affect our earnings from operations in those
  countries;


23





•
            imposition
      of, or unexpected adverse changes in, foreign laws or regulatory
      requirements may occur, including those pertaining to export duties and
      quota, trade and employment restrictions;•
            longer
      payment cycles for sales in foreign countries and difficulties in
      collecting accounts receivables;•
            competition
      from local suppliers; and•
            political
      unrest, war or acts of terrorism.






Each of
the foregoing risks could reduce our revenue or increase our
expenses.






We
are exposed to domestic and foreign currency fluctuations that could harm our
reported revenue and results of operations.






Historically,
our international sales were generally denominated in the United States dollar.
As a result of our acquisitions of Double-Take EMEA and Double-Take Canada
(including emBoot), we now have international sales that are denominated in
foreign currencies, and this revenue could be materially affected by currency
exchange rate fluctuations. Our primary exposures are to fluctuations in
exchange rates for the United States dollar versus the Euro and Canadian dollar,
as well as the Euro versus the British Pound. Changes in currency exchange rates
could adversely affect our reported revenue and could require us to reduce our
prices to remain competitive in foreign markets, which could also materially
adversely affect our results of operations. We have not historically hedged
exposure to changes in foreign currency exchange rates and, as a result, we
could incur unanticipated gains or losses.


Protection
of our intellectual property is limited, and any misuse of our intellectual
property by others could materially adversely affect our sales and results of
operations.






Proprietary
technology in our software is important to our success. To protect our
proprietary rights, we rely on a combination of patents, copyrights, trademarks,
trade secrets, confidentiality procedures and contractual provisions. While we
own nine issued patents, seven of which were acquired through our purchase of
TimeSpring, we have not emphasized patents as a source of significant
competitive advantage and have also sought to protect our proprietary technology
under laws affording protection for trade secrets, copyright and trademark
protection of our software, products and developments where available and
appropriate. In addition, our issued patents may not provide us with any
competitive advantages or may be challenged by third parties, and the patents of
others may seriously impede our ability to conduct our business. Further, any
patents issued to us may not be timely or broad enough to protect our
proprietary rights.






We also
have eight registered trademarks in the U.S., including the Double-Take mark.
Although we attempt to monitor use of and take steps to prevent third parties
from using our trademarks without permission, policing the unauthorized use of
our trademarks is difficult. If we fail to take steps to enforce our trademark
rights, our competitive position and brand recognition may be
diminished.






We
protect our software, trade secrets and proprietary information, in part, by
requiring all of our employees to enter into agreements providing for the
maintenance of confidentiality and the assignment of rights to inventions made
by them while employed by us. We also enter into


24


non-disclosure
agreements with our consultants to protect our confidential and proprietary
information. There can be no assurance that our confidentiality agreements with
our employees, consultants and other third parties will not be breached, that we
will be able to effectively enforce these agreements, have adequate remedies for
any breach, or that our trade secrets and other proprietary information will not
be disclosed or otherwise be protected. Furthermore, there also can be no
assurance that others will not independently develop technologies that are
similar or superior to our technology or reverse engineer our
products.






Protection
of trade secret and other intellectual property rights in the markets in which
we operate and compete is highly uncertain and may involve complex legal and
scientific questions. The laws of countries in which we operate may afford
little or no protection to our trade secrets and other intellectual property
rights. Policing unauthorized use of our trade secret technologies and proving
misappropriation of our technologies is particularly difficult, and we expect
software piracy to continue to be a persistent problem. Piracy of our products
represents a loss of revenue to us. Furthermore, any changes in, or unexpected
interpretations of, the trade secret and other intellectual property laws in any
country in which we operate may adversely affect our ability to enforce our
trade secret and intellectual property rights. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our
confidential information and trade secret protection. If we are unable to
protect our proprietary rights or if third-parties independently develop or gain
access to our or similar technologies, our competitive position and revenue
could suffer.






Claims
that we misuse the intellectual property of others could subject us to
significant liability and disrupt our business, which could materially adversely
affect our results of operations and financial condition.






Because
of the nature of our business, we may become subject to material claims of
infringement by competitors and other third-parties with respect to current or
future software applications, trademarks or other proprietary rights. Further,
we may not be aware of all of the patents and other intellectual property rights
owned by third-parties that may be potentially adverse to our interests. Intellectual
property litigation can be complex, costly and protracted. As a result, any
intellectual property litigation to which we are subject could disrupt our
business operations, require us to incur substantial costs and subject us to
significant liabilities, each of which could severely harm our business.





In
December 2005, we agreed to terms for settlement of a legal proceeding with a
provider of information storage systems that involved claims regarding some of
the intellectual property components of our software.  Pursuant to a
settlement agreement, in January 2006 we paid $3.8 million to the other
company. We also agreed to make future payments of $0.5 million in each of
January 2007, 2007, 2009 and 2010, which we collateralized by a
$2.0 million letter of credit to that company. The letter of credit will be
drawn down automatically in increments of $0.5 million at the time of each
payment requirement. Our future obligations under the settlement will be reduced
on a dollar-for-dollar basis to the extent that we purchase or resell the other
company’s products. As of December 31, 2008, we have purchased
$1.8 million of computer equipment that has reduced this
obligation.  In January 2009, both parties agreed to have the letter
of credit reduced to the remaining amount outstanding of $0.2
million.





Any
intellectual property litigation commenced against us could force us to take
actions that could be harmful to our business, including the
following:






.•
            stop
      selling our products or using the technology that contains the allegedly
      infringing intellectual
property;


25





•
            attempt
      to obtain a license to use the relevant intellectual property, which may
      not be available on reasonable terms or at
all; and•
            attempt
      to redesign the products that allegedly infringed upon the intellectual
      property.






In
addition, plaintiffs in intellectual property cases often seek injunctive
relief.  If we are forced to take any of the foregoing actions, our
business, financial position and operating results could be harmed. We may not
be able to develop, license or acquire non-infringing technology under
reasonable terms, if at all. These developments would result in an inability to
compete for customers and would adversely affect our ability to increase our
revenue. The measure of damages in intellectual property litigation can be
complex, and is often subjective or uncertain. If we were to be found liable for
the infringement of a third party’s proprietary rights, the amount of damages we
might have to pay could be substantial and would be difficult to
predict.


We
cannot predict our future capital needs and we may be unable to obtain
additional financing to fund acquisitions, which could materially adversely
affect our business, results of operations and financial
condition.






We may
need to raise additional funds in the future in order to acquire complementary
businesses, technologies, products or services. 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. If additional financing is not
available when required or is not available on acceptable terms, we may be
unable to successfully develop or enhance our software and services through
acquisitions in order to take advantage of business opportunities or respond to
competitive pressures, which could materially adversely affect our software and
services offerings, revenue, results of operations and financial condition. We
have no current plans, nor are we currently considering any proposals or
arrangements, written or otherwise, to acquire a material business, technology,
product or service.






We
have only generated net profits two years since our inception and we may be
unable to sustain profitability in the future.






We
generated net losses of $15.3 million for 2004, $11.8 million for 2005
and $0.6 million for 2006. In 2007 and 2008, we generated net profits of
$20.1 million and $17.6 million, respectively. We may be unable to sustain
profitability in future periods. We intend to continue to expend significant
funds in developing our software offerings and for general corporate purposes,
including marketing, services and sales operations, hiring additional personnel
as needed, upgrading our infrastructure as needed, and regulatory compliance
obligations in connection with being a public reporting company. If we
experience a downturn in our business, we may incur or continue to incur losses
and negative cash flows from operations, which could materially adversely affect
our results of operations and capitalization.


26


Risks
Related to Our Common Stock






We
may experience a decline in revenue or volatility in our operating results,
which may adversely affect the market price of our common
stock.






We cannot
predict our future revenue with certainty because of many factors outside of our
control, including the economic downturn that occurred in 2008. A significant
revenue or profit decline, lowered forecasts or volatility in our operating
results could cause the market price of our common stock to decline
substantially. Factors that could affect our revenue and operating results
include the following:






•
            the
      possibility that our customers may cancel, defer or limit purchases as a
      result of reduced information technology budgets;•
            the
      possibility that our customers may defer purchases of our software
      applications in anticipation of new software applications or updates from
      us or our competitors;•
            the
      ability of our distributors, value-added resellers and OEMs to meet their
      sales objectives;•
            market
      acceptance of our new applications and enhancements;•
            our
      ability to control expenses;•
            changes
      in our pricing and distribution terms or those of our
      competitors;•
            the
      demands on our management, sales force and services infrastructure as a
      result of the introduction of new software applications or
      updates; and•
            the
      possibility that our business will be adversely affected as a result of
      the threat of terrorism or military actions taken by the United States or
      its allies.






Our
expense levels are relatively fixed and are based, in part, on our expectations
of our future revenue. If revenue levels fall below our expectations, our net
income would decrease because only a small portion of our expenses varies with
our revenue. Therefore, any significant decline in revenue for any period could
have an immediate adverse impact on our results of operations for the period. We
believe that period-to-period comparisons of our results of operations should
not be relied upon as an indication of future performance. In addition, our
results of operations could be below expectations of public market analysts and
investors in future periods, which would likely cause the market price of our
common stock to decline.






If
securities analysts do not publish research or reports about our business or if
they publish negative evaluations of our stock, the price of our stock could
decline.






The
trading market for our common stock relies in part on the research and reports
that industry or financial analysts publish about us or our business. If one or
more of the analysts covering us downgrade their evaluations of our stock, the
price of our stock could decline. If one or more of these analysts cease
coverage of our company, we could lose visibility in the market for our stock,
which in turn could cause our stock price to decline.


27


Sales
of outstanding shares of our common stock into the market pursuant to our
currently effective shelf registration statement or in the future could cause
the market price of our common stock to drop significantly, even if our business
is doing well.






As of
February 27, 2009, the number of shares of our common stock outstanding was
22,022,250 shares. In February 2008 a shelf registration statement (file
No. 333-148840) for the sale of all of the shares of our common stock held
by funds affiliated with ABS Capital Partners was declared effective. The sale
of the shares registered on the shelf registration statement could result in a
substantial amount of previously unregistered shares of our common stock being
sold, which could cause the trading price of our common stock to decline. The
market price of our common stock could also decline as a result of sales of
shares of our common stock in the market that were previously not registered
other than in connection with that registration statement or the perception that
these sales could occur. These sales, or the possibility that these sales may
occur, also might make it more difficult for us to sell equity securities in the
future at a time and price that we deem appropriate.






Some
of our stockholders may exert significant influence over us.






One
general partner of ABS Capital Partners currently serves on our board of
directors. Funds affiliated with ABS Capital Partners currently own in the
aggregate shares representing approximately 14.5% of our outstanding common
stock, but may reduce, or liquidate entirely, their holdings as a result of our
shelf registration statement that was declared effective in February 2008. If
these funds sell only a portion or none of their shares, they will be able to
continue to exert significant influence over all matters presented to our
stockholders for approval, including election and removal of our directors and
change of control transactions. The interests of these stockholders may not
coincide with the interests of the other holders of our common stock with
respect to our operations or strategy.






We
do not anticipate paying any dividends on our common stock.






We do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. If we do not pay cash dividends, you could only receive a return on your
investment in our common stock if the market price of our common stock increases
before you sell your shares. In addition, the terms of our loan and security
agreement restrict our ability to pay dividends.






Our
stockholder rights agreement provisions in our organizational documents and in
the Delaware General Corporation Law may prevent takeover attempts that could be
beneficial to our stockholders.






We have a stockholder rights
agreement, which we adopted in November 2008 that may have the effect of
discouraging unsolicited takeover proposals.  The rights issued under
the shareholder rights plan would cause substantial dilution to a person or
group that attempts to acquire more than 15% of our common stock (20% in the
case of ABS Capital Partners) on terms not approved in advance by our board of
directors.  In addition, provisions in our charter and bylaws and in
the Delaware General Corporation Law may make it difficult and expensive for a
third party to pursue a takeover attempt we oppose even if a change in control
of our company would be beneficial to the interests of our stockholders. Our
board of directors has the authority to issue up to 20,000,000 shares of
preferred stock in one or more series and to fix the powers, preferences and
rights of each series without stockholder approval. The ability to issue
preferred stock could discourage unsolicited acquisition proposals or make it
more difficult for a third party to gain control of our company, or otherwise
could adversely affect the market price of our


28


common
stock. Further, as a Delaware corporation, we are subject to Section 203 of
the Delaware General Corporation Law. This section generally prohibits us from
engaging in mergers and other business combinations with stockholders that
beneficially own 15% or more of our voting stock, or with their affiliates,
unless our directors or stockholders approve the business combination in the
prescribed manner. However, because funds affiliated with ABS Capital Partners
acquired their shares prior to our initial public offering, Section 203 is
currently inapplicable to any business combination or transaction with it or its
affiliates.









Item 1B.
            Unresolved
      Staff Comments.






Not
applicable.










Item 2.
            Properties.






We
maintain our most significant leased office space in Indianapolis,
Indiana.   Our Indianapolis facility includes our main
development operation, principal call center, sales support, and other corporate
functions.  In addition to our space in Indianapolis, we also maintain
other offices, all of which are much smaller and we believe more easily
replaceable, and none of which have significant customized features. We also
maintain leased office space in Montreal and Toronto, Canada as part of our
development organization.  Our Southborough, Massachusetts and
Hoboken, New Jersey offices generally provide corporate support for the
organization. Our office located in Paris, France is our main sales and services
office for our Europe, Africa and Middle East region.  Our offices in
Bracknell, United Kingdom, Worcester, United Kingdom, Frankfurt, Germany,
Brussels, Belgium, Singapore, Shanghai, China, Hong Kong, China and Dubai,
United Arab Emirates generally serve our sales and services
organization.





We have
45,429 square feet of office space in Indianapolis pursuant to a lease that
expires in 2010.  We believe that all of our current facilities are
suitable and adequate to meet our near term  needs and could be
replaced if necessary.  As our Indianapolis office lease expires in
2010, we are currently in the process of reviewing our office space
options.  We expect that we will relatively easily be able to meet our
space needs as we believe there is adequate office space in the Indianapolis
area.






Item 3.
            Legal
      Proceedings.






We
currently have no material legal proceedings pending.






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






None






PART II






Item 5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.







29




Market
Information






Since
December 15, 2006, our common stock has traded on the NASDAQ Global Market
under the symbol “DBTK.” Prior to trading on the NASDAQ Global Market our common
stock was not listed or quoted on any national exchange or market
system.






The
following table sets forth, for the periods indicated, the high and low sale
price for our common stock as reported on the NASDAQ Global
Market.






High
                
                
                LowYear ended December 31,
20081st
      Quarter (January 1 through March 31)
                
                $
                21.80
                
                
                $
                10.152nd
      Quarter (April 1 through June 30)
                
                $
                14.91
                
                
                $
                10.283rd
      Quarter (July 1 through September 30)
                
                $
                13.79
                
                
                $
                9.754th Quarter
      (October 1 through December 31)
                
                $
                9.59
                
                
                $
                6.22Year ended December 31,
20071st
      Quarter (January 1 through March 31)
                
                $
                16.22
                
                
                $
                10.742nd
      Quarter (April 1 through June 30)
                
                $
                17.61
                
                
                $
                13.533rd
      Quarter (July 1 through September 30)
                
                $
                19.11
                
                
                $
                15.074th Quarter
      (October 1 through December 31)
                
                $
                25.26
                
                
                $
                17.96









On
February 27, 2009, the last sale price reported on the NASDAQ Global Market
for our common stock was $6.92.






Stockholders






As of
February 27, 2009, there were 154 holders of record of our common
stock.






Dividends






We did
not pay cash dividends on our common stock in 2008 or 2007 and we do not
anticipate that we will pay cash dividends on our common stock in the
foreseeable future. Future declaration and payment of dividends, if any, on our
common stock will be determined by our board of directors in light of factors
the board of directors deems relevant, including our earnings, operations,
capital requirements and financial condition and restrictions in our financing
agreements. In addition, the terms of our loan and security agreement with
Silicon Valley Bank restrict our ability to pay dividends.






Securities
Authorized for Issuance under Equity Compensation Plans






Information
regarding securities authorized for issuance under our equity compensation plans
is included in Item 12 of this annual report.


30





Performance
Graph






The graph
set forth below compares the cumulative total stockholder return on our common
stock between December 15, 2006 (the date our common stock initially began
trading on the NASDAQ Global Market) and December 31, 2008, with the
cumulative total return of (i) the NASDAQ Composite Index and (ii) the
NASDAQ Technology Index, over the same period. This graph assumes the investment
of $100,000 on December 15, 2006 in our common stock, the NASDAQ Composite
Index and the NASDAQ Technology Index, and assumes the reinvestment of
dividends, if any. The graph assumes the initial value of our common stock on
December 15, 2006 was the closing price of $12.66 per share. The
comparisons shown in the graph below are based upon historical data. We caution
that the stock price performance shown in the graph below is not necessarily
indicative of, nor is it intended to forecast, the potential future performance
of our common stock.







12/15/06
                
                
                12/29/06
                
                
                3/31/07
                
                
                6/30/07
                
                
                9/30/07
                
                
                12/31/07
                
                
                3/31/08
                
                
                6/30/08
                
                
                9/30/08
                
                
                12/31/08Double-Take
      Software
                
                
                100.0
                
                
                
                101.7
                
                
                
                106.7
                
                
                
                129.6
                
                
                
                150.9
                
                
                
                171.6
                
                
                
                92.3
                
                
                
                108.5
                
                
                
                78.6
                
                
                
                70.9NASDAQ
      Composite Index
                
                
                100.0
                
                
                
                98.3
                
                
                
                98.6
                
                
                
                105.9
                
                
                
                109.9
                
                
                
                107.6
                
                
                
                92.8
                
                
                
                93.3
                
                
                
                85.1
                
                
                
                64.2NASDAQ
      Technology Index
                
                
                100.0
                
                
                
                97.0
                
                
                
                97.1
                
                
                
                106.9
                
                
                
                112.6
                
                
                
                119.0
                
                
                
                95.0
                
                
                
                99.7
                
                
                
                84.2
                
                
                
                63.4









Use
of Proceeds






On
December 14, 2006, our Registration Statement on Form S-1 (333-136499)
covering our initial public offering was declared effective by the SEC, and the
offering commenced the following day. We registered 5,000,000 shares of
common stock to be sold by us, 2,500,000 shares to be sold by selling
stockholders and an additional 1,125,000 to be sold by selling stockholders to
cover an over-allotment option granted to the underwriters. Cowen &
Company, LLC and Thomas Weisel Partners LLC acted as joint bookrunning managers
for the offering. The initial closing of the offering was on December 20,
2006, at which time we sold 5,000,000 shares and the selling stockholders
sold 2,500,000 shares. The closing of the underwriters’ over-allotment
option and the offering closed on January 5, 2007, at which time the
selling stockholders sold an additional 1,125,000 shares.  The
shares sold by us and the selling stockholders at the initial closing were sold
at a price to the public of $11.00 per share.





Our net
proceeds from the transaction were approximately $47.5 million.  We
used approximately $10.2 million of the proceeds from our initial public
offering to make payment of a special dividend to the holders of the
Series B Preferred Stock in December 2006, leaving the remaining
proceeds to be used for working capital and other general corporate purposes. We
did not use any of the proceeds during 2007.  During 2008, of the
remaining proceeds from the offering, we used $9.9 million for the
acquisition of emBoot, Inc. in July 2008, $0.8 million for the purchase of
property and equipment, and $26.6 million for general corporate
purposes.






Issuer
Purchases of Equity Securities






None.


31





Item 6.
            Selected
      Financial Data.






The
following selected consolidated financial data should be read in conjunction
with our audited consolidated financial statements and related notes thereto and
with Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere in this annual report. The consolidated
statement of operations data for the years ended December 31, 2008, 2007
and 2006, and the selected consolidated balance sheet data as of
December 31, 2007 and 2006 are derived from, and are qualified by reference
to, the audited consolidated financial statements included in the annual report.
The consolidated statement of operations data for the years ended
December 31, 2005 and 2004, and the consolidated balance sheet data as of
December 31, 2006, 2005, and 2004 are derived from audited consolidated
financial statements which are not included in the Annual
Report.






Year Ended December 31,2008
                                                                                
                                                                                
                                                                                
                                                                                2007
                                                                                
                                                                                
                                                                                
                                                                                2006
                                                                                
                                                                                
                                                                                
                                                                                2005
                                                                                
                                                                                
                                                                                
                                                                                2004(in
      thousands)Statement
      of Operations Data:Revenue:Software
      licenses
                                                                                
                                                                                $
                                                                                52,923
                                                                                
                                                                                
                                                                                $
                                                                                49,169
                                                                                
                                                                                
                                                                                $
                                                                                38,418
                                                                                
                                                                                
                                                                                $
                                                                                26,222
                                                                                
                                                                                
                                                                                $
                                                                                19,943Maintenance
      and professional services
                                                                                
                                                                                
                                                                                43,380
                                                                                
                                                                                
                                                                                
                                                                                33,599
                                                                                
                                                                                
                                                                                
                                                                                22,422
                                                                                
                                                                                
                                                                                
                                                                                14,488
                                                                                
                                                                                
                                                                                
                                                                                9,895Total
      revenue
                                                                                
                                                                                
                                                                                96,303
                                                                                
                                                                                
                                                                                
                                                                                82,768
                                                                                
                                                                                
                                                                                
                                                                                60,840
                                                                                
                                                                                
                                                                                
                                                                                40,710
                                                                                
                                                                                
                                                                                
                                                                                29,838Cost
      of revenue:Software
      licenses
                                                                                
                                                                                
                                                                                589
                                                                                
                                                                                
                                                                                
                                                                                411
                                                                                
                                                                                
                                                                                
                                                                                1,355
                                                                                
                                                                                
                                                                                
                                                                                38
                                                                                
                                                                                
                                                                                
                                                                                559Maintenance
      and professional services
                                                                                
                                                                                
                                                                                9,622
                                                                                
                                                                                
                                                                                
                                                                                7,827
                                                                                
                                                                                
                                                                                
                                                                                6,193
                                                                                
                                                                                
                                                                                
                                                                                4,357
                                                                                
                                                                                
                                                                                
                                                                                3,694Total
      cost of revenue
                                                                                
                                                                                
                                                                                10,211
                                                                                
                                                                                
                                                                                
                                                                                8,238
                                                                                
                                                                                
                                                                                
                                                                                7,548
                                                                                
                                                                                
                                                                                
                                                                                4,395
                                                                                
                                                                                
                                                                                
                                                                                4,253Gross
      profit
                                                                                
                                                                                
                                                                                86,092
                                                                                
                                                                                
                                                                                
                                                                                74,530
                                                                                
                                                                                
                                                                                
                                                                                53,292
                                                                                
                                                                                
                                                                                
                                                                                36,315
                                                                                
                                                                                
                                                                                
                                                                                25,585Operating
      expenses:Sales
      and marketing
                                                                                
                                                                                
                                                                                34,928
                                                                                
                                                                                
                                                                                
                                                                                28,872
                                                                                
                                                                                
                                                                                
                                                                                22,211
                                                                                
                                                                                
                                                                                
                                                                                17,191
                                                                                
                                                                                
                                                                                
                                                                                16,188Research
      and development
                                                                                
                                                                                
                                                                                16,540
                                                                                
                                                                                
                                                                                
                                                                                11,896
                                                                                
                                                                                
                                                                                
                                                                                10,679
                                                                                
                                                                                
                                                                                
                                                                                9,748
                                                                                
                                                                                
                                                                                
                                                                                8,717General
      and administrative
                                                                                
                                                                                
                                                                                13,419
                                                                                
                                                                                
                                                                                
                                                                                14,863
                                                                                
                                                                                
                                                                                
                                                                                11,824
                                                                                
                                                                                
                                                                                
                                                                                6,730
                                                                                
                                                                                
                                                                                
                                                                                5,666Depreciation
      and amortization
                                                                                
                                                                                
                                                                                3,638
                                                                                
                                                                                
                                                                                
                                                                                2,346
                                                                                
                                                                                
                                                                                
                                                                                1,613
                                                                                
                                                                                
                                                                                
                                                                                805
                                                                                
                                                                                
                                                                                
                                                                                527Legal
      fees and settlement costs
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                5,671
                                                                                
                                                                                
                                                                                
                                                                                1,755Total
      operating expenses
                                                                                
                                                                                
                                                                                68,525
                                                                                
                                                                                
                                                                                
                                                                                57,977
                                                                                
                                                                                
                                                                                
                                                                                46,327
                                                                                
                                                                                
                                                                                
                                                                                40,145
                                                                                
                                                                                
                                                                                
                                                                                32,853Operating
      income (loss)
                                                                                
                                                                                
                                                                                17,567
                                                                                
                                                                                
                                                                                
                                                                                16,553
                                                                                
                                                                                
                                                                                
                                                                                6,965
                                                                                
                                                                                
                                                                                
                                                                                (3,830
                                                                                )
                                                                                
                                                                                
                                                                                (7,268
                                                                                )Interest
      income
                                                                                
                                                                                
                                                                                1,695
                                                                                
                                                                                
                                                                                
                                                                                3,019
                                                                                
                                                                                
                                                                                
                                                                                319
                                                                                
                                                                                
                                                                                
                                                                                83
                                                                                
                                                                                
                                                                                
                                                                                7Interest
      expense
                                                                                
                                                                                
                                                                                (29
                                                                                )
                                                                                
                                                                                
                                                                                (49
                                                                                )
                                                                                
                                                                                
                                                                                (91
                                                                                )
                                                                                
                                                                                
                                                                                (36
                                                                                )
                                                                                
                                                                                
                                                                                (765
                                                                                )Foreign
      exchange (loss) gain
                                                                                
                                                                                
                                                                                (864
                                                                                )
                                                                                
                                                                                
                                                                                (234
                                                                                )
                                                                                
                                                                                
                                                                                56
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —Income
      (loss) before income taxes
                                                                                
                                                                                
                                                                                18,369
                                                                                
                                                                                
                                                                                
                                                                                19,289
                                                                                
                                                                                
                                                                                
                                                                                7,249
                                                                                
                                                                                
                                                                                
                                                                                (3,783
                                                                                )
                                                                                
                                                                                
                                                                                (8,026
                                                                                )Income
      tax expense (benefit)
                                                                                
                                                                                
                                                                                724
                                                                                
                                                                                
                                                                                
                                                                                (789
                                                                                )
                                                                                
                                                                                
                                                                                494
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —Net
      income (loss)
                                                                                
                                                                                
                                                                                17,645
                                                                                
                                                                                
                                                                                
                                                                                20,078
                                                                                
                                                                                
                                                                                
                                                                                6,755
                                                                                
                                                                                
                                                                                
                                                                                (3,783
                                                                                )
                                                                                
                                                                                
                                                                                (8,026
                                                                                )Less:Accretion
      of preferred stock
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                (4,496
                                                                                )
                                                                                
                                                                                
                                                                                (5,332
                                                                                )
                                                                                
                                                                                
                                                                                (5,314
                                                                                )Reduction
      in Series B preferred stock conversion price
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —Warrants
      exchanged for common stock
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —Exchange
      of Series A for Series B preferred stock
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —Dividends
      on preferred stock
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                (2,830
                                                                                )
                                                                                
                                                                                
                                                                                (2,686
                                                                                )
                                                                                
                                                                                
                                                                                (2,029
                                                                                )Net
      income (loss) attributable to common stockholders
                                                                                
                                                                                $
                                                                                17,645
                                                                                
                                                                                
                                                                                $
                                                                                20,078
                                                                                
                                                                                
                                                                                $
                                                                                (571
                                                                                )
                                                                                
                                                                                $
                                                                                (11,801
                                                                                )
                                                                                
                                                                                $
                                                                                (15,369
                                                                                )Net
      income (loss) per share attributable to common
    stockholders:Basic
                                                                                
                                                                                $
                                                                                0.80
                                                                                
                                                                                
                                                                                $
                                                                                0.94
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )
                                                                                
                                                                                $
                                                                                (3.11
                                                                                )
                                                                                
                                                                                $
                                                                                (4.06
                                                                                )Diluted
                                                                                
                                                                                $
                                                                                0.76
                                                                                
                                                                                
                                                                                $
                                                                                0.87
                                                                                
                                                                                
                                                                                $
                                                                                (0.13
                                                                                )
                                                                                
                                                                                $
                                                                                (3.11
                                                                                )
                                                                                
                                                                                $
                                                                                (4.06
                                                                                )Weighted-average
      number of shares used in per share amounts:Basic
                                                                                
                                                                                
                                                                                21,971
                                                                                
                                                                                
                                                                                
                                                                                21,332
                                                                                
                                                                                
                                                                                
                                                                                4,306
                                                                                
                                                                                
                                                                                
                                                                                3,789
                                                                                
                                                                                
                                                                                
                                                                                3,786Diluted
                                                                                
                                                                                
                                                                                23,173
                                                                                
                                                                                
                                                                                
                                                                                23,027
                                                                                
                                                                                
                                                                                
                                                                                4,306
                                                                                
                                                                                
                                                                                
                                                                                3,789
                                                                                
                                                                                
                                                                                
                                                                                3,786







December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006
                                        
                                        
                                        2005
                                        
                                        
                                        2004(in
      thousands)Balance
      Sheet Data:Current
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        40,659
                                        
                                        
                                        $
                                        25,748
                                        
                                        
                                        $
                                        55,170
                                        
                                        
                                        $
                                        8,341
                                        
                                        
                                        $
                                        5,831Short
      term investments
                                        
                                        
                                        32,524
                                        
                                        
                                        
                                        38,977
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Working
      Capital
                                        
                                        
                                        70,945
                                        
                                        
                                        
                                        56,807
                                        
                                        
                                        
                                        42,674
                                        
                                        
                                        
                                        (2,256
                                        )
                                        
                                        
                                        497Total
      Assets
                                        
                                        
                                        132,040
                                        
                                        
                                        
                                        114,606
                                        
                                        
                                        
                                        77,026
                                        
                                        
                                        
                                        18,590
                                        
                                        
                                        
                                        13,318Deferred
      revenue
                                        
                                        
                                        27,078
                                        
                                        
                                        
                                        24,162
                                        
                                        
                                        
                                        16,744
                                        
                                        
                                        
                                        10,562
                                        
                                        
                                        
                                        7,304Long-term
      deferred revenue
                                        
                                        
                                        4,614
                                        
                                        
                                        
                                        4,485
                                        
                                        
                                        
                                        3,977
                                        
                                        
                                        
                                        2,887
                                        
                                        
                                        
                                        1,607Long-term
      deferred rent
                                        
                                        
                                        117
                                        
                                        
                                        
                                        272
                                        
                                        
                                        
                                        406
                                        
                                        
                                        
                                        518
                                        
                                        
                                        
                                        610Long-term
      capital lease obligations
                                        
                                        
                                        9
                                        
                                        
                                        
                                        13
                                        
                                        
                                        
                                        17
                                        
                                        
                                        
                                        7
                                        
                                        
                                        
                                        38Redeemable
      convertible preferred stock
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        50,561
                                        
                                        
                                        
                                        42,489Total
      stockholders’ equity (deficit)
                                        
                                        $
                                        93,410
                                        
                                        
                                        $
                                        75,544
                                        
                                        
                                        $
                                        45,230
                                        
                                        
                                        $
                                        (54,307
                                        )
                                        
                                        $
                                        (42,601
                                        )





32




Item 7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.






You
should read the following discussion and analysis together with our historical
financial statements and the related notes included elsewhere in this annual
report.






Overview






Double-Take
Software currently develops, sells and supports affordable software that allows
IT organizations of all sizes to dynamically move, protect and recover workloads
across any distance and any combination of physical and virtual server
environments.  As enterprise IT systems evolve they increasingly take
the form of a dynamic infrastructure where the ability to move information
freely, intelligently and securely becomes critical.  Our hardware-
and application-independent software enables a dynamic infrastructure by
efficiently protecting, moving and recovering data created by any application on
almost any type or brand of disk storage on any brand of server running on
Microsoft Windows operating systems as well as many versions of the Linux
operating system. In particular, we believe that through our flagship
“Double-Take” software  that we are the leading supplier of
replication software for Microsoft server environments and that our business is
distinguished by our focus on software license and recurring maintenance sales,
our productive distribution network and our efficient services infrastructure.
Our flagship Double-Take software continuously replicates software and data
changes made on a primary operating server to a duplicate server at a different
location.  Because the duplicate server can commence operating in
place of the primary server at almost any time, our flagship software
facilitates rapid failover and application recovery in the event of a disaster
or other service interruption.





The
disaster recovery market has been our primary historical focus, but as a result
of recent acquisitions and internal development, we are expanding into adjacent
markets for system migrations, back-up and network booting, which is part of our
business model of offering products that optimize workloads for dynamic
infrastructure. With our acquisition of TimeSpring Software Corporation in
December 2007, now known as Double-Take Canada, Inc. (“Double-Take Canada”) and
its TimeData products we can also recover data from almost any point in time
from a repository located on- or off-site.  In July 2008, we acquired
emBoot, Inc., which is now included as part of Double-Take Canada, and
specializes in network booting technology.  The technology acquired
with emBoot allows organizations to easily assign and re-assign computing
workloads to any available Windows or Linux physical servers or desktops or any
virtual machine in their environment.  IT organizations can now move
those workloads around in a matter of minutes, whether it is because a disaster
has occurred, a data center is moving, the company has decided to virtualize its
infrastructure or an application needs more capacity.  We estimate
that we have sold approximately 178,000 software licenses to more than 19,000
customers.





Since
2005, the last year we incurred a net loss, we have experienced substantial
growth.   We increased our total revenue from $40.7 million
for the year ended December 31, 2005 to $96.3 million for the year ended
December 31, 2008, and we have gone from having a net loss of $3.8 million
to a net income of $17.6 million during that same period. We believe that
our focus on providing affordable software to companies of all sizes through an
efficient direct sales team and a robust distribution network has been
instrumental to our revenue growth.





As a
result of our investments in developing our software and establishing our broad
distribution network, as well as legal fees and settlement costs associated with
the defense and settlement of a legal case involving our intellectual property,
we experienced significant operating losses through 2005.  Our ability
to increase the productivity of our sales force and
distribution


33


partners
while controlling our other expenses led to the improvement in our results
through 2008 Our acquisition of Double-Take EMEA on May 23, 2006 has also
contributed to our improved results since 2005, while costs associated with our
acquisitions in Canada have served to decrease net income.





Effect of Recent
Market Conditions and Uncertain Economic Environment on our
Business





During
2008, our overall financial performance remained strong.  We increased
total revenue by $13.5 million or 16% as compared to 2007.  Our 2008
operating profit increased $1.0 million or 6% as compared to
2007.  While our revenue and operating profit increased, our net
income decreased by $2.4 million or 12% as compared to 2007.  This
decrease is primarily related to revenue growing in 2008 at a slower rate than
expenses as well as lower interest income, which we believe is primarily due to
the economic downturn.  During the second half of 2008, we began to
experience the effects of worsening economic conditions, further exacerbated by
customer-specific challenges and significant disruptions in the financial and
credit markets globally.  We experienced order delays, and slightly
lengthening sales cycles and slowing deployments worldwide, which resulted in a
software revenue decrease from the second quarter to the third
quarter.  As a result of these conditions, the revenue in the second
half of 2008 only grew 9% over the second half of 2007 as compared to revenue
growth of 25% in the first half of 2008 over the first half of
2007.





Significant
uncertainty around current macroeconomic and industry conditions persists,
particularly the effect these conditions and any sustained lack of liquidity in
the capital markets may have upon the capital spending of our
customers.  Moreover, we are uncertain of the impact of any near-term
change of enterprise and consumer spending and behavior, in response to these
market conditions, may have on the spending or financial position of our
customers.  The level of competition we face during periods of
economic weakness can be expected to increase.  We cannot be certain
how long these conditions will continue and the magnitude of their effects on
our business and results of operations.  Consequently, these
conditions have negatively affected visibility of our business and made our
forecasting and planning more difficult.





While we
expect the near term market conditions to be challenging, we continue to believe
in our ability to execute our business plan in the near term and our longer term
market opportunities.  We believe the need for organizations to
protect, recover and maintain their data, applications and operating systems and
affordable software that enables dynamic infrastructure will require our current
customers as well as new customers to continue to invest in their
infrastructure.  As a result, we intend to continue to prudently
invest in our business, through continued product development and sales and
marketing efforts.  While the company's sales pipelines are as robust
as they have ever been and support generating revenue and net income in 2009,
the predictability of closure on those pipelines is
uncertain.  Therefore financial performance for 2009 is difficult to
predict, including the predictability of the extent of any revenue growth and
the extent of net income.








Some
Important Aspects of Our Operations






We license our software under perpetual
licenses to end-user customers directly and to a network of distributors,
value-added resellers and original equipment manufacturers, or
OEMs.  Our distributors primarily sell our software to our resellers.
Our resellers bundle or sell our software together with their own products and
also sell our software independently.  Our OEMs market, sell and
support our software and services on a stand-alone basis and incorporate our
software into their ownhardware and software
products.


34


Software
sales made to or through our distributors, value-added resellers and OEMs
generated approximately 92% of total software sales in 2008.  Of the
software sales made to or through our indirect sources, approximately 14% were
made to our distributors for sale to value-added resellers, approximately 72% of
which were made directly through resellers and approximately 6% were made
through OEMs, primarily Hewlett-Packard Co. During 2008, approximately 8% of our
software sales were made solely by our direct sales force. We believe that we
will need to continue to maintain close relationships with our partners to
continue to generate sales. We have no current plans to focus future sales
concentration on one distribution channel versus another. We believe our direct
sales force complements our indirect distribution network.


In 2008,
the median price of sales of Double-Take software licenses to customers was
approximately $5,900 compared to $5,000 in 2007 and $4,000 in 2006, and the
average sales cycle was approximately three months compared to an average sales
cycle of less than three months in 2007 and 2006. The pricing of our product has
not materially changed from 2003 through 2006. On May 1, 2007 and
December 1, 2007, we implemented a nominal price increase across all of our
products except in a few international markets where the price was already
commensurate with the nominal price increase implemented in the United States.
We believe that the pricing and sales cycles have contributed to more balanced
sales throughout the year and more predictable revenue streams in comparison to
other software companies with perpetual license models. We believe that the
affordability of our software is a competitive advantage.





Our
acquisition of Double-Take EMEA in 2006 has continued to provide us with a
direct presence in the European, Middle Eastern and African markets, the
opportunity to further our strategic initiative to increase revenue generated
outside of the United States, and opportunities for improved
margins.  The inclusion of Double-Take EMEA’s assets and operations in
our business since May 23, 2006 has contributed to a significant increase
in the size of our business over the past years.


On
December 24, 2007, we completed our acquisition of Double-Take
Canada.  The acquisition did not provide meaningful revenue in 2008,
but we believe the acquisition of Double-Take Canada’s patented technology and
the engineering expertise of the employees, specifically in the area of file
systems and application level recovery, fits extremely well into our core
capabilities as does the product design into our architecture.  We
expect that this acquisition will help broaden development efforts of our
products.  During 2008, substantially all of the expenses related to
Double-Take Canada were related to research and development and to a lesser
extent depreciation and amortization. On July 28, 2008, we completed our
acquisition of emBoot.  The acquisition did not provide meaningful
revenue in 2008, and we expect substantially all of the on-going expenses will
be related to research and development and to a lesser extent depreciation and
amortization.  We expect the on-going use of the acquired technologies
to further expand our product offering in future periods.


Revenue






We derive
revenue from sales of perpetual licenses for our software and from maintenance
and professional services.


Software
Licenses.  We derive the majority of our revenue from sales of
perpetual licenses of our software applications, which allow our customers to
use the software indefinitely.  We do not customize our software for a
specific end user customer. We recognize revenue from sales of perpetual
licenses generally upon shipment of the software.  In accordance with
EITF 01-9, our software revenue is reported net of rebates and discounts because
we do not receive an identifiable benefit in exchange for the rebate or
discount.


35


Our
software revenue generated approximately 55%, 59% and 63% of our total revenue
in 2008, 2007 and 2006, respectively.  Our software revenue generally
experiences some seasonality.  We believe that many organizations do
not make the bulk of their information technology purchases, including software,
in the first quarter of any year.  We believe that this historically
has generally resulted in lower revenue generated by software sales in our first
quarter of any year.  Historically, we have also experienced lower
revenue in the summer months.  Due to the recent economic downturn,
our quarterly revenue predictability has decreased significantly.  As
a result, future quarterly revenue may trend differently than it has
historically.  Currently we have no way to predict the quarterly
revenue trending, but believe that in line with our historical seasonality the
first quarter of 2009 should be the weakest quarter of the year.


Maintenance and Professional
Services.  We also generate revenue by providing our customers
with maintenance comprised of software updates and product support. We generally
include our maintenance for a designated period in the price of the software at
the time of sale. In addition, some of our customers enter into a maintenance
agreement for periods longer than a year. These agreements entitle our customers
to software updates on a when-and-if-available basis and product support for an
annual fee based on the licenses purchased and the level of service subscribed.
Almost all of our customers that purchase maintenance pay the entire amount
payable under the agreement in advance, although we recognize maintenance
revenue ratably over the term of the agreement. Thispolicy
has contributed to increasing deferred revenue balances on our balance sheet and
positive cash flow from operations.






In some
cases, most often in connection with the licensing of our software, we provide
professional services to assist our customers in strategic planning for disaster
recovery and application high availability, the installation of our software and
the training of their employees to use our software. We provide most of our
professional services on a fixed price basis and we generally recognize the
revenue for professional services once we complete the engagement. For any paid
professional services, including training, that have not been performed within
three years of the original invoice date, we recognize the services as revenue
in the quarter that is three years after original invoice date.


Of total
maintenance and professional services revenue, maintenance revenue represented
90%, 87% and 85% in 2008, 2007 and 2006, respectively.  Professional
services generated the remainder of our total maintenance and professional
services revenue in these periods.


Of our
total revenue, maintenance revenue represented 41%, 35% and 32% in 2008, 2007
and 2006, respectively.  Professional services accounted for 4%, 6%
and 5% of our total revenue 2008, 2007 and 2006, respectively.  Our
maintenance and professional services revenue historically has generated lower
gross margins than our software revenue.  The gross margin generated
by our maintenance and professional services revenue was 78%, 77% and 72% in
2008, 2007 and 2006, respectively.  We have focused on increasing our
maintenance revenue and we believe it has increased more rapidly than license
revenue due to price increases and increased renewal rates attributable to
focused sales efforts and the inclusion of significant new functionality in the
product at no charge for licenses on which maintenance has been
purchased.  As the percentage of total revenue attributable to
maintenance increases, our overall gross margins will be adversely
affected.  Additionally, as a result of the current economic downturn,
companies may decide not to renew their annual maintenance.  Should
this happen, maintenance and professional services revenue may
decrease.


36


Cost
of Revenue






Our cost
of revenue primarily consists of the following:






Cost of Software Revenue.
  Cost of software revenue consists primarily of media, manual,
translation and distribution costs, and royalties to third-party software
developers for technology embedded within our software. Because our development
initiatives have resulted in insignificant time and costs incurred between
technological feasibility and the point at which the software is ready for
general release, we do not capitalize any of our internally-developed
software.






Cost of Services Revenue.
  Cost of services revenue consists primarily of salary and other
personnel-related costs incurred in connection with our provision of maintenance
and professional services. Cost of services revenue also includes other
allocated overhead expenses for our professional services and product support
personnel, as well as travel-related expenses for our staff to perform work at a
customer’s site.






Operating
Expenses






We
classify our operating expenses as follows:






Sales and Marketing.
  Sales and marketing expenses primarily consist of the
following:




·
            personnel
      and related costs for employees engaged in sales, corporate marketing,
      product marketing and product management with partners in our distribution
      network, including salaries, commissions and other incentive compensation,
      including equity-based compensation, related employee benefit costs and
      allocated overhead expenses;




·
            travel
      related expenses to meet with existing and potential customers, and for
      other sales and marketing related
  purposes; and




·
            sales
      promotion expenses, public relations expenses and costs for marketing
      materials and other marketing events, including trade shows, industry
      conventions and advertising, and marketing development funds for our
      distribution partners.








We
expense our sales commissions at the time of sale. We expect our sales and
marketing expense to increase in the future as we continue to invest in
marketing programs and we increase various sales activities which may include an
increase in the number of direct sales professionals.


Research and Development.
  Research and development expenses primarily represent the expense of
developing new software and modifying existing software. These expenses
primarily consist of the following:


·
              personnel
      and related costs, including salaries, employee benefits, equity and other
      incentive compensation and allocated overhead expenses, for research and
      development personnel, including software engineers, software quality
      assurance engineers and systems
  engineers; and


·
              contract
      labor expense and consulting fees paid to independent consultants and
      others who provide software engineering services to us, as well as other
      expenses associated with the design and testing of our
      software.


37





To date,
our research and development efforts have been primarily devoted to increases in
features and functionality of our existing software. We expect research and
development expense to increase in the future as we continue to develop new
solutions for our customers.  We expect research and development
expense to increase as a percentage of revenue in 2009 as we continue to invest
in product development efforts. The 2009 research and development expense will
include a full year of expense related to Double-Take Canada’s acquisition of
emBoot as compared to a partial year in 2008 as the acquisition was made in July
2008.






General and Administrative.
  General and administrative expenses represent the costs and expenses
of managing and supporting our operations. General and administrative expenses
consist primarily of the following:





·
              personnel
      and related costs including salaries, employee benefits, equity and other
      incentive compensation and allocated overhead expenses, for our
      executives, finance, human resources, corporate information technology
      systems, strategic business, corporate quality, corporate training and
      other administrative
personnel;





·
              legal
      and accounting professional
fees;





·
              recruiting
      and training costs;





·
              travel
      related expenses for executives and other administrative
      personnel; and





·
              computer
      maintenance and support for our internal information technology
      system.







General
and administrative expenses have historically increased as we have incurred
increased expenses related to being a publicly-traded company and have invested
in an infrastructure to support our growth. However, we expect general and
administrative expenses to decrease as a percentage of revenue for the
foreseeable future, as we believe the rate at which our revenue will increase
will exceed the rate at which we expect to incur these additional
expenses.






Depreciation and
Amortization.   Depreciation and amortization expense consists
of depreciation expense primarily for computer equipment we use for information
services and in our development and test labs, and amortization of intangible
assets acquired.






Legal Fees and Settlement
Costs.   In December 2005, we agreed to terms for settlement of
a legal proceeding with a provider of information storage systems that involved
claims regarding some of the intellectual property used in our software.
Pursuant to a settlement agreement entered into in January 2006, we paid
$3.8 million in January 2006, which represented our initial settlement
payment in connection with the resolution of this matter, and we agreed to pay
the other company an additional $0.5 million in each of January 2007, 2008,
2009 and 2010. Our obligation to make these future payments will be reduced on a
dollar-for-dollar basis to the extent that we purchase or resell the other
company’s products. We have purchased computer equipment in the amount of
$1.8 million through December 31, 2008. As a result, our future
obligation has been reduced to $0.2 million as of December 31, 2008. Our
obligation to make these payments is collateralized by a letter of credit from
Silicon Valley Bank.


38


Results of
Operations






The
following table sets forth our revenue, costs of revenue and other selected
financial data for the specified periods and as a percentage of our total
revenue for those periods.






Year
      Ended December 31,2008
                                        
                                        
                                        2007
                                        
                                        
                                        2006(In
      thousands)Revenue:Software
      licenses
                                        
                                        $
                                        52,923
                                        
                                        
                                        $
                                        49,169
                                        
                                        
                                        $
                                        38,418Maintenance
      and professional services
                                        
                                        
                                        43,380
                                        
                                        
                                        
                                        33,599
                                        
                                        
                                        
                                        22,422Total
      revenue
                                        
                                        
                                        96,303
                                        
                                        
                                        
                                        82,768
                                        
                                        
                                        
                                        60,840Cost
      of revenue:Software
      licenses
                                        
                                        
                                        589
                                        
                                        
                                        
                                        411
                                        
                                        
                                        
                                        1,355Maintenance
      and professional services
                                        
                                        
                                        9,622
                                        
                                        
                                        
                                        7,827
                                        
                                        
                                        
                                        6,193Total
      cost of revenue
                                        
                                        
                                        10,211
                                        
                                        
                                        
                                        8,238
                                        
                                        
                                        
                                        7,548Gross
      profit
                                        
                                        
                                        86,092
                                        
                                        
                                        
                                        74,530
                                        
                                        
                                        
                                        53,292Operating
      expenses:Sales
      and marketing
                                        
                                        
                                        34,928
                                        
                                        
                                        
                                        28,872
                                        
                                        
                                        
                                        22,211Research
      and development
                                        
                                        
                                        16,540
                                        
                                        
                                        
                                        11,896
                                        
                                        
                                        
                                        10,679General
      and administrative
                                        
                                        
                                        13,419
                                        
                                        
                                        
                                        14,863
                                        
                                        
                                        
                                        11,824Depreciation
      and amortization
                                        
                                        
                                        3,638
                                        
                                        
                                        
                                        2,346
                                        
                                        
                                        
                                        1,613Legal
      fees and settlement costs
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Total
      operating expenses
                                        
                                        
                                        68,525
                                        
                                        
                                        
                                        57,977
                                        
                                        
                                        
                                        46,327Income
      from operations
                                        
                                        
                                        17,567
                                        
                                        
                                        
                                        16,553
                                        
                                        
                                        
                                        6,965Interest
      income
                                        
                                        
                                        1,695
                                        
                                        
                                        
                                        3,019
                                        
                                        
                                        
                                        319Interest
      expense
                                        
                                        
                                        (29
                                        )
                                        
                                        
                                        (49
                                        )
                                        
                                        
                                        (91
                                        )Foreign
      exchange (loss) gain
                                        
                                        
                                        (864
                                        )
                                        
                                        
                                        (234
                                        
                                        
                                        
                                        56Income
      before income taxes
                                        
                                        
                                        18,369
                                        
                                        
                                        
                                        19,289
                                        
                                        
                                        
                                        7,249Income
      tax expense (benefit)
                                        
                                        
                                        724
                                        
                                        
                                        
                                        (789
                                        )
                                        
                                        
                                        494Net
      income
                                        
                                        
                                        17,645
                                        
                                        
                                        
                                        20,078
                                        
                                        
                                        
                                        6,755Accretion
      on redeemable shares:Series B
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (4,477
                                        )Series C
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (19
                                        )Dividends
      on Series B
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (2,140
                                        )Dividends
      on Series C
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (690
                                        )Net
      income (loss) attributable to common stockholders
                                        
                                        $
                                        17,645
                                        
                                        
                                        $
                                        20,078
                                        
                                        
                                        $
                                        (571
                                        )









39





Year
      Ended December 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Revenue:Software
      licenses
                                      
                                      
                                      55
                                      %
                                      
                                      
                                      59
                                      %
                                      
                                      
                                      63
                                      %Maintenance
      and professional services
                                      
                                      
                                      45
                                      %
                                      
                                      
                                      41
                                      %
                                      
                                      
                                      37
                                      %Total
      revenue
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      100
                                      %
                                      
                                      
                                      100
                                      %Cost
      of revenue:Software
      licenses
                                      
                                      
                                      1
                                      %
                                      
                                      
                                      —
                                      
                                      
                                      
                                      2
                                      %Maintenance
      and professional services
                                      
                                      
                                      10
                                      %
                                      
                                      
                                      10
                                      %
                                      
                                      
                                      10
                                      %Total
      cost of revenue
                                      
                                      
                                      11
                                      %
                                      
                                      
                                      10
                                      %
                                      
                                      
                                      12
                                      %Gross
      profit
                                      
                                      
                                      89
                                      %
                                      
                                      
                                      90
                                      %
                                      
                                      
                                      88
                                      %Operating
      expenses:Sales
      and marketing
                                      
                                      
                                      36
                                      %
                                      
                                      
                                      35
                                      %
                                      
                                      
                                      37
                                      %Research
      and development
                                      
                                      
                                      17
                                      %
                                      
                                      
                                      14
                                      %
                                      
                                      
                                      18
                                      %General
      and administrative
                                      
                                      
                                      14
                                      %
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      19
                                      %Depreciation
      and amortization
                                      
                                      
                                      4
                                      %
                                      
                                      
                                      3
                                      %
                                      
                                      
                                      3
                                      %Total
      operating expenses
                                      
                                      
                                      71
                                      %
                                      
                                      
                                      70
                                      %
                                      
                                      
                                      77
                                      %Income
      from operations
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      20
                                      %
                                      
                                      
                                      11
                                      %Interest
      income
                                      
                                      
                                      2
                                      %
                                      
                                      
                                      3
                                      %
                                      
                                      
                                      —Interest
      expense
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Foreign
      exchange (loss) gain
                                      
                                      
                                      (1
                                      )%
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Income
      before income taxes
                                      
                                      
                                      19
                                      %
                                      
                                      
                                      23
                                      %
                                      
                                      
                                      11
                                      %Income
      tax expense (benefit)
                                      
                                      
                                      1
                                      %
                                      
                                      
                                      (1
                                      )%
                                      
                                      
                                      1Net
      income
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      24
                                      %
                                      
                                      
                                      10
                                      %Accretion
      on redeemable shares:Series B
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      %
                                      
                                      
                                      (7
                                      )%Series C
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Dividends
      on Series B
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      %
                                      
                                      
                                      (3
                                      )%Dividends
      on Series C
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      %
                                      
                                      
                                      (1
                                      )%Net
      income (loss) attributable to common stockholders
                                      
                                      
                                      18
                                      %
                                      
                                      
                                      24
                                      %
                                      
                                      
                                      (1
                                      )%









2008
Compared to 2007






Revenue






We derive
our revenue from sales of our products and support and services. Revenue
increased 16% to $96.3 million in 2008 from $82.8 million in 2007.
Revenue in 2008 includes a full year of revenue from the acquisition of
Double-Take Canada and revenue from the date of the acquisition of emBoot, which
was July 28, 2008.  Neither Double-Take Canada or emBoot had
significant revenue in 2008.


40





Software License Revenue.
  Software revenue increased $3.8 million, or 8%, from
$49.2 million in 2007 to $52.9 million in 2008. The increase in
software revenue was primarily due to increased volume of $2.3 million
attributable to broader demand for, and acceptance of, our software,
$1.2 million from new products available during 2008 and $0.3 million
from sales of the TimeData and emBoot products.








Maintenance and
Professional Services Revenue.   Maintenance and professional
services revenue increased $9.8 million, or 29%, from $33.6 million in
2007 to $43.4 million in 2008. Maintenance and professional services
revenue represented 45% of our total revenue in 2008 and 41% of our total
revenue in 2007. Maintenance revenue increased $10.3 million, or 36%, from
$28.9 million in 2007 to $39.2 million in 2008. The increase in
maintenance revenue was attributable to higher sales to our expanding base of
customers and continued maintenance revenue from our existing customers.
Professional services revenue decreased $0.5 million, or 11%, from
$4.7 million in 2007 to $4.2 million in 2008. The slight decrease in
professional services revenue was due to fewer professional service deliveries
due to fewer professional services being sold as well as due to the timing of
scheduling of the service.







Cost
of Revenue and Gross Profit






Total
cost of revenue increased $2.0 million, or 24%, from $8.2 million in 2007
to $10.2 million in 2008. Total cost of revenue represented 11% of our
total revenue in 2008 and 10% of our total revenue in 2007.






Cost of software revenue increased
$0.2 million, or 43%, from $0.4 million in 2007 to $0.6 million
in 2008. The increase was
a result of increased royalties paid to third parties related to software
included in our product. Cost of software revenue was 1% of
total revenue in 2008 and nominal as a percent of total revenue in
2007.






Cost of
services revenue increased $1.8 million, or 23%, from $7.8 million in
2007 to $9.6 million in 2008. The increase was primarily a result of an
increase in personnel and stock based compensation expense pursuant to Statement of Financial Accounting
Standards No. 123(R) (“FAS123R”) of $1.6 million due to increased
headcount and increased travel expense of $0.2 million.  Cost of
services revenue represented 22% of our services revenue in 2008 and 23% of
our services revenue in 2007.






Gross
profit increased $11.6 million, or 16%, from $74.5 million in 2007 to
$86.1 million in 2008. Gross margin effectively remained constant at 89% in
2008 as compared to 90% in 2007. The slight decrease to gross profit is
primarily a result of  increased personnel costs in maintenance and
professional services and less revenue growth than in prior
years.






Operating
Expenses






Sales and Marketing.
  Sales and marketing expenses increased $6.1 million, or 21%,
from $28.9 million in 2007 to $34.9 million in 2008. The increase was
substantially due to the combined increase of compensation expense and stock
based compensation expense of $3.4 million and travel expense of $0.8 million
related to an increase in personnel which included the reallocation of certain
Double-Take EMEA resources from general and administrative because they are more
directly related to the sales efforts in 2008.  Additionally,
marketing and advertising expense increased by $1.3 million as a result of
efforts related to creating Double-Take brand awareness and the expanding
customer base, third party consulting fees increased by


41


$0.5
million and $0.1 million of the overall increase related to expenses from
Double-Take Canada.






Research and Development.
  Research and development expenses increased $4.6 million, or
39%, from $11.9 million in 2007 to $16.5 million in 2008. The increase
primarily resulted from higher compensation expense and stock based compensation
expense of $1.7 million due to an increase in personnel, $0.5 million
from outsourced development projects, and $2.3 million related to our
acquisitions of Double-Take Canada on December 24, 2007 and emBoot on July 28,
2008.






General and Administrative.
  General and administrative expenses decreased $1.4 million, or 10%,
from $14.9 million in 2007 to $13.4 million in 2008.  The decrease
resulted from a decrease of $0.8 million in compensation expense and stock based
compensation expense primarily as a result of a reallocation of certain
Double-Take EMEA resources to sales and marketing because they are more directly
related to the sales efforts in 2008.  The decrease in compensation
expense is partially offset by increased personnel costs related to increased
headcount.  Additionally, the decrease in general and administrative
expenses also resulted from the decreased costs related to the compliance with
the Sarbanes-Oxley Act of 2002 and costs for being a public company by $1.1
million.  As 2007 was the first year we needed to be compliant with
the Sarbanes-Oxley Act of 2002, our costs decreased from 2007 to
2008.   The decreases in expenses were partially offset by
an increase of $0.1 million related to bad debt expense substantially related to
our EMEA receivables, $0.1 million related to on-going maintenance renewals on
software and infrastructure equipment and miscellaneous expenses, and $0.1
million related to Double-Take Canada.






Depreciation and
Amortization.   Depreciation and amortization expense increased
$1.3 million, or 55%, from $2.3 million in 2007 to $3.6 million
in 2008. The increase was attributable to increased depreciation expense of
$0.7 million associated with increased capital expenditures, which were
primarily for product development and other computer-related equipment, as well
as increased amortization expense of $0.6 million related to amortization
of the intangible assets acquired as part of the Double-Take Canada and emBoot
acquisitions.






Interest
Income






Interest
income decreased $1.3 million from $3.0 million in 2007 to
$1.7 million in 2008. While our cash and short term investments increased
$8.5 million from December 31, 2007 to December 31, 2008, our interest income
decreased.  The decrease was a result of lower returns on our cash and
short term investments which matured 2008 and were reinvested at lower rates
than in 2007.  During 2009, should the interest rates continue to
remain at lower levels than those experienced in 2008, we expect our interest
income to be less in 2009 than in 2008.






Foreign
Exchange gains (losses)






Foreign
currency losses increased to $0.9 million in 2008 from a $0.2 million loss in
2007 due to foreign currency fluctuations related to Double-Take
EMEA.  The loss occurred on assets we had that were denominated in
British Pounds in Europe.  These assets are converted to Euros and
then subsequently to US dollars for financial statement reporting
purposes.  Because the UK Pound weakened significantly during 2008
against the Euro, the translation to Euros and then subsequently to US dollars
produced the loss.  This is the first time since our acquisition of
Double-Take EMEA in May 2006 that we have recorded a significant foreign
currency gain or loss related to our UK Pound denominated assets.  If
the UK Pound


42


weakens
further against the Euro in future quarters, we may incur additional
losses.  If the UK Pound strengthens against the Euro in the future,
we would incur foreign currency gains at that time.


Income
Tax Expense (benefit)






Income
tax expense was $0.7 million in 2008 and a benefit of $0.8 million in 2007.
During 2007, we recorded a current tax expense of $8.2 million, excluding
the benefit of net operating loss carryforwards, related to income generated
during the period using an effective tax rate for the full year. Because we had
delivered consistent profitability during 2006 and 2007, we concluded that it
was more likely than not that we would generate sufficient taxable income to
utilize the benefit from our net operating loss carryforwards eligible to be
used in 2007, 2008 and 2009. As a result, we reversed the valuation allowance on
$9.0 million of deferred tax assets resulting in a net benefit of
$0.8 million in 2007. During 2008, we recorded a current tax expense
of $9.3 million, excluding the benefit of net operating loss carryforwards,
related to income generated during the period using an effective tax rate for
the full year.  The increase in current tax expense was substantially
a result of increased taxable income generated from operations in the United
States and increased stock option expense that is not deductible for tax
purposes.  During the fourth quarter of 2008, based upon newly
available information, we re-evaluated our ability to utilize the benefit from
our net operating loss carryforwards.  We concluded that we are able
to utilize our net operating loss carryforwards more quickly than originally
anticipated.  As a result, in 2008 we fully utilized the deferred tax
asset recorded in 2007.  As a result of our ability to utilize an
increased amount of our net operating loss carryforwards in 2008, we reversed
the valuation allowance on $3.6 million of deferred tax assets that was
substantially utilized in 2008.  For 2009 and beyond, we have
evaluated whether we believe it is more likely than not that we would generate
sufficient taxable income to further use the net operating loss carryforwards
eligible to be utilized in 2009 and beyond.  Based upon our consistent
profitability over the past two years and our evaluation of our 2009 taxable
income, we believe it is more likely than not that we would generate sufficient
taxable income to utilize at least a portion of our net operating loss
carryforwards available to be used in 2009 and beyond.  As a result,
in the fourth quarter of 2008 we reversed an additional $5.0 million of the
valuation allowance of the deferred tax assets.  During 2009, we will
continue to evaluate whether we believe it is more likely than not further net
operating loss carryforwards will be able to be utilized.  When
further positive evidence exists we will be able to utilize the further
available net operating loss carryforwards, we will reverse additional valuation
allowance on the deferred tax assets.





In
determining future taxable income, assumptions are made to forecast federal,
state and international operating income, the reversal of temporary timing
differences, and the implementation of any feasible and prudent tax planning
strategies. The assumptions require significant judgment regarding the forecasts
of future taxable income, and are consistent with forecasts used to manage the
business. As of December 31, 2008, the valuation allowance against net
deferred tax assets, which are primarily comprised of net operating loss
carryforwards resulting from operating losses incurred since inception and
resulting from our acquisition of Double-Take Canada is approximately
$16.4 million. Realization of deferred tax assets is dependent upon future
earnings, if any, the timing of which is uncertain. Accordingly, the remaining
net deferred tax assets are offset by the valuation allowance. If not utilized,
the federal and state net operating loss and tax credit carryforwards will
expire between 2017 and 2026. Utilization of these net operating losses and
credit carryforwards are subject to annual limitations due to provisions of the
Internal Revenue Code of 1986, as amended, that are applicable due to “ownership
changes” that have occurred. The valuation allowance as of December 31,
2008 will be maintained until sufficient further positive evidence exists to
support a reversal of, or decrease in, the valuation.






43


Net
Income






Net
income decreased $2.4 million from a net income of $20.1 million in
2007 to net income of $17.6 million in 2008. This decrease is primarily related
to revenue growing at a slower rate than expenses in 2008 as well as lower
interest income and increased income tax expense.  Net income would
have decreased at a rate greater than 12% in 2008 absent our continued focus on
expense control.  Our operating expenses increased 18% in 2008 as
compared to a 25% increase in 2007.  The focus on expense control was
offset by lower returns on our cash and short term investments as well a
decrease in the reversal of the valuation allowance on our deferred tax assets
in 2008 as compared to 2007.







2007
Compared to 2006






Revenue






We derive
our revenue from sales of our products and support and services. Revenue
increased 36% to $82.8 million in 2007 from $60.8 million in 2006.
Revenue in 2007 includes revenue from Double-Take EMEA for the entire year
whereas 2006 only includes revenue from Double-Take EMEA from the acquisition
date of May 23, 2006 through December 31, 2006. There was no revenue
included in 2007 related to our acquisition of Double-Take
Canada.






Software License Revenue.
  Software revenue increased $10.8 million, or 28%, from
$38.4 million in 2006 to $49.2 million in 2007. The increase in
software revenue was primarily due to increased volume of $5.2 million
attributable to increased volume resulting from broader demand for, and
acceptance of, our software, $1.0 million from new products available
during 2007 and $4.6 million from sales through Double-Take EMEA as a
result of an entire year of sales being included in 2007 because Double-Take
EMEA was acquired on May 23, 2006.






Maintenance and Professional
Services Revenue.   Maintenance and professional services
revenue increased $11.2 million, or 50%, from $22.4 million in 2006 to
$33.6 million in 2007. Maintenance and professional services revenue
represented 41% of our total revenue in 2007 and 37% of our total revenue in
2006. Maintenance revenue increased $9.7 million, or 51%, from
$19.2 million in 2006 to $28.9 million in 2007. The increase in
maintenance revenue was attributable to higher sales to our expanding base of
customers, continued maintenance revenue from our existing customers, as well as
maintenance revenue of $5.4 million generated by an entire year of revenue
from Double-Take EMEA, which was acquired on May 23, 2006. Professional
services revenue increased $1.3 million, or 39%, from $3.3 million in
2006 to $4.7 million in 2007. The increase in professional services revenue
was due to more professional service deliveries due to an increase in
professional services personnel as well as $0.7 million of revenue
generated by Double-Take EMEA as a result of an entire year of sales being
included in 2007 because Double-Take EMEA was acquired on May 23,
2006.






Cost
of Revenue and Gross Profit






Total
cost of revenue increased $0.7 million, or 9%, from $7.5 million in
2006 to $8.2 million in 2007. Total cost of revenue represented 10% of our
total revenue in 2007 and 12% of our total revenue in 2006.






Cost of
software revenue decreased $1.0 million, or 70%, from $1.4 million in
2006 to $0.4 million in 2007. The decrease was due to cost of software for
Double-Take EMEA sales in the period from May 24, 2006 through
December 31, 2006 relating to the inventory of Double-Take products on hand
at May 23, 2006 of $1.4 million. This inventory was substantially
sold


44


during
2006 resulting in no similar costs in 2007. The $0.4 million of expense in
2007 was royalties paid to third parties related to software we began to include
in our product in 2007. Cost of software revenue was nominal as a percent of
total revenue in 2007 and 2% of total revenue in 2006.






Cost of
services revenue increased $1.6 million, or 26%, from $6.2 million in
2006 to $7.8 million in 2007. The increase was the result of higher
employee compensation of $0.8 million due to an increase in the number of
our maintenance and professional services personnel and $0.8 million of
costs of maintenance and professional services personnel of Double-Take EMEA
which was acquired on May 23, 2006. Cost of services revenue represented
23% of our services revenue in 2007 and 28% of our services revenue in
2006.






Gross
profit increased $21.2 million, or 40%, from $53.3 million in 2006 to
$74.5 million in 2007. Gross margin increased from 88% in 2006 to 90% in
2007. This increase is primarily related to the increased maintenance revenue in
2007 from Double-Take EMEA and the expanding customer base. Additionally, cost
of software revenue decreased in 2007 as a result of the use of Double-Take
EMEA’s inventory during 2006. These increases to gross profit are all partially
offset by increased personnel costs in maintenance and professional
services.






Operating
Expenses






Sales and Marketing.
  Sales and marketing expenses increased $6.7 million, or 30%,
from $22.2 million in 2006 to $28.9 million in 2007. The increase was
due to an increase of compensation and commission expense of $2.1 million
resulting from increased sales and headcount, an increase of $1.0 million
in marketing and advertising related to creating Double-Take brand awareness, an
increase of $0.2 of travel expense and an increase of $3.3 million of costs
of sales and marketing efforts through Double-Take EMEA which was acquired on
May 23, 2006.






Research and Development.
  Research and development expenses increased $1.2 million, or
11%, from $10.7 million in 2006 to $11.9 million in 2007. The increase
resulted primarily from higher compensation expense of $0.7 million due to
an increase in personnel and $0.4 million from outsourced development
projects.






General and Administrative.
  General and administrative expenses increased $3.0 million, or
26%, from $11.8 million in 2006 to $14.9 million in 2007. The increase
in 2007 was primarily related to $0.3 million of compensation expense
related to increased headcount, an increase of $2.5 million related to
legal, accounting, insurance and consulting fees as a result of being a public
company, $1.3 million attributable to expensing of stock options because of
the adoption of FAS 123R in January 2006, and $1.5 million of costs
from Double-Take EMEA which was acquired on May 23, 2006. Additionally, in
2006, there was a settlement with the former COO for $1.2 million recorded
as a reduction to general and administrative expense. There was no similar
reduction to expense in 2007. These increases are partially offset by a decrease
in compensation expense in 2007 of $3.2 million due to the issuance of
stock to our CEO in 2006 and $1.2 million as a result of the vesting of
stock options to our former CEO in 2006.






Depreciation and
Amortization.   Depreciation and amortization expense increased
$0.7 million, or 45%, from $1.6 million in 2006 to $2.3 million
in 2007. The increase was attributable to increased depreciation expense of
$0.4 million associated with increased capital expenditures, which were
primarily for product development and other computer-related equipment, as well
as increased amortization expense of $0.3 million related to the
intangible


45


assets
acquired in the Double-Take EMEA acquisition and minimal amortization of the
intangibles acquired as part of the Double-Take Canada
acquisition.






Interest
Income






Interest
income increased $2.7 million from $0.3 million in 2006 to
$3.0 million in 2007. The increase is attributable to higher balances in
our cash and short term investment accounts, mainly as a result of our initial
public offering in December 2006 and our positive cash flow from
operations.






Foreign
Exchange gains (losses)






Foreign
currency losses totaled $0.2 million due to foreign currency fluctuations
related to Double-Take EMEA during 2007.






Income
Tax Expense (benefit)






Income
tax expense was $0.5 million in 2006 and was a benefit of $0.8 million
in 2007. During 2007, we recorded a current tax expense of $8.2 million,
excluding the benefit of net operating loss carryforwards, related to income
generated during the period using an effective tax rate for the full year.
Because we have delivered consistent profitability over the past two years, we
concluded that it was more likely than not that we would generate sufficient
taxable income to utilize the benefit from our net operating loss carryforwards
eligible to be used in 2007, 2007 and 2009. As a result, the Company reversed
the valuation allowance on $9.0 million of deferred tax assets resulting in
a net benefit of $0.8 million in 2007.






In
determining future taxable income, assumptions are made to forecast federal,
state and international operating income, the reversal of temporary timing
differences, and the implementation of any feasible and prudent tax planning
strategies. The assumptions require significant judgment regarding the forecasts
of future taxable income, and are consistent with forecasts used to manage the
business. As of December 31, 2007, the valuation allowance against net
deferred tax assets, which are primarily comprised of net operating loss
carryforwards as a result of operating losses incurred since inception, and our
acquisition of Double-Take Canada is approximately $26.0 million.
Realization of deferred tax assets is dependent upon future earnings, if any,
the timing of which is uncertain. Accordingly, the net deferred tax assets were
offset by the valuation allowance. If not utilized, the federal and state net
operating loss and tax credit carryforwards will expire between 2011 and 2026.
Utilization of these net operating losses and credit carryforwards are subject
to annual limitations due to provisions of the Internal Revenue Code of 1986, as
amended, that are applicable due to “ownership changes” that have occurred. The
valuation allowance as of December 31, 2007 will be maintained until
sufficient further positive evidence exists to support a reversal of, or
decrease in, the valuation.






Net
Income






Net
income increased $13.3 million from a net income of $6.8 million in
2006 to net income of $20.1 million in 2007. This increase is primarily related
to our revenue growth of $21.9 million in 2007 while operating expenses
have increased by only $11.7 million in the same period. This increase was
the result of our continued focus on expense control and continuing to leverage
our existing sales force and partners to generate incremental revenue, as well
as our acquisition of Double-Take EMEA, which occurred on May 23, 2006. The
other contributing factors are the


46


reversal
of the valuation allowance on our deferred tax assets as well as increased
interest income during 2007.


Preferred
Stock






Accretion
on our Series B and Series C Preferred stock decreased from
$4.5 million in 2006 to $0.0 million in 2007. The accretion increased
the carrying value of the preferred shares from their carrying value to their
redemption value on a straight-line basis over the period from the investment
date to the mandatory redemption date. Accretion ceased as of November 12,
2006, the redemption date for both issuances.






Dividends
on our Series B and Series C Preferred stock decreased from
$2.8 million in 2006 to $0.0 million in 2007. In connection with our
initial public offering in December 2006, our Series B and Series C
Preferred stock converted into an aggregate of 11,553,130 shares of common
stock. Thus, there are no dividends in 2007.







Critical
Accounting Policies






In
presenting our financial statements in conformity with accounting principles
generally accepted in the United States, we are required to make estimates and
judgments that affect the amounts reported in our financial statements. Some of
the estimates and assumptions we are required to make relate to matters that are
inherently uncertain as they pertain to future events. We formulate these
estimates and assumptions based on historical experience and on various other
matters that we believe to be reasonable and appropriate. Actual results may
differ significantly from these estimates. Of our significant accounting
policies described in Note A to the historical financial statements
included elsewhere in this annual report, we believe that the following policies
may involve a higher degree of judgment and complexity.





Revenue
Recognition


In
accordance with EITF 01-9, our revenue is reported net of rebates and
discounts because there is no identifiable benefit in exchange for the rebate or
discount. We derive revenues from two primary sources or elements: software
licenses and services. Services include customer support, consulting,
installation services and training. A typical sales arrangement includes both of
these elements. We apply the provisions of Statement of Position (“SOP”) 97-2,
Software Revenue
Recognition as amended by SOP 98-4 and SOP 98-9, and related
interpretations to all transactions to determine the recognition of
revenue.






For
software arrangements involving multiple elements, we recognize revenue using
the residual method as described in SOP 98-9. Under the residual method, we
allocate and defer revenue for the undelivered elements based on relative fair
value and recognize the difference between the total arrangement fee and the
amount deferred for the undelivered elements as revenue. The determination of
fair value of the undelivered elements in multiple element arrangements is based
on the price charged when such elements are sold separately, which is commonly
referred to as vendor-specific objective-evidence (“VSOE”).






Our
software licenses typically provide for a perpetual right to use our software
and are sold on a per-copy basis. We recognize software revenue through direct
sales channels and resellers upon receipt of a purchase order or other
persuasive evidence and when all other basic revenue recognition criteria are
met as described below. Revenue from software licenses sold through an OEM
partner is recognized upon the receipt of a royalty report evidencing
sales.


47





Services
revenue includes revenue from customer support and other professional services.
Customer support includes software updates (including unspecified product
upgrades and enhancements) on a when-and-if-available basis, telephone support
and bug fixes or patches. Customer support revenue is recognized ratably over
the term of the customer support agreement, which is typically one year. To
determine the price for the customer support element when sold separately, we
use actual rates at which we have previously sold support as established
VSOE.






Other
professional services such as consulting and installation services provided by
us are not essential to the functionality of the software and can also be
performed by the customer or a third party. Revenues from consulting and
installation services are recognized when the services are completed. Training
fees are recognized after the training course has been provided. Any paid
professional services, including training, that have not been performed within
three years of the original invoice date are recognized as revenue in the
quarter that is three years after the original invoice date. Based on our
analysis of such other professional services transactions sold on a stand-alone
basis, we have concluded we have established VSOE for such other professional
services when sold in connection with a multiple-element software arrangement.
The price for other professional services has not materially changed for the
periods presented.






We have
analyzed all of the undelivered elements included in our multiple-element
arrangements and determined that VSOE of fair value exists to allocate revenues
to services. Accordingly, assuming all basic revenue recognition criteria are
met, software revenue is recognized upon delivery of the software license using
the residual method in accordance with SOP 98-9.






We
consider the four basic revenue recognition criteria for each of the elements as
follows:






Persuasive evidence of an
arrangement with the customer exists.   Our customary practice
is to require a purchase order and, in some cases, a written contract signed by
both the customer and us prior to recognizing revenue with respect to an
arrangement.






Delivery or performance has
occurred.   Our software applications are usually physically
delivered to customers with standard transfer terms such as FOB shipping point.
Software and/or software license keys for add-on orders or software updates are
typically delivered via email. We recognize software revenue upon shipment to
resellers and distributors because there is no right of return or refund and
generally no price protection agreements. In situations where multiple copies of
licenses are purchased, all copies are delivered to the customer in one shipment
and revenue is recognized upon shipment. Occasionally, we enter into a site
license with a customer that allows the customer to use a specified number of
licenses within the organization. When a site license is sold, we deliver a
master disk to the customer that allows the product to be installed on multiple
servers. We have no further obligation to provide additional copies of the
software or user manuals. Revenue on site licenses is recognized upon shipment
of the master disk to the customer. Sales made by our Original Equipment
Manufacturer (“OEM”) partners are recognized as revenue in the month the product
is shipped. We estimate the revenue from a preliminary report received from the
OEM shortly after the end of the month. Once the final report is received, the
revenue is adjusted to that based on the final report, usually in the following
month. Services revenue is recognized when the services are completed, except
for customer support, which is recognized ratably over the term of the customer
support agreement, which is typically one year.


48


Fee is fixed or determinable.
  The fee customers pay for software applications, customer support
and other professional services is negotiated at the outset of an arrangement.
The fees are therefore considered to be fixed or determinable at the inception
of the arrangement.






Collection is probable.
  Probability of collection is assessed on a customer-by-customer
basis. Each new customer undergoes a credit review process to evaluate its
financial position and ability to pay. If we determine from the outset of an
arrangement that collection is not probable based upon the review process,
revenue is recognized on a cash-collected basis.





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





Stock-Based
Compensation






We
adopted FAS 123R on January 1, 2006, which requires compensation cost
to be recognized as expense in 2006 and all periods thereafter for the portion
of outstanding awards that were unvested at that date and awards that are
subsequently granted, based on the fair value of those awards on the measurement
date, calculated using an option pricing model. For more information regarding
our accounting for stock option grants, see Note J[3] to our financial
statements, “Shareholders’ Equity.”





We amortize the unearned stock-based compensation and record
stock-based compensation expense ratably over the vesting periods of these stock
options. We recorded $2.6 million of stock-based compensation expense in
2007 and $3.9 million in 2008.






The
intrinsic value of our outstanding options at December 31, 2008 was
$10.7 million with $9.8 million attributable to vested options and
$0.9 million attributable to unvested options. The intrinsic value of our
outstanding options at December 31, 2007 was $35.4 million with
$27.2 million attributable to vested options and $8.2 million
attributable to unvested options.






We
account for stock options grants to non-employees in accordance with
FAS No. 123(R) and EITF Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services , which
require that the fair value of these instruments be recognized as an expense
over the period in which the related services are rendered.






Income
Taxes


We account for
income taxes in accordance with Statement of Financial Accounting Standards No.
109, Accounting for Income
Taxes (“FAS 109”). Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted laws and tax rates that are
expected to be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits not expected to be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.






We
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (“FIN 48”) on January 1, 2008. The application of this
Interpretation requires a two-step process that separates recognition from
measurement. Upon implementing FIN 48 and performing the analysis we did
not recognize any


49


uncertain
tax positions and during 2008, we did not recognize any increase or decrease to
reserves for uncertain tax positions.


We are
subject to income taxes in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income
tax assessments by tax authorities for the years before 2003.






We have
elected to record interest and penalties recognized in accordance with
FIN 48 in the financial statements as income taxes. Any subsequent change
in classification of FIN 48 interest and penalties will be treated as a
change in accounting principle subject to the requirements of Statement of Financial Accounting
Standards No. 154, Accounting Changes and Error Corrections
..






Software
Development Costs






Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (“FAS 86”),
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Our current process for developing
software is essentially completed concurrently with the establishment of
technological feasibility and therefore no software development costs have been
capitalized for the years ended December 31, 2008, 2007 and 2006. Costs
incurred to develop software programs prior to the achievement of technological
feasibility are expensed as incurred.






Liquidity
and Capital Resources






Overview






During
the development stages of our business, we incurred significant losses from
operating activities. Since the three months ended June 30, 2005, however,
our operations have generated sufficient cash flow to meet substantially all of
the cash requirements of our business, including our operating, capital and
other cash requirements. Our ability to sustain a level of positive cash flow
from operations that is sufficient to continue to meet all of our future
operating, capital and other cash requirements is subject to the risks
associated with our business, including those described under “Risk Factors” in
this annual report, and to changes in our business plan, capital structure and
other events.






From the
start of our operations in 1991 until the three months ended June 30, 2005,
we financed our operations primarily through the issuance of preferred stock and
common stock. Since the three months ended June 30, 2005, we have primarily
financed our operations through internally generated cash flows. In December
2006, we received $47.5 million in net proceeds from our initial public
offering and $1.0 million in net proceeds from our secondary offering in
August 2007. As of December 31, 2008, we had cash and cash equivalents and
short term investments of $73.2 million and accounts receivable of
$19.6 million.






In
January 2006, in connection with the settlement of an intellectual property
dispute reached in December 2005, we paid $3.8 million to another company.
We also agreed to make future payments of $0.5 million in each of January
2007, 2007, 2009 and 2010, which we collateralized by a $2.0 million letter
of credit to that company. The letter of credit will be drawn down automatically
in increments of $0.5 million at the time of each payment requirement. Our
future obligations under the settlement will be reduced on a dollar-for-dollar
basis to the extent that we


50


purchase
or resell the other company’s products. As of December 31, 2008, we have
purchased $1.8 million of computer equipment that has reduced this
obligation.  In January 2009, both parties agreed to have the letter
of credit reduced to the remaining amount outstanding of $0.2
million.






In May
2006, we paid $1.1 million to the former stockholders of Double-Take EMEA,
which was our primary distributor in Europe, the Middle East and Africa as the
initial payment for the acquisition of that company. Subsequent payments
totaling $9.2 million have been made through December 31, 2008
concluding the earn-out obligation. A portion of our earn-out payments were held
in escrow to satisfy claims against the selling shareholders that we may have
from time to time as a result of breaches of representations, warranties or
covenants.  No claims were made and the escrow was released in
2008.





In
December 2007, we acquired all of the issued and outstanding shares of
TimeSpring Software Corporation, now known as Double-Take Canada, for a cash
purchase price of approximately $8.3 million plus transaction costs and
subject to certain customary post-closing working capital adjustments.
Approximately $1.4 million of the purchase price was placed into escrow to
secure certain indemnification obligations of the Sellers.  In
February 2009, approximately $0.2 million of the escrow was
released.






In May
2008, we entered into an amendment to the credit facility with Silicon Valley
Bank that extended the term of the facility to April 29, 2009. Under the
terms of the facility, our maximum borrowings are $2 million less the
aggregate amounts of all outstanding letters of credit, foreign exchange
contracts, or any other accommodations issued or incurred, or caused to be
issued or incurred by the bank. Up to $0.5 million of the facility is
available for foreign exchange contracts. The rate of interest for this
amendment is 0.75% above the prime rate. This facility is collateralized by all
of our assets, excluding intellectual property. This amendment modified the need
for the consent for an acquisition of 100 percent of an entity’s stock or
assets. As of December 31, 2008 there was a letter of credit relating to
our settled legal proceeding (noted above) outstanding for $1.0 million
which was subsequently reduced to $0.2 million in January
2009.






In July
2008 Double-Take Software, Inc. and Double-Take Canada acquired all of the
issued and outstanding shares of emBoot, Inc., a Canadian corporation for a cash
purchase price of approximately $9.6 million plus transaction costs and
subject to certain customary post-closing working capital adjustments.
Approximately $1.6 million of the purchase price was placed into escrow to
secure certain indemnification obligations of the sellers.








Sources
and Uses of Cash






For 2008,
cash generated from operating activities was $21.5 million. We used cash in
investing activities in the amount of $6.5 million. We generated cash from
financing activities in the amount of $0.2 million. Our net increase in
cash and cash equivalents from December 31, 2007 to December 31, 2008
was $14.9 million. The increase in cash and cash equivalents was a result
of cash generated from operations as well as a slight shift in our investment
strategy.  We are investing excess funds substantially in investments
that are considered cash and cash equivalents. As of December 31, 2008 we
had $32.5 million of short term securities. With the current economic
downturn affecting our ability to generate revenue and subsequently generate
cash, we are uncertain we will continue to experience significant positive cash
flow from operations in future periods.  As of December 31, 2008, we
have $73.2 million in cash and cash equivalents and short term
investments.  We believe this is sufficient cash to meet our operating
obligations should we not generate the amount of cash from operations as we have
generated historically.


51





The
following table sets forth cash flow data for the periods
indicated:






Year
      Ended December 31,2008
                              
                              
                              2007
                              
                              
                              2006(In
      thousands)Cash
      flow data:Net
      cash provided by operating activities
                              
                              $
                              21,507
                              
                              
                              $
                              20,513
                              
                              
                              $
                              13,651Cash
      used by investing activities
                              
                              
                              (6,467
                              )
                              
                              
                              (57,306
                              )
                              
                              
                              (4,123
                              )Net
      cash provided by financing activities
                              
                              
                              233
                              
                              
                              
                              7,593
                              
                              
                              
                              37,193Effect
      of exchange rate changes on cash and cash equivalents
                              
                              
                              (362
                              )
                              
                              
                              (222
                              )
                              
                              
                              108Net
      increase (decrease) in cash and equivalents
                              
                              
                              14,911
                              
                              
                              
                              (29,422
                              )
                              
                              
                              46,829Cash
      and cash equivalents, beginning of period
                              
                              
                              25,748
                              
                              
                              
                              55,170
                              
                              
                              
                              8,341Cash
      and equivalents, end of period
                              
                              $
                              40,659
                              
                              
                              $
                              25,748
                              
                              
                              $
                              55,170









Cash
Flows from Operating Activities






Cash
provided by operating activities was $21.5 million in 2008 as compared to $20.5
million in 2007.  Our positive cash flow from operations in 2008 was
primarily a result of $17.6 million of net income in 2008.  Our
continued growth of deferred revenue of $3.5 million, which was a result of
our increase in software license sales and maintenance renewals, was partially
offset by a $1.4 million increase in accounts receivable. Compensation expense
of $3.9 million related to FAS 123(R), and $3.6 million related
to depreciation and amortization are additional add backs to cash flow from
operations. These increases in cash flows from operations have been partially
offset by the change in prepaid expenses and other current assets and accounts
payable and accrued expenses. The deferred tax asset decreased by
$0.5 million as a result of the utilization in 2008 of the deferred tax
assets recorded in 2007.  The decrease was partially offset by the
2008 reduction of the deferred tax asset valuation allowance. Due to the
economic downturn, we do not anticipate significant growth in deferred revenue
in the near term.  Likely any growth in deferred revenue will be
offset by growth in accounts receivable balances due to sales and slower
collections from customers. Additionally, as the deferred tax asset recorded in
2008 is utilized in future years, our operating cash flows will increase. During
2008, the acquisition of Double-Take Canada and emBoot both decreased our
operating cash flow.  As we continue to utilize these entities as part
of our research and development organization while integrating the TimeData and
emBoot products, we anticipate these entities will decrease our operating cash
flow.







Cash
provided by operating activities increased in 2007 compared to 2006 primarily
due to having $20.1 million of net income in 2007 compared to net income of
$6.8 million in 2006 and our continued growth of deferred revenue of
$7.1 million, which was a result of our increase in software license sales
and maintenance renewals. Compensation expense of $2.6 million related to
FAS 123R, and $2.3 million related to depreciation and amortization
are additional increases to cash flows from operations. These increases in cash
flows from operations have been partially offset by the change in accounts
receivable, prepaid expenses and other assets, and deferred tax assets. The
deferred tax asset increased by $5.9 million as a result of the reduction
of the deferred tax asset valuation allowance and the increase in accounts
receivable of $4.8 is a result of increased sales.





52


Cash
Flows from Investing Activities






Cash used
in investing activities decreased in 2008 by $50.8 million as compared to
2007 primarily due to the maturities of short term investments slightly offset
by the purchases of short term investments.  Additionally, the cash
used in acquisitions decreased.  In 2008 we purchased emBoot while in
2007 we purchased TimeSpring as well as made our earn-out payments related to
the acquisition of Double-Take EMEA, with the exception of the final earn out
payment made in the first quarter of 2008.  While our purchases of
equipment only increased slightly during 2008, the purchases were primarily for
research and development equipment.  As a result of the economic
downturn, we plan to be very cautious with our spending, but we expect to
continue to invest in our research and development equipment as needed in the
future. As a result, unless we make another acquisition, we expect net cash used
in investing activities to decrease in the near term.





Cash used
in investing activities increased in 2007 by $57.3 million as compared to
2006 primarily due to purchases of short term investments with the proceeds of
our initial public offering, increased research and development lab equipment
expenditures, earn-out payments related to our acquisition of Double-Take EMEA
on May 23, 2006 and our acquisition of Double-Take Canada in December
2007.  The final earn-out payment related to our acquisition of
Double-Take EMEA in the amount of $0.3 million was made in the first
quarter of 2008.






Cash
Flows from Financing Activities






Cash
provided by financing activities decreased $7.4 million in 2008 compared to
2007.  During 2007, we received $2.7 million of proceeds from a
secondary offering and stock option exercises and $4.9 million as excess tax
benefits from stock based compensation.  In 2008, we did not have a
secondary offering and due to our lower stock price there were only limited
stock option exercises as well as minimal excess tax benefits from stock based
compensation.






Cash
provided by financing activities decreased $29.6 million in 2007 compared
to 2006 substantially due to our initial public offering in 2006. In 2006 the
proceeds from our initial public offering, which were offset by payments made
for the repurchase of common stock from the CEO and payments made to the holders
of our Series B preferred stock upon the conversion of the outstanding
shares of our Series B convertible preferred stock in connection with our
initial public offering, resulted in approximately $36.8 million of cash
provided by financing activities. There was an additional $0.5 million of
stock options exercises in 2006. These transactions resulted in cash provided by
financing activities of approximately $37.2 million. In 2007, we received
$2.7 million of proceeds from our secondary offering and stock option
exercises and $4.9 million as excess tax benefits from stock based
compensation.





53


Cash
Requirements






We have
various contractual obligations and commercial commitments. The following table
sets forth our future contractual obligations and commercial commitments as of
December 31, 2008:






Payments
      Due by PeriodLess
      Than
                    
                    
                    1
      to 3
                    
                    
                    3
      to 5Total
                    
                    
                    1 Year
                    
                    
                    Years
                    
                    
                    Years
                    
                    
                    5+
      Years(In
      thousands)Contractual
      obligationsAs
      of December 31, 2008Capital
      (finance) lease obligations
                    
                    $
                    27
                    
                    
                    $
                    21
                    
                    
                    $
                    6
                    
                    
                    $
                    —
                    
                    
                    $
                    —Operating
      lease obligations
                    
                    
                    4,522
                    
                    
                    
                    1,794
                    
                    
                    
                    2,393
                    
                    
                    
                    174
                    
                    
                    
                    161Purchase
      obligations
                    
                    
                    250
                    
                    
                    
                    250
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    $
                    4,799
                    
                    
                    $
                    2,065
                    
                    
                    $
                    2,399
                    
                    
                    $
                    174
                    
                    
                    $
                    161









We have
entered into various non-cancelable operating lease agreements, with expiration
dates through 2011, for office space and computer equipment. Some of these
leases have free or escalating rent payment provisions. Werecognize rent expense under these leases on a straight-line basis. Our purchase
obligations as of December 31, 2008 represent non-cancelable contractual
obligations for equipment and services. The foregoing table does not reflect any
contractual obligations and commercial commitments that we entered into after
December 31, 2008.






As of
December 31, 2008, we have $73.2 million in cash and cash equivalents and short
term investments.  Given our current cash and cash equivalents, our
short term investments, our accounts receivable, our continued revenue stream
related to on-going maintenance renewals, available borrowings under our
revolving loan agreement and our expectation of some continued positive cash
flow from operations, we believe that we will have sufficient liquidity to fund
our business and meet our contractual obligations over a period beyond the next
12 months. We may need to raise additional funds in the future, including
for acquisitions or investments in complementary businesses or technologies or
if we experience operating losses. In the event that additional financing is
required, we may not be able to obtain it on acceptable terms or at all.
Additional sources may include equity and debt financing and other financing
arrangements. If we raise additional funds through the issuance of equity or
convertible securities, our stockholders may experience dilution. We may not be
able to generate sufficient cash flow from operations according to our planned
schedule, or to obtain any additional financing arrangements we may require or
seek on terms acceptable to us. Any inability by us to generate or obtain the
sufficient funds that we may require could limit our ability to generate revenue
or to continue or enhance our profitability.






Off-Balance
Sheet Arrangements






As of
December 31, 2008, other than our operating leases described under
“— Liquidity and Capital Resources — Cash Requirements” above, we do
not have off-balance sheet financing arrangements, including any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose
entities.


54


Quarterly
Results of Operations






The
following table sets forth our unaudited quarterly consolidated statement of
operations data for each of the eight quarters ended December 31, 2008. The
data has been prepared on the same basis as the audited consolidated financial
statements included in this annual report and reflects all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of this data. The results of historical periods are not
necessarily indicative of the results of operations for a full year or any
future period.






For
      the Three Months Ended2008
                                                              
                                                              
                                                              2007Dec. 31
                                                              
                                                              
                                                              
                                                              Sep. 30
                                                              
                                                              
                                                              
                                                              Jun. 30
                                                              
                                                              
                                                              
                                                              Mar. 31
                                                              
                                                              
                                                              
                                                              Dec. 31
                                                              
                                                              
                                                              
                                                              Sep. 30
                                                              
                                                              
                                                              
                                                              Jun. 30
                                                              
                                                              
                                                              
                                                              Dec. 31(In
      thousands, except per share data)Revenue:Software
      licenses
                                                              
                                                              $
                                                              14,068
                                                              
                                                              
                                                              $
                                                              12,819
                                                              
                                                              
                                                              $
                                                              13,620
                                                              
                                                              
                                                              $
                                                              12,416
                                                              
                                                              
                                                              $
                                                              14,176
                                                              
                                                              
                                                              $
                                                              12,612
                                                              
                                                              
                                                              $
                                                              11,991
                                                              
                                                              
                                                              $
                                                              10,390Maintenance
      and professional services
                                                              
                                                              
                                                              10,888
                                                              
                                                              
                                                              
                                                              11,132
                                                              
                                                              
                                                              
                                                              10,784
                                                              
                                                              
                                                              
                                                              10,576
                                                              
                                                              
                                                              
                                                              9,348
                                                              
                                                              
                                                              
                                                              8,695
                                                              
                                                              
                                                              
                                                              8,021
                                                              
                                                              
                                                              
                                                              7,535Total
      revenue
                                                              
                                                              
                                                              24,956
                                                              
                                                              
                                                              
                                                              23,951
                                                              
                                                              
                                                              
                                                              24,404
                                                              
                                                              
                                                              
                                                              22,992
                                                              
                                                              
                                                              
                                                              23,524
                                                              
                                                              
                                                              
                                                              21,307
                                                              
                                                              
                                                              
                                                              20,012
                                                              
                                                              
                                                              
                                                              17,925Cost
      of revenue:Software
      licenses
                                                              
                                                              
                                                              192
                                                              
                                                              
                                                              
                                                              156
                                                              
                                                              
                                                              
                                                              121
                                                              
                                                              
                                                              
                                                              120
                                                              
                                                              
                                                              
                                                              195
                                                              
                                                              
                                                              
                                                              71
                                                              
                                                              
                                                              
                                                              118
                                                              
                                                              
                                                              
                                                              27Maintenance
      and professional services
                                                              
                                                              
                                                              2,424
                                                              
                                                              
                                                              
                                                              2,342
                                                              
                                                              
                                                              
                                                              2,517
                                                              
                                                              
                                                              
                                                              2,339
                                                              
                                                              
                                                              
                                                              2,035
                                                              
                                                              
                                                              
                                                              1,927
                                                              
                                                              
                                                              
                                                              2,008
                                                              
                                                              
                                                              
                                                              1,857Total
      cost of revenue
                                                              
                                                              
                                                              2,616
                                                              
                                                              
                                                              
                                                              2,498
                                                              
                                                              
                                                              
                                                              2,638
                                                              
                                                              
                                                              
                                                              2,459
                                                              
                                                              
                                                              
                                                              2,230
                                                              
                                                              
                                                              
                                                              1,998
                                                              
                                                              
                                                              
                                                              2,126
                                                              
                                                              
                                                              
                                                              1,884Gross
      profit
                                                              
                                                              
                                                              20,340
                                                              
                                                              
                                                              
                                                              21,453
                                                              
                                                              
                                                              
                                                              21,766
                                                              
                                                              
                                                              
                                                              20,533
                                                              
                                                              
                                                              
                                                              21,294
                                                              
                                                              
                                                              
                                                              19,309
                                                              
                                                              
                                                              
                                                              17,886
                                                              
                                                              
                                                              
                                                              16,041Operating
      expensesSales
      and marketing
                                                              
                                                              
                                                              8,635
                                                              
                                                              
                                                              
                                                              8,393
                                                              
                                                              
                                                              
                                                              8,879
                                                              
                                                              
                                                              
                                                              9,021
                                                              
                                                              
                                                              
                                                              8,189
                                                              
                                                              
                                                              
                                                              6,935
                                                              
                                                              
                                                              
                                                              6,845
                                                              
                                                              
                                                              
                                                              6,903Research
      and development
                                                              
                                                              
                                                              4,061
                                                              
                                                              
                                                              
                                                              4,331
                                                              
                                                              
                                                              
                                                              4,129
                                                              
                                                              
                                                              
                                                              4,019
                                                              
                                                              
                                                              
                                                              3,140
                                                              
                                                              
                                                              
                                                              3,042
                                                              
                                                              
                                                              
                                                              2,839
                                                              
                                                              
                                                              
                                                              2,875General
      and administrative
                                                              
                                                              
                                                              3,374
                                                              
                                                              
                                                              
                                                              3,371
                                                              
                                                              
                                                              
                                                              3,507
                                                              
                                                              
                                                              
                                                              3,167
                                                              
                                                              
                                                              
                                                              3,856
                                                              
                                                              
                                                              
                                                              4,100
                                                              
                                                              
                                                              
                                                              3,690
                                                              
                                                              
                                                              
                                                              3,217Depreciation
      and amortization
                                                              
                                                              
                                                              996
                                                              
                                                              
                                                              
                                                              974
                                                              
                                                              
                                                              
                                                              863
                                                              
                                                              
                                                              
                                                              805
                                                              
                                                              
                                                              
                                                              639
                                                              
                                                              
                                                              
                                                              603
                                                              
                                                              
                                                              
                                                              555
                                                              
                                                              
                                                              
                                                              549Total
      operating expenses
                                                              
                                                              
                                                              17,066
                                                              
                                                              
                                                              
                                                              17,069
                                                              
                                                              
                                                              
                                                              17,378
                                                              
                                                              
                                                              
                                                              17,012
                                                              
                                                              
                                                              
                                                              15,824
                                                              
                                                              
                                                              
                                                              14,680
                                                              
                                                              
                                                              
                                                              13,929
                                                              
                                                              
                                                              
                                                              13,544Operating
      income
                                                              
                                                              
                                                              5,274
                                                              
                                                              
                                                              
                                                              4,384
                                                              
                                                              
                                                              
                                                              4,388
                                                              
                                                              
                                                              
                                                              3,521
                                                              
                                                              
                                                              
                                                              5,470
                                                              
                                                              
                                                              
                                                              4,629
                                                              
                                                              
                                                              
                                                              3,957
                                                              
                                                              
                                                              
                                                              2,497Interest
      income
                                                              
                                                              
                                                              220
                                                              
                                                              
                                                              
                                                              396
                                                              
                                                              
                                                              
                                                              470
                                                              
                                                              
                                                              
                                                              609
                                                              
                                                              
                                                              
                                                              806
                                                              
                                                              
                                                              
                                                              798
                                                              
                                                              
                                                              
                                                              772
                                                              
                                                              
                                                              
                                                              643Interest
      expense
                                                              
                                                              
                                                              (6
                                                              )
                                                              
                                                              
                                                              (9
                                                              )
                                                              
                                                              
                                                              (7
                                                              )
                                                              
                                                              
                                                              (7
                                                              )
                                                              
                                                              
                                                              (10
                                                              )
                                                              
                                                              
                                                              (9
                                                              )
                                                              
                                                              
                                                              (11
                                                              )
                                                              
                                                              
                                                              (19
                                                              )Foreign
      exchange (loss) gain
                                                              
                                                              
                                                              (399
                                                              )
                                                              
                                                              
                                                              (79
                                                              )
                                                              
                                                              
                                                              (41
                                                              )
                                                              
                                                              
                                                              (345
                                                              )
                                                              
                                                              
                                                              (184
                                                              )
                                                              
                                                              
                                                              (55
                                                              )
                                                              
                                                              
                                                              6
                                                              
                                                              
                                                              
                                                              (1
                                                              )Income
      before income taxes
                                                              
                                                              
                                                              5,089
                                                              
                                                              
                                                              
                                                              4,692
                                                              
                                                              
                                                              
                                                              4,810
                                                              
                                                              
                                                              
                                                              3,778
                                                              
                                                              
                                                              
                                                              6,082
                                                              
                                                              
                                                              
                                                              5,363
                                                              
                                                              
                                                              
                                                              4,724
                                                              
                                                              
                                                              
                                                              3,120Income
      tax expense (benefit)
                                                              
                                                              
                                                              (5,127
                                                              )
                                                              
                                                              
                                                              2,070
                                                              
                                                              
                                                              
                                                              2,156
                                                              
                                                              
                                                              
                                                              1,625
                                                              
                                                              
                                                              
                                                              (258
                                                              )
                                                              
                                                              
                                                              2,055
                                                              
                                                              
                                                              
                                                              (2,768
                                                              )
                                                              
                                                              
                                                              182Net
      income
                                                              
                                                              $
                                                              10,216
                                                              
                                                              
                                                              $
                                                              2,622
                                                              
                                                              
                                                              $
                                                              2,654
                                                              
                                                              
                                                              $
                                                              2,153
                                                              
                                                              
                                                              $
                                                              6,340
                                                              
                                                              
                                                              $
                                                              3,308
                                                              
                                                              
                                                              $
                                                              7,492
                                                              
                                                              
                                                              $
                                                              2,938Net
      income per share, basic
                                                              
                                                              $
                                                              0.46
                                                              
                                                              
                                                              $
                                                              0.12
                                                              
                                                              
                                                              $
                                                              0.12
                                                              
                                                              
                                                              $
                                                              0.10
                                                              
                                                              
                                                              $
                                                              0.29
                                                              
                                                              
                                                              $
                                                              0.15
                                                              
                                                              
                                                              $
                                                              0.36
                                                              
                                                              
                                                              $
                                                              0.14Net
      income per share, diluted
                                                              
                                                              $
                                                              0.44
                                                              
                                                              
                                                              $
                                                              0.11
                                                              
                                                              
                                                              $
                                                              0.11
                                                              
                                                              
                                                              $
                                                              0.09
                                                              
                                                              
                                                              $
                                                              0.27
                                                              
                                                              
                                                              $
                                                              0.14
                                                              
                                                              
                                                              $
                                                              0.33
                                                              
                                                              
                                                              $
                                                              0.13Stock-based
      compensation expense included in above
                                                              
                                                              $
                                                              989
                                                              
                                                              
                                                              $
                                                              995
                                                              
                                                              
                                                              $
                                                              1,077
                                                              
                                                              
                                                              $
                                                              886
                                                              
                                                              
                                                              $
                                                              726
                                                              
                                                              
                                                              $
                                                              1,140
                                                              
                                                              
                                                              $
                                                              483
                                                              
                                                              
                                                              $
                                                              272










55




Item 7A.
            Quantitative
      and Qualitative Disclosures About Market
Risk.






We do not engage in trading activities
involving non-exchange traded contracts. As such, we are not materially exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in these relationships.





Historically,
our exposure to foreign currency exchange rates was limited as our international
sales were denominated in the United States dollar. As a result of our
acquisition of Double-Take EMEA in May 2006, Double-Take Canada in
December 2007, and emBoot in July 2008, we now have international
sales that are denominated in foreign currencies, and we face exposure to
adverse movements in foreign currency exchange rates. Depending on the amount of
our revenue generated from Double-Take EMEA and Double-Take Canada (including
emBoot), adverse movement in foreign currency exchange rates could have a
material adverse impact on our financial results. Our primary exposures are to
fluctuations in exchange rates for the United States dollar versus the Euro and
Canadian dollar, as well as the Euro versus the British Pound. See “ Foreign exchange gains (losses)”in Management’s
Discussion and Analysis of Financial Condition and Results of Operations
above. Changes in currency exchange rates could adversely affect our reported
revenue and could require us to reduce our prices to remain competitive in
foreign markets, which could also materially adversely affect our results of
operations. We have not historically hedged exposure to changes in foreign
currency exchange rates and, as a result, we could incur unanticipated gains or
losses.


56


Item
8.  Financial Statements and Supplementary Data.





INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS





PageDouble-Take
      Software, Inc.:Consolidated
      Historical Financial Statements:Report
      of Independent Registered Public Accounting Firm
                58Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                59Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007
      and 2006
                60Consolidated
      Statement of Changes in Stockholders’ Equity (Deficit) for the years ended
      December 31, 2008, 2007 and 2006
                61Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007
      and 2006
                62Notes
      to Consolidated Financial Statements
                63Schedule II —
      Valuation and Qualifying Accounts
                91








57


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Double-Take
Software, Inc.








We have
audited the accompanying consolidated balance sheets of Double-Take Software,
Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and
the related consolidated statements of operations, changes in stockholders’
equity (deficit) and cash flows and Schedule II for each of the years in the
three-year period ended December 31, 2008. These financial statements
and schedule are the responsibility of the Company’s
management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements and Schedule II are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Double-Take Software,
Inc. as of December 31, 2008 and 2007, and the consolidated results of
their operations and their consolidated cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, Schedule II referred to above, when considered in relation to the
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Double-Take Software Inc.’s internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated March 12,
2009 expressed an unqualified opinion thereon.














/s/
Eisner LLP





New York,
New York


March 12,
2009


58


DOUBLE-TAKE
SOFTWARE, INC.


Consolidated
Balance Sheets


(In
thousands, except share and per share amounts)





December 31,2008
                      
                      
                      2007AssetsCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      40,659
                      
                      
                      $
                      25,748Short
      term investments
                      
                      
                      32,524
                      
                      
                      
                      38,977Accounts
      receivable, net of allowance for doubtful accounts of $765 and $599
      at December 31, 2008 and 2007, respectively
                      
                      
                      19,593
                      
                      
                      
                      18,171Prepaid
      expenses and other current assets
                      
                      
                      6,621
                      
                      
                      
                      5,019Deferred
      tax assets
                      
                      
                      5,438
                      
                      
                      
                      3,184Total
      current assets
                      
                      
                      104,835
                      
                      
                      
                      91,099Property
      and equipment — at cost, net of accumulated depreciation of $6,687
      and $4,505 at December 31, 2008 and 2007, respectively
                      
                      
                      4,236
                      
                      
                      
                      4,184Customer
      relationships, net of accumulated amortization of $1,181 and $727 at
      December 31, 2008 and 2007, respectively
                      
                      
                      1,086
                      
                      
                      
                      1,540Marketing
      relationships, net of accumulated amortization of $648 and $399 at
      December 31, 2008 and 2007, respectively
                      
                      
                      1,344
                      
                      
                      
                      1,593Technology
      related intangibles, net of accumulated amortization of $533 and $8 at
      December 31, 2008 and 2007, respectively
                      
                      
                      3,533
                      
                      
                      
                      1,928Goodwill
                      
                      
                      16,267
                      
                      
                      
                      11,408Other
      assets
                      
                      
                      739
                      
                      
                      
                      149Long-term
      deferred tax
      assets
                      
                      
                      —
                      
                      
                      
                      2,705Total
      assets
                      
                      $
                      132,040
                      
                      
                      $
                      114,606LiabilitiesCurrent
      liabilities:Accounts
      payable
                      
                      $
                      1,280
                      
                      
                      $
                      1,983Accrued
      expenses
                      
                      
                      5,142
                      
                      
                      
                      7,396Other
      liabilities
                      
                      
                      390
                      
                      
                      
                      751Deferred
      revenue
                      
                      
                      27,078
                      
                      
                      
                      24,162Total
      current liabilities
                      
                      
                      33,890
                      
                      
                      
                      34,292Long-term
      deferred revenue
                      
                      
                      4,614
                      
                      
                      
                      4,485Long-term
      deferred rent
                      
                      
                      117
                      
                      
                      
                      272Long-term
      capital lease obligations
                      
                      
                      9
                      
                      
                      
                      13Total
      long-term liabilities
                      
                      
                      4,740
                      
                      
                      
                      4,770Total
      liabilities
                      
                      
                      38,630
                      
                      
                      
                      39,062Stockholders’
      equityPreferred
      Stock, $.01 par value per share; 20,000,000 shares authorized;
      0 shares issued and outstanding at December 31, 2008 and
      2007
                      
                      
                      —
                      
                      
                      
                      —Common
      stock, $.001 par value per share; 130,000,000 shares authorized;
      22,013,608 and 21,928,664 shares issued and outstanding at
      December 31, 2008 and 2007, respectively
                      
                      
                      22
                      
                      
                      
                      22Additional
      paid-in capital
                      
                      
                      152,853
                      
                      
                      
                      148,628Accumulated
      deficit
                      
                      
                      (55,594
                      )
                      
                      
                      (73,239
                      )Accumulated
      other comprehensive incomeUnrealized
      gain on short term investments
                      
                      
                      47
                      
                      
                      
                      14Cumulative
      foreign currency translation adjustment
                      
                      
                      (3,918
                      )
                      
                      
                      119Total
      stockholders’ equity
                      
                      
                      93,410
                      
                      
                      
                      75,544Total
      liabilities and stockholders’ equity
                      
                      $
                      132,040
                      
                      
                      $
                      114,606


See notes
to financial statements


59


DOUBLE-TAKE
SOFTWARE, INC.


Consolidated
Statements of Operations


(In
thousands, except per share amounts)





Year
      Ended December 31,2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006Revenue:Software
      licenses
                                            
                                            $
                                            52,923
                                            
                                            
                                            $
                                            49,169
                                            
                                            
                                            $
                                            38,418Maintenance
      and professional services
                                            
                                            
                                            43,380
                                            
                                            
                                            
                                            33,599
                                            
                                            
                                            
                                            22,422Total
      revenue
                                            
                                            
                                            96,303
                                            
                                            
                                            
                                            82,768
                                            
                                            
                                            
                                            60,840Cost
      of revenue:Software
      licenses
                                            
                                            
                                            589
                                            
                                            
                                            
                                            411
                                            
                                            
                                            
                                            1,355Maintenance
      and professional services
                                            
                                            
                                            9,622
                                            
                                            
                                            
                                            7,827
                                            
                                            
                                            
                                            6,193Total
      cost of revenue
                                            
                                            
                                            10,211
                                            
                                            
                                            
                                            8,238
                                            
                                            
                                            
                                            7,548Gross
      profit
                                            
                                            
                                            86,092
                                            
                                            
                                            
                                            74,530
                                            
                                            
                                            
                                            53,292Operating
      expenses:Sales
      and marketing
                                            
                                            
                                            34,928
                                            
                                            
                                            
                                            28,872
                                            
                                            
                                            
                                            22,211Research
      and development
                                            
                                            
                                            16,540
                                            
                                            
                                            
                                            11,896
                                            
                                            
                                            
                                            10,679General
      and administrative
                                            
                                            
                                            13,419
                                            
                                            
                                            
                                            14,863
                                            
                                            
                                            
                                            11,824Depreciation
      and amortization
                                            
                                            
                                            3,638
                                            
                                            
                                            
                                            2,346
                                            
                                            
                                            
                                            1,613Total
      operating expenses
                                            
                                            
                                            68,525
                                            
                                            
                                            
                                            57,977
                                            
                                            
                                            
                                            46,327Operating
      income
                                            
                                            
                                            17,567
                                            
                                            
                                            
                                            16,553
                                            
                                            
                                            
                                            6,965Interest
      income
                                            
                                            
                                            1,695
                                            
                                            
                                            
                                            3,019
                                            
                                            
                                            
                                            319Interest
      expense
                                            
                                            
                                            (29
                                            )
                                            
                                            
                                            (49
                                            )
                                            
                                            
                                            (91
                                            )Foreign
      exchange (loss) gains
                                            
                                            
                                            (864
                                            )
                                            
                                            
                                            (234
                                            )
                                            
                                            
                                            56Income
      before income taxes
                                            
                                            
                                            18,369
                                            
                                            
                                            
                                            19,289
                                            
                                            
                                            
                                            7,249Income
      tax expense (benefit)
                                            
                                            
                                            724
                                            
                                            
                                            
                                            (789
                                            )
                                            
                                            
                                            494Net
      income
                                            
                                            
                                            17,645
                                            
                                            
                                            
                                            20,078
                                            
                                            
                                            
                                            6,755Accretion
      on redeemable shares:Series B
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (4,477
                                            )Series C
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (19
                                            )Dividends
      on Series B
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (2,140
                                            )Dividends
      on Series C
                                            
                                            
                                            —
                                            
                                            
                                            
                                            —
                                            
                                            
                                            
                                            (690
                                            )Net
      income (loss) attributable to common stockholders
                                            
                                            $
                                            17,645
                                            
                                            
                                            $
                                            20,078
                                            
                                            
                                            $
                                            (571
                                            )Net
      income (loss) per share attributable to common
    stockholders:Basic
                                            
                                            $
                                            0.80
                                            
                                            
                                            $
                                            0.94
                                            
                                            
                                            $
                                            (0.13
                                            )Diluted
                                            
                                            $
                                            0.76
                                            
                                            
                                            $
                                            0.87
                                            
                                            
                                            $
                                            (0.13
                                            )Weighted-average
      number of shares used in per share amounts:Basic
                                            
                                            
                                            21,971
                                            
                                            
                                            
                                            21,332
                                            
                                            
                                            
                                            4,306Diluted
                                            
                                            
                                            23,173
                                            
                                            
                                            
                                            23,027
                                            
                                            
                                            
                                            4,306





See notes
to financial statements


60


DOUBLE-TAKE
SOFTWARE, INC.


Consolidated
Statements of Changes in Stockholders’ Equity (Deficit)


(In
thousands, except share and per share amounts)





AccumulatedAdditional
                          
                          
                          
                          
                          
                          
                          
                          
                          OtherCommon Stock
                          
                          
                          Paid-in
                          
                          
                          Accumulated
                          
                          
                          Comprehensive
                          
                          
                          ComprehensiveShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Deficit
                          
                          
                          Income
                          
                          
                          Income
                          
                          
                          TotalBalance
      – January 1, 2006
                          
                          
                          3,789,270
                          
                          
                          
                          4
                          
                          
                          
                          42,931
                          
                          
                          
                          (97,242
                          )
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          (54,307
                          )Net
      income for the year
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          6,755
                          
                          
                          
                          6,755
                          
                          
                          
                          
                          
                          
                          
                          6,755Foreign
      currency translation adjustment
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          128
                          
                          
                          
                          128
                          
                          
                          
                          128Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          6,883Accretion
      of difference between carrying amount and redemption price – Series
      B
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (4,477
                          )
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (4,477
                          )Redeemable
      convertible preferred stock dividends – Series B
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (2,140
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,140
                          )Return
      of Capital – Series B
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (10,225
                          )
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (10,225
                          )Accretion
      of difference between carrying amount and redemption price – Series
      C
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (19
                          )
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (19
                          )Redeemable
      convertible preferred stock dividends – Series C
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (690
                          )
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (690
                          )Conversion
      of preferred stock
                          
                          
                          11,553,130
                          
                          
                          
                          12
                          
                          
                          
                          57,979
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          57,991Public
      offering, net of expenses
                          
                          
                          5,000,000
                          
                          
                          
                          5
                          
                          
                          
                          47,544
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          47,549Options
      issued for services
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,240
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          2,240Exercise
      of stock options
                          
                          
                          158,198
                          
                          
                          
                          —
                          
                          
                          
                          528
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          528Exercise
      of warrants
                          
                          
                          67,996
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          —Shares
      issued to CEO
                          
                          
                          157,995
                          
                          
                          
                          —
                          
                          
                          
                          1,897
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          —Balance
      – December 31, 2006
                          
                          
                          20,726,589
                          
                          
                          $
                          21
                          
                          
                          $
                          138,398
                          
                          
                          $
                          (93,317
                          )
                          
                          
                          
                          
                          
                          $
                          128
                          
                          
                          $
                          45,230Net
      income for the year
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          20,078
                          
                          
                          
                          20,078
                          
                          
                          
                          —
                          
                          
                          
                          20,078Foreign
      currency translation adjustment
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (9
                          )
                          
                          
                          (9
                          )
                          
                          
                          (9
                          )Unrealized
      gain on short term investments
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          14
                          
                          
                          
                          14
                          
                          
                          
                          14Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          20,083Options
      issued for services
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          2,621
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          2,621Exercise
      of stock options
                          
                          
                          1,018,407
                          
                          
                          
                          1
                          
                          
                          
                          1,588
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          1,589Exercise
      of warrants
                          
                          
                          67,918
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          —Excess
      tax benefits on stock based compensation
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          4,895
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          4,895Proceeds
      from public offering, net of expenses
                          
                          
                          115,750
                          
                          
                          
                          —
                          
                          
                          
                          1,126
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          1,126Balance
      - December 31, 2007
                          
                          
                          21,928,664
                          
                          
                          $
                          22
                          
                          
                          $
                          148,628
                          
                          
                          $
                          (73,239
                          )
                          
                          
                          
                          
                          
                          $
                          133
                          
                          
                          $
                          75,544Net
      income for the year
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          17,645
                          
                          
                          
                          17,645
                          
                          
                          
                          —
                          
                          
                          
                          17,645Foreign
      currency translation adjustment
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          (4,037
                          )
                          
                          
                          (4,037
                          )
                          
                          
                          (4,037
                          )Unrealized
      gain on short term investments
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          33
                          
                          
                          
                          33
                          
                          
                          
                          33Total
      comprehensive income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          $
                          13,641Options
      issued for services
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          3,948
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          3,948Exercise
      of stock options
                          
                          
                          84,944
                          
                          
                          
                          —
                          
                          
                          
                          114
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          114Excess
      tax benefits on stock based compensation
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          163
                          
                          
                          
                          —
                          
                          
                          
                          
                          
                          
                          
                          —
                          
                          
                          
                          163Balance
      – December 31, 2008
                          
                          
                          22,013,608
                          
                          
                          $
                          22
                          
                          
                          $
                          152,853
                          
                          
                          $
                          (55,594
                          )
                          
                          
                          
                          
                          
                          $
                          (3,871
                          )
                          
                          $
                          93,410





See notes
to financial statements


61


DOUBLE-TAKE
SOFTWARE, INC.


Consolidated
Statements of Cash Flows


(In
thousands, except share and per share amounts)





Year Ended
December 31,2008
                    
                    
                    2007
                    
                    
                    2006Cash
      flows from operating activities:Net
      income
                    
                    $
                    17,645
                    
                    
                    $
                    20,078
                    
                    
                    $
                    6,755Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                    
                    
                    2,348
                    
                    
                    
                    1,636
                    
                    
                    
                    1,189Amortization
      of intangible assets
                    
                    
                    1,290
                    
                    
                    
                    710
                    
                    
                    
                    424Provision
      for (recovery of) doubtful accounts
                    
                    
                    (174
                    )
                    
                    
                    19
                    
                    
                    
                    200Issuance
      of options for services
                    
                    
                    3,948
                    
                    
                    
                    2,621
                    
                    
                    
                    2,215Issuance
      of common stock to CEO
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    3,241Issuance
      of redeemable convertible Series C preferred to management as
      compensation
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    103Deferred
      income tax expense (benefit)
                    
                    
                    451
                    
                    
                    
                    (5,889
                    )
                    
                    
                    —Excess
      tax benefits from stock based compensation
                    
                    
                    (163
                    )
                    
                    
                    (4,895
                    )
                    
                    
                    —Changes
      in:Accounts
      receivable
                    
                    
                    (1,413
                    )
                    
                    
                    (4,840
                    )
                    
                    
                    (1,939
                    )Prepaid
      expenses and other assets
                    
                    
                    (1,867
                    )
                    
                    
                    (1,128
                    )
                    
                    
                    (1,684
                    )Inventory
                    
                    
                    —
                    
                    
                    
                    14
                    
                    
                    
                    328Other
      assets
                    
                    
                    (579
                    )
                    
                    
                    (20
                    )
                    
                    
                    (2
                    )Accounts
      payable and accrued expenses
                    
                    
                    (3,113
                    )
                    
                    
                    4,546
                    
                    
                    
                    (2,159
                    )Other
      liabilities
                    
                    
                    (324
                    )
                    
                    
                    582
                    
                    
                    
                    (887
                    )Deferred
      revenue
                    
                    
                    3,458
                    
                    
                    
                    7,079
                    
                    
                    
                    5,867Net
      cash provided by operating activities
                    
                    
                    21,507
                    
                    
                    
                    20,513
                    
                    
                    
                    13,651Cash
      flows from investing activities:Purchase
      of property and equipment
                    
                    
                    (2,458
                    )
                    
                    
                    (2,340
                    )
                    
                    
                    (2,050
                    )Purchase
      of short term investments
                    
                    
                    (67,226
                    )
                    
                    
                    (65,179
                    )
                    
                    
                    —Sales
      of short term investments
                    
                    
                    73,492
                    
                    
                    
                    26,445
                    
                    
                    
                    —Acquisitions,
      net of cash acquired
                    
                    
                    (10,275
                    )
                    
                    
                    (16,232
                    )
                    
                    
                    (2,073
                    )Net
      cash used in investing activities
                    
                    
                    (6,467
                    )
                    
                    
                    (57,306
                    )
                    
                    
                    (4,123
                    )Cash
      flows from financing activities:Return
      of Capital – Series B
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (10,225
                    )Proceeds
      from public offering, net of expenses
                    
                    
                    —
                    
                    
                    
                    1,126
                    
                    
                    
                    48,319Repurchase
      of common stock from CEO
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (1,343
                    )Proceeds
      from exercise of stock options
                    
                    
                    114
                    
                    
                    
                    1,589
                    
                    
                    
                    453Excess
      tax benefits from stock based compensation
                    
                    
                    163
                    
                    
                    
                    4,895
                    
                    
                    
                    —Payment
      on capital lease obligation
                    
                    
                    (44
                    )
                    
                    
                    (17
                    )
                    
                    
                    (11
                    )Net
      cash provided by financing activities
                    
                    
                    233
                    
                    
                    
                    7,593
                    
                    
                    
                    37,193Effect
      of exchange rate changes on cash
                    
                    
                    (362
                    )
                    
                    
                    (222
                    )
                    
                    
                    108Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    15,273
                    
                    
                    
                    (29,200
                    )
                    
                    
                    46,721Cash
      and cash equivalents — beginning of year
                    
                    
                    25,748
                    
                    
                    
                    55,170
                    
                    
                    
                    8,341Cash
      and cash equivalents — end of year
                    
                    $
                    40,659
                    
                    
                    $
                    25,748
                    
                    
                    $
                    55,170Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                    
                    $
                    5
                    
                    
                    $
                    —
                    
                    
                    $
                    78Income
      taxes
                    
                    $
                    2,729
                    
                    
                    $
                    1,852
                    
                    
                    $
                    1,066Supplemental
      disclosures of noncash investing and financing activities:Issuance
      of common stock upon cashless exercise of warrants
                    
                    $
                    —
                    
                    
                    $
                    201
                    
                    
                    $
                    —Accrued
      costs for public offering
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    770Receivable
      from employees in connection with exercise of stock
options
                    
                    $
                    —
                    
                    
                    $
                    —
                    
                    
                    $
                    74


See notes
to financial statements


62
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements
 December
31, 2008, 2007 and 2006
 (In
thousands, except for share and per share amounts)




Note A — Organization
and Significant Accounting Policies





[1]  The
Company:


Double-Take
Software, Inc. (formerly NSI Software, Inc.) (the “Company”), a Delaware
corporation develops, sells and supports affordable software that allows IT
organizations of all sizes to dynamically move, protect and recover workloads
across any distance and any combination of physical and virtual server
environments. The Company operates in one reportable segment and its revenues
are mainly derived from sales of software and related services. Software is
licensed by the Company primarily to distributors, value added resellers
(“VARS”) and original equipment manufacturers (“OEMS”), located primarily in the
United States and in Europe.




The Company
completed an initial public offering of its common stock in December
2006.




In connection
with the Company’s initial public offering or IPO:





•
            The
      Company effected a 1 for 4.9 reverse stock split of its common stock
      on November 3, 2006. All share and per share amounts related to
      common stock, options and warrants included in the consolidated financial
      statements have been restated to reflect the reverse stock split. The
      conversion ratios of the Company’s Series B Preferred Stock and
      Series C Preferred Stock have also been adjusted to reflect the
      reverse split.





•
            There
      were 7.5 million shares of common stock sold at $11.00 per share to the
      public, comprising 5 million shares of common stock sold by the Company
      and 2.5 million shares of common stock sold by existing
      stockholders.   The Company received gross proceeds of
      $55,000, or $47,549 after deducting underwriting discounts and commissions
      of $3,850 and offering costs of $3,601.  Upon closing of the
      IPO, all shares of redeemable preferred stock automatically converted into
      11,553,130 shares of common stock.





•
            On
      January 4, 2007, the underwriters of the Company’s initial public offering
      exercised their over-allotment option to purchase an additional 1,125,000
      shares of common stock of the Company from certain existing
      stockholders.  The Company did not receive any proceeds from the
      sale of the shares of the selling
stockholders.





The
      Company completed a secondary offering of its common stock in August
      2007.





In
      connection with this secondary
offering:





•
            There
      were 2.8 million shares of common stock sold at $16.00 per share to the
      public, comprising 100,000 shares of common stock sold by the Company and
      2.7 million shares of common stock sold by existing
      stockholders.   The Company did not receive any proceeds
      from shares of common stock sold by the selling
      stockholders.  The Company received gross proceeds of $1,600, or
      $1,002 after deducting underwriting discounts and commissions of $88 and
      offering costs of $510.  The Company paid the offering costs of
      the selling stockholders.





•
            On
      August 13, 2007, the underwriters of the Company’s secondary offering
      exercised their over-allotment option to purchase an additional 15,750
      shares from the Company and 402,750 shares from one of the selling
      stockholders.  The Company did not receive any proceeds from the
      sale of shares by the selling stockholder.  The Company received
      gross proceeds of $252, or $238 after underwriting commissions of
      $14.


63
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


Between
November 2002 and October 2004, the Company issued shares of preferred stock in
private placement transactions with institutional and other accredited
investors, including the selling stockholders. The shares of preferred stock
issued in these private placements and outstanding immediately prior to the
initial public offering in December 2006 were automatically converted into
shares of the Company’s common stock in connection with the initial public
offering. In connection with the Company’s October 2004 private placement, the
Company entered into an amended and restated registration rights agreement.
Pursuant to the terms of the registration rights agreement, and upon the request
of the selling stockholders, on January 24, 2008 the Company filed a
registration statement on Form S-3 with the SEC in order to register the
disposition from time to time of up to 3,184,519 shares of the Company’s
common stock held by the selling stockholders.  The Form S-3 was
effective on February 27, 2008.





Principles
of Consolidation




The
consolidated financial statements include all subsidiaries. All inter-company
transactions and balances have been eliminated.  Double-Take Software
Canada, Inc. (“Double-Take Canada”), a Canadian corporation and wholly-owned
subsidiary of the Company, entered into a share purchase agreement withTimeSpring Software Corporation (“TimeSpring”) on
December 24, 2007 and a share purchase agreement with emBoot, Inc
(“emBoot”) on July 28, 2008 to acquire 100 percent of both entities,
respectively. The consolidated financial statements include the financial
results and activities related to Double-Take Canada’s acquisition of TimeSpring
and emBoot from the dates of each acquisition.  Double-Take Software
S.A.S. (“Double-Take EMEA”) has been consolidated since May 23, 2006, which is
the date Double-Take EMEA was acquired.




[2] Acquisition of emBoot, Inc.:




On July
28, 2008, the Company and Double-Take Canada entered into a share purchase
agreement (the “emBoot Purchase Agreement”) with emBoot, a Canadian corporation
(a company specializing in network booting technology), and the shareholders of
emBoot (the “emBoot Sellers”).  Pursuant to the terms of the emBoot
Purchase Agreement, Double-Take Canada acquired from the emBoot Sellers all of
the issued and outstanding shares of emBoot for a cash purchase price of
approximately $9.6 million plus transaction costs and subject to certain
customary post-closing working capital adjustments.  Approximately
$1.6 million of the purchase price was placed into escrow for twenty four months
after the date of acquisition to secure certain indemnification obligations of
the emBoot Sellers.




The
acquisition of emBoot was accounted for using the purchase method of accounting
and the assets acquired and liabilities assumed were accounted for at their fair
values at the acquisition date based on a management review. The amounts are
based on currently available information and certain assumptions and estimates
that management believes are reasonable. Operating results of the Double-Take
Canada acquisition of emBoot are included in the consolidated financial
statements from its date of acquisition.





The
details of the initial purchase price are as follows:





Cash
      purchase price
                            
                            $
                            9,573Working
      capital adjustments
                            
                            
                            40Transaction
      costs
                            
                            
                            280Total
      initial purchase price
                            
                            $
                            9,893





64
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


The
following table summarizes the estimated fair values of the assets acquired and
the liabilities assumed at the date of acquisition. The allocation is subject to
refinement substantially related to the finalization of the post-closing working
capital adjustments:





LifeCash
      and cash equivalents
                  
                  $
                  89Accounts
      receivable
                  
                  
                  119Prepaid
      expenses
                  
                  
                  34Accounts
      payable
                  
                  
                  (1
                  )Accrued
      expenses
                  
                  
                  (173
                  )Deferred
      revenue
                  
                  
                  (20
                  )Property
      plant equipment,
                  
                  
                  35
                  
                  3
      yearsTechnology
      related intangible
                  
                  
                  3,000
                  
                  5
      yearsGoodwill
                  
                  
                  6,810Net
      assets acquired
                  
                  $
                  9,893




[3] Acquisition of TimeSpring Software Corporation:





On
December 24, 2007, the Company and Double-Take Canada, a Canadian corporation
and wholly-owned subsidiary of the Company, entered into a share purchase
agreement (the “TimeSpring Purchase Agreement”) with TimeSpring Software
Corporation, a Canadian corporation, and the shareholders of TimeSpring (the
“TimeSpring Sellers”) for the acquisition of TimeSpring.  Pursuant to
the terms of the TimeSpring Purchase Agreement, Double-Take Canada acquired from
the TimeSpring Sellers all of the issued and outstanding shares of TimeSpring
for a cash purchase price of approximately $8.3 million plus transaction costs
and subject to certain customary post-closing working capital
adjustments.  Approximately $1.4 million of the purchase price was
placed into escrow to secure certain indemnification obligations of the
TimeSpring Sellers.  Approximately $0.2 million of the purchase price
was released from escrow in February 2009.  The remaining $1.2 million
of the purchase price will be held in escrow for twenty four months after the
date of acquisition.





The
acquisition of TimeSpring was accounted for using the purchase method of
accounting and the assets acquired and liabilities assumed were accounted for at
their fair values at the acquisition date based on a management
review.  The amounts are based on currently available information and
certain assumptions and estimates that management believes are
reasonable.  Operating results of the Double-Take Canada acquisition
of TimeSpring are included in the consolidated financial statements from its
date of acquisition.  The operating results from December 24, 2007
through December 31, 2007 for Double-Take Canada were de minimus.





The
details of the initial purchase price are as follows (in
thousands):





Cash
      purchase price
                    
                    $
                    8,339Working
      capital adjustments
                    
                    
                    818Transaction
      costs
                    
                    
                    620Total
      initial purchase price
                    
                    $
                    9,777





65
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


The
following table summarizes the estimated fair values of the assets acquired and
the liabilities assumed at the date of acquisition.  The allocation
was subject to refinement substantially related to the finalization of the
post-closing working capital adjustments:





LifeBank
      overdraft
                        
                        $
                        (149
                        )Accounts
      receivable
                        
                        
                        60Prepaid
      expenses and other current assets
                        
                        
                        1,215Account
      payable
                        
                        
                        (25
                        )Accrued
      expenses
                        
                        
                        (113
                        )Other
      liabilities
                        
                        
                        (92
                        )Deferred
      revenue
                        
                        
                        (36
                        )Properties
      and equipment
                        
                        
                        453
                        
                        3-5
      yearsTechnology
      related intangible
                        
                        
                        1,936
                        
                        5
      yearsGoodwill
                        
                        
                        6,528Net
      assets acquired
                        
                        $
                        9,777





In
accordance with the TimeSpring Purchase Agreement between TimeSpring and
Double-Take Canada, the Company made post-closing working capital adjustments to
the purchase price allocation of $134.  These post-closing adjustments
increased the goodwill related to this acquisition to $6,662.





The
following unaudited pro forma information represents the Company’s condensed
consolidated results of operations as if the acquisition of Double-Take Canada
had occurred as of the beginning of the years ended December 31, 2007 and
2006.  The pro forma amounts of net income (loss) attributable to
common stockholders include amortization of the amounts ascribed to intangible
assets acquired in the acquisition.





Year Ended
December 31,2007
                      
                      
                      2006Total
      Revenue
                      
                      $
                      83,142
                      
                      
                      $
                      61,373Net
      income (loss) attributable to common stockholders
                      
                      $
                      15,461
                      
                      
                      $
                      (5,841
                      )Basic
      income (loss) per share
                      
                      $
                      0.72
                      
                      
                      $
                      (1.36
                      )Diluted
      income (loss) per share
                      
                      $
                      0.67
                      
                      
                      $
                      (1.36
                      )Weighted
      average shares outstanding – basic
                      
                      
                      21,332
                      
                      
                      
                      4,306Weighted
      average shares outstanding – diluted
                      
                      
                      23,027
                      
                      
                      
                      4,306




[4] Acquisition of Double-Take EMEA:




On
May 23, 2006, the Company acquired all of the issued and outstanding shares
of Sunbelt System Software S.A.S. which is now known as Double-Take Software
S.A.S., or Double-Take EMEA. From 1998 through the acquisition date, Double-Take
EMEA was the principal or exclusive distributor of the Company’s software in the
European, Middle Eastern and African market and a certified Double-Take training
organization. An initial payment of $1.1 million was made to the former
stockholders of Double-Take EMEA for the acquisition, which represented earn-out
payments for the period January 1, 2006 through April 30, 2006.
Subsequent payments totaling $2.4 million were made through
December 31, 2006. A portion of the earn-out payments were held in
escrow.  The escrow account was established to hold 20% of the initial
$1.1 million payment and 20% of each earn-out payment through
December 31, 2007 to satisfy claims against the selling shareholders that
we may have from time to time as a result of breaches of representations,
warranties or covenants through December 31, 2007.




The
acquisition of Double-Take EMEA was accounted for using the purchase method of
accounting, and the assets acquired and liabilities assumed were accounted for
at their fair values at the acquisition date based on a management review. The
amounts are based on currently available information and certain assumptions
and


66
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


estimates
that management believes are reasonable.  Operating results of
Double-Take EMEA are included in the consolidated financial statements from its
date of acquisition.




The details
of the initial purchase price are as follows (in thousands):





Earn-out
      payments for the period January 1, 2006 through April 30,
      2006
                  
                  $
                  1,133Amount
      due to former Double-Take EMEA shareholders
                  
                  
                  932Transaction
      costs
                  
                  
                  318Total
      initial purchase price
                  
                  $
                  2,383




In accordance
with Statement of Financial Accounting Standards No 141, Business Combinations
(“FAS 141”), earn-out payments, which had been estimated to be between $10
and $12 million, were not all included in the calculation of the purchase
price because they were contingent in nature and based on a specified percentage
of the payments made to the Company by Double-Take EMEA under the Company’s
intercompany distribution agreement through December 2007. A portion of the
contingent purchase price equal to the excess of the fair value of the assets
acquired and liabilities assumed over the non-contingent portion of the purchase
price was accrued in accordance with FAS 141. Earn-out payments in excess
of the initial amount recorded as the liability have been recorded as additional
purchase price and goodwill.  In 2008, the Company paid the final
earn-out payment of $0.3 million.  The aggregate earn-out payments as
a result of the acquisition were $10.2 million to the former owners of
Double-Take EMEA, $5.2 million of which was recorded as
goodwill.  Additionally, the amounts held in escrow were released to
the former owners of Double-Take EMEA.




The
identifiable assets and liabilities on the date of acquisition were as follows
(in thousands):





LifeCash
      and cash equivalents
                      
                      $
                      1,778Accounts
      receivable,
                      
                      
                      2,927Inventory
                      
                      
                      1,381Prepaid
      expenses
                      
                      
                      2,694Account
      payable
                      
                      
                      (1,229
                      )Accrued
      expenses
                      
                      
                      (1,790
                      )Other
      liabilities
                      
                      
                      (144
                      )Deferred
      revenue
                      
                      
                      (3,944
                      )Properties
      and equipment
                      
                      
                      275
                      
                      5
      yearsOther
      assets
                      
                      
                      54Customer
      relationships
                      
                      
                      2,267
                      
                      5
      yearsMarketing
      relationships(1)
                      
                      
                      1,992
                      
                      8
      yearsTotal
      assets acquired
                      
                      $
                      6,261Purchase
      Price paid through December 31, 2006
                      
                      $
                      4,836Accrued
      purchase price
                      
                      
                      1,425Total
                      
                      $
                      6,261








(1)
            The
      acquired intangible marketing relationship included in the acquisition of
      Double-Take EMEA relates to the reacquisition of a preexisting
      distribution arrangement between Double-Take Software and Double-Take EMEA
      for software marketing rights that had previously been granted to
      Double-Take EMEA. Under the agreement, Double-Take EMEA purchases software
      licenses from Double-Take Software at rates that were negotiated at arms
      length and that represented current market rates. At the date of
      acquisition, the agreement between Double-Take Software and Double-Take
      EMEA was continued without any amendments upon the acquisition and was
      neither favorable nor unfavorable to either party. Accordingly, there was
      no gain or loss recorded upon the reacquisition of the preexisting
      arrangement.





67
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


The
consolidated financial statements include the results of operations of
Double-Take EMEA from the date of acquisition which was May 23,
2006.  Cost of software in the consolidated financial statements
included costs of Double-Take products on hand at Double-Take EMEA on
May 23, 2006 (the acquisition date) for the period from May 24, 2006
through the date that all such products were sold.  The following
unaudited pro forma information represents the Company’s condensed consolidated
results of operations as if the acquisition of Double-Take EMEA had occurred as
of the beginning of the year ended December 31, 2006.  The pro forma
amounts of net income (loss) attributable to common stockholders include
amortization of the amounts ascribed to intangible assets acquired in the
acquisition.





Year
      Ended December 31,2006Total
      Revenue
                  
                  $
                  65,621Net
      income (loss) attributable to common stockholders
                  
                  $
                  (417
                  )Basic
      and diluted income (loss) per share
                  
                  $
                  (0.10
                  )Weighted
      average shares outstanding – basic and diluted
                  
                  
                  4,306








[5]  Cash
and cash equivalents:




The Company
considers all highly liquid investments purchased with an original maturity of
90 days or less to be cash equivalents.




[6]  Short term investments and fair value





Short
term investments, which are carried at fair value, generally consist of
commercial paper and corporate notes with original maturities of one year or
less with Standard and Poor’s ratings ranging from A to AAA, and United States
Treasury obligations with original maturities of one year or less. The Company
classifies these securities as available-for-sale. Management determines the
appropriate classification of its investments at the time of purchase and at
each balance sheet date. Available-for-sale securities are carried at fair value
with unrealized gains and losses reported in accumulated other comprehensive
income. Interest received on these securities is included in interest income.
Realized gains or losses upon disposition of available-for-sale securities are
included in other income.




SFAS 157
defines fair value 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. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes the following three levels of inputs that may be used to
measure fair value:




●
            Level 1 - Unadjusted
      quoted prices in active markets that are accessible at the measurement
      date for identical, unrestricted assets or
  liabilities.




●
            Level 2 - Observable
      inputs other than Level 1 prices such as quoted prices for similar assets
      or liabilities; quoted prices in markets that are not active; or other
      inputs that are observable or can be corroborated by observable market
      data for substantially the full term of the assets or
      liabilities.




●
            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.




The Company’s
assets that are measured at fair value on a recurring basis are generally
classified within Level 1 or Level 2 of the fair value hierarchy.  The
types of instruments valued based on quoted market prices in active markets
generally include most money market securities and equity investments and can
include certain


68
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


corporate
notes, United States treasury obligations and some federal notes and
bonds.  Such instruments are generally classified within Level 1 of
the fair value hierarchy.  The Company invests in money market funds
that are traded daily and does not adjust the quoted price for such
instruments.  The types of instruments valued based on quoted prices
in less active markets, broker or dealer quotations, or alternative pricing
sources with reasonable levels of price transparency generally include the
Company’s commercial paper and can include certain federal notes and
bonds.  Such instruments are generally classified within Level 2 of
the fair value hierarchy.  The Company uses consensus pricing, which
is based on multiple pricing sources, to value its cash equivalents and short
term investments.




In October
2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
(“FAS 157-3”). FAS 157-3 clarified the application of FAS 157.
FAS 157-3 demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FAS 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of this standard did not have
an impact on the Company’s consolidated financial statements.








[7]  Accounts
receivable and allowance for doubtful accounts:




Financial
instruments that potentially subject the Company to significant concentration of
credit risk consist primarily of accounts receivable. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit issues based on historical trends.





[8]  Fair
value other than investments:




At
December 31, 2008 and 2007, the Company’s financial instruments other than
investments consist primarily of accounts receivable, accounts payable. The
carrying values of accounts receivable and accounts payable approximate their
fair value, because of their short-term nature.





[9]  Revenue
recognition:





In
accordance with EITF 01-9, the Company’s revenue is reported net of rebates
and discounts because there is no identifiable benefit in exchange for the
rebate or discount. The Company derives revenues from two primary sources or
elements: software licenses and services. Services include customer support,
consulting, installation services and training. A typical sales arrangement
includes both of these elements. The Company applies the provisions of Statement
of Position (“SOP”) 97-2, Software Revenue Recognition,
as amended by SOP 98-4 and SOP 98-9, and related interpretations to
all transactions to determine the recognition of revenue.






For
software arrangements involving multiple elements, the Company recognizes
revenue using the residual method as described in SOP 98-9. Under the
residual method, the Company allocates and defers revenue for the undelivered
elements based on relative fair value and recognizes the difference between the
total arrangement fee and the amount deferred for the undelivered elements as
revenue. The determination of fair value of the undelivered elements in multiple
element arrangements is based on the price charged when such elements are sold
separately, which is commonly referred to as vendor-specific objective-evidence
(“VSOE”).






The
Company’s software licenses typically provide for a perpetual right to use the
Company’s software and are sold on a per-copy basis. The Company recognizes
software revenue through direct sales channels and resellers upon receipt of a
purchase order or other persuasive evidence and when all other basic revenue
recognition criteria are met as described below. Revenue from software licenses
sold through an original equipment manufacturer partner is recognized upon the
receipt of a royalty report evidencing sales.


69
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)





Services
revenue includes revenue from customer support and other professional services.
Customer support includes software updates (including unspecified product
upgrades and enhancements) on a when-and-if-available basis, telephone support
and bug fixes or patches. Customer support revenue is recognized ratably over
the term of the customer support agreement, which is typically one year. To
determine the price for the customer support element when sold separately, the
Company uses actual rates at which it has previously sold support as established
VSOE.






Other
professional services such as consulting and installation services provided by
the Company are not essential to the functionality of the software and can also
be performed by the customer or a third party. Revenues from consulting and
installation services are recognized when the services are completed. Training
fees are recognized after the training course has been provided. Any paid
professional services, including training, that have not been performed within
three years of the original invoice date are recognized as revenue in the
quarter that is three years after the original invoice date. Based on the
Company’s analysis of such other professional services transactions sold on a
stand-alone basis, the Company has concluded it has established VSOE for such
other professional services when sold in connection with a multiple-element
software arrangement. The price for other professional services has not
materially changed for the periods presented.






The
Company has analyzed all of the undelivered elements included in its
multiple-element arrangements and determined that VSOE of fair value exists to
allocate revenues to services. Accordingly, assuming all basic revenue
recognition criteria are met, software revenue is recognized upon delivery of
the software license using the residual method in accordance with
SOP 98-9.






The
Company considers the four basic revenue recognition criteria for each of the
elements as follows:






Persuasive evidence of an
arrangement with the customer exists.   The Company’s customary
practice is to require a purchase order and, in some cases, a written contract
signed by both the customer and the Company prior to recognizing revenue with
respect to an arrangement.






Delivery or performance has
occurred.   The Company’s software applications are usually
physically delivered to customers with standard transfer terms such as FOB
shipping point. Software and/or software license keys for add-on orders or
software updates are typically delivered via email. The Company recognizes
software revenue upon shipment to resellers and distributors because there is no
right of return or refund and generally no price protection agreements. In
situations where multiple copies of licenses are purchased, all copies are
delivered to the customer in one shipment and revenue is recognized upon
shipment. Occasionally, the Company enters into a site license with a customer
that allows the customer to use a specified number of licenses within the
organization. When a site license is sold, the Company delivers a master disk to
the customer that allows the product to be installed on multiple servers. The
Company has no further obligation to provide additional copies of the software
or user manuals. Revenue on site licenses is recognized upon shipment of the
master disk to the customer. Sales made by the Company’s Original Equipment
Manufacturer (OEM) partners are recognized as revenue in the month the product
is shipped. The Company estimates the revenue from a preliminary report received
from the OEM shortly after the end of the month. Once the final report is
received, the revenue is adjusted to that based on the final report, usually in
the following month. Services revenue is recognized when the services are
completed, except for customer support, which is recognized ratably over the
term of the customer support agreement, which is typically one
year.






70
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




Fee is fixed or determinable.
  The fee customers pay for software applications, customer support
and other professional services is negotiated at the outset of an arrangement.
The fees are therefore considered to be fixed or determinable at the inception
of the arrangement.






Collection is probable.
  Probability of collection is assessed on a customer-by-customer
basis. Each new customer undergoes a credit review process to evaluate its
financial position and ability to pay. If the Company determines from the outset
of an arrangement that collection is not probable based upon the review process,
revenue is recognized on a cash-collected basis.





The
Company’s arrangements do not generally include acceptance clauses. However, if
an arrangement does include an acceptance clause, revenue for such an
arrangement is deferred and recognized upon acceptance. Acceptance occurs upon
the earliest of receipt of a written customer acceptance, waiver of customer
acceptance or expiration of the acceptance period.





[10]  Cost
of revenue:




Cost of software
revenue.  Cost of software revenue consists primarily of media,
manual, translation and distribution costs.





Cost of services
revenue.  Cost of services revenue consists primarily of salary
and other personnel-related costs incurred in connection with the Company’s
provision of maintenance and professional services. Cost of services revenue
also includes other allocated overhead expenses for professional services and
product support personnel, as well as travel-related expenses for staff to
perform work at a customer’s site.





[11]  Property,
plant and equipment:




Furniture,
equipment and computer hardware are depreciated using the straight-line method
over their estimated useful lives of up to three years. Leasehold improvements
are amortized by the straight-line method over the shorter of the remaining
initial terms of the respective leases or economic useful life.





[12]  Software
development costs:




Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed (“FAS 86”), requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility.  The Company’s current
process for developing software is essentially completed concurrently with the
establishment of technological feasibility and therefore no software development
costs have been capitalized for the years ended December 31, 2008 and
2007.  Costs incurred to develop software programs prior to the
achievement of technological feasibility are expensed as incurred.





[13]  Goodwill:




The Company
accounts for goodwill in accordance with Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible
Assets (“FAS 142”).  FAS 142 requires that goodwill with
indefinite lives is not amortized but reviewed for impairment if impairment
indicators arise and, at a minimum, annually. During 2008, there were no
impairment indicators that arose, therefore, the impairment test was completed
only annually.  FAS 142 requires a two-step impairment test with the
first step comparing the fair value of the reporting unit with its carrying
amount.  The second step of the impairment test is comparing the
implied fair value of the reporting unit’s goodwill with the carrying amount of
that goodwill.  If in the first step of the impairment test the fair
value of the reporting unit exceeds the carrying amount of the reporting unit,
then the second step of the impairment test is unnecessary.  During
2008 the fair value of the reporting unit exceeded the carrying value,
therefore, goodwill was not impaired as of December 31, 2008.








71
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


[14]  Intangible
assets:




Intangible
assets are amortized using the straight-line method over their estimated useful
lives.  Customer relationships and technology related intangibles have
an estimated useful life of 5 years and marketing relationships have an
estimated useful life of 8 years.





[15]  Impairment
of long-lived assets:




In accordance
with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (“FAS 144”), the Company records impairment
losses on long-lived assets used in operations or expected to be disposed of
when indicators of impairment exist and the cash flows expected to be derived
from those assets are less than carrying amounts of those assets. The Company
has not recorded any impairment charge for the years ended December 31,
2008, 2007 and 2006.





[16]  Advertising
expense:




Advertising
costs, which include reimbursements to resellers and distributors of $2,868,
$2,772 and $2,997 for the years ended December 31, 2008, 2007 and 2006,
respectively, are expensed as incurred. Advertising costs are included in sales
and marketing costs.





[17]  Income
taxes:




The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, Accounting
for Income Taxes (“FAS 109”). Deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities, and are measured using the enacted laws and tax rates
that are expected to be in effect when the differences are expected to reverse.
The measurement of deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits not expected to be realized. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
the period that such tax rate changes are enacted.





The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 Accounting for Uncertainty in Income
Taxes (“FIN 48”) on January 1, 2007. The application of this
Interpretation requires a two-step process that separates recognition from
measurement. Upon implementing FIN 48 and performing the analysis, there has not
been any increase or decrease to reserves for uncertain tax
positions.





[18]  Sales
tax:




The Company
records sales tax collected from its customers on a net basis.





[19]  Accounting
estimates:




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue, costs and expenses
during the period. Based on historical experience and current account
information, estimates are made regarding provisions for allowances for doubtful
accounts receivable, sales discounts and other allowances, depreciation,
amortization, asset valuations and stock based compensation. Actual results
could differ from those estimates.





72
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


[20]  Concentration
of credit risk:




The Company
grants credit to customers in a wide variety of industries and geographic
locations.




The Company’s
cash and cash equivalents and short term investments are carried at their fair
value, and at times, may exceed federally insured limits.





[21]  Foreign
Currency Translation




The
functional currency of the Company’s foreign operations are the local country’s
currency, the Euro and Canadian Dollar. In accordance with Statement of
Financial Accounting Standards No. 52, Foreign Currency Translation (“FAS
52”), the assets and liabilities of the Company’s international subsidiaries are
translated at their respective period-end exchange rates, and revenues and
expenses are translated at average currency exchange rates for the period. The
resulting balance sheet translation adjustments are included in “Other
comprehensive income (loss)” and are reflected as a separate component of
stockholders’ equity (deficit). Foreign currency transaction gains and losses
are included in results of operations. Through December 31, 2008, the Company
has not entered into any transactions to hedge its exposure to changes in
foreign currency exchange rates.





[22]  Comprehensive
Income (Loss)




Comprehensive
income (loss), presented in the statement of changes in stockholders’ equity
(deficit), includes other comprehensive income and net income or loss. Other
comprehensive income includes certain changes in equity that are excluded from
net income (loss). Specifically, cumulative foreign currency translation
adjustments and unrealized gains (losses) on marketable securities are included
in accumulated other comprehensive income.





[23]  Stock-based
compensation:




Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of FAS No. 123(R) using the prospective transition method, which
requires the Company to apply its provisions only to awards granted, modified,
repurchased or cancelled after the effective date. Under this transition method,
stock-based compensation expense recognized beginning January 1, 2006 is
based on the grant-date fair value of stock option awards granted or modified
after January 1, 2006. As the Company had used the minimum value method for
valuing its stock options under SFAS 123, all options granted prior to
January 1, 2006 continue to be accounted for under APB Opinion
No. 25.




The Company
accounts for stock option grants to non-employees in accordance with
FAS 123(R) and EITF Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services, which require that the fair value of these
instruments be recognized as an expense over the period in which the related
services are rendered.





[24]  Net
income (loss) per share:




Basic and
diluted net loss per share information for all periods is presented under the
requirements of Statement of Financial Accounting Standards No. 128, Earnings Per Share (“FAS
128”). Basic income (loss) per share is calculated by dividing the net loss
attributable to common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted income (loss) per share is
calculated by dividing net income (loss) attributable to common stockholders by
the weighted-average number of common shares outstanding, adjusted for the
dilutive effect, if any, of potential common shares.





73
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




The following
potential common shares (in thousands) were excluded from the computation of
diluted net income (loss) attributable to common stockholders per share because
they had an anti-dilutive impact:





Year Ended
December 31,2008
                  
                  
                  2007
                  
                  
                  2006Stock
      options
                  
                  
                  1,507
                  
                  
                  
                  727
                  
                  
                  
                  2,929Warrants
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  82




[25]  Reclassifications




Certain
reclassifications have been made to prior year amounts to conform to the current
period presentation.








[26]  Recent
accounting pronouncements:





In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements, (“FAS 157”). FAS 157 (a) establishes a
common definition for fair value to be applied to assets and liabilities, where
required or permitted by Accounting Standards; (b) establishes a framework
for measuring fair value; and (c) expands disclosures concerning fair value
measurements. FAS 157 does not extend the required use of fair value to any
new circumstances. In February 2008, the FASB issued Staff Position No. FAS
157-2 which provides for a one-year deferral of the effective date of SFAS 157
for non-financial assets and liabilities that are recognized or disclosed at
fair value in the financial statements on a nonrecurring basis.  FAS
157 was, with the exception of the one-year deferral for non-financial assets
and liabilities as previously noted, effective for the Company January 1, 2008
and there was no material effect on the Company’s consolidated financial
position, results of operations or cash flows. The Company does not expect the
adoption of Staff Position No. FAS 157-2 will have a material effect on the
Company’s consolidated financial position, results of operations or cash
flows.


In October
2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active
(“FAS 157-3”). FAS 157-3 clarified the application of FAS 157.
FAS 157-3 demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive. FAS 157-3
was effective upon issuance, including prior periods for which financial
statements had not been issued. The implementation of this standard did not have
an impact on the Company’s consolidated financial statements.




In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities(“FAS 159”). The
fair value option established by FAS 159 permits, but does not require, all
entities to choose to measure eligible items at fair value at specified election
dates. An entity would report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date. FAS 159 is effective for the Company January 1, 2008 and there was no
material effect on the Company’s consolidated financial position, results of
operations or cash flows. The Company did not elect the fair value
option.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities (“FAS 161”). FAS
161 is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows.  FAS 161 also improves transparency about the
location and amounts of derivative instruments in an entity’s financial
statements; how derivative instruments and related hedged items are accounted
for under Statement 133; and how derivative instruments and related hedged items
affect its financial position, financial performance, and cash flows.  FAS
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application
encouraged.  The Company is evaluating the impact of the adoption of FAS
161 on its


74
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


financial
statements but believes the adoption of FAS 161 will not have a material effect
on its consolidated financial position and results of operations.





In
December 2007, the FASB issued Statement of Financial Accounting
Standards 141 (revised 2007), Business Combinations,
(“FAS 141R”). FAS 141R establishes principles and requirements for how
an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, including goodwill, the liabilities assumed and any
non-controlling interest in the acquiree. The Statement also establishes
disclosure requirements to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. FAS 141R is
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The impact of adopting FAS 141R will be dependent
on the future business combinations that the Company may pursue after its
effective date.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB
No. 51 (“FAS 160”). This standard establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of the Company’s fiscal year beginning after December 15, 2008.
The Company is currently assessing what the impact of the adoption of
FAS 160 will be on the Company’s financial position and results of
operations.





In May
2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted
Accounting Principles (“FAS 162). FAS 162 is intended to improve
financial reporting by identifying a consistent framework, or hierarchy, for
selecting accounting principles to be used in preparing financial statements
that are presented in conformity with U.S. generally accepted accounting
principles for nongovernmental entities. The hierarchy under FAS 162 is as
follows:




·
            FASB
      Statements of Financial Accounting Standards and Interpretations, FASB
      Statement 133 Implementation Issues, FASB Staff Positions, AICPA
      Accounting Research Bulletins and Accounting Principles Board Opinions
      that are not superseded by actions of the FASB, and Rules and interpretive
      releases of the SEC for SEC
registrants.






·
            FASB
      Technical Bulletins and, if cleared by the FASB, AICPA Industry Audit and
      Accounting Guides and Statements of
Position.






·
            AICPA
      Accounting Standards Executive Committee Practice Bulletins that have been
      cleared by the FASB, consensus positions of the EITF, and Appendix D EITF
      topics.






·
            Implementation
      guides (Q&As) published by the FASB staff, AICPA Accounting
      Interpretations, AICPA Industry Audit and Accounting Guides and Statements
      of Position not cleared by the FASB, and practices that are widely
      recognized and prevalent either generally or in the
    industry.




FAS 162
is effective 60 days following the SEC's approval of the PCAOB amendments to AU
Section 411, The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.  The Company is evaluating the impact of the
adoption of FAS 162 on its financial statements but believes the adoption of FAS
162 will not have a material effect on its consolidated financial position and
results of operations.





In April
2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets (“FAS 142”). The intent of FSP 142-3 is
to improve the consistency between the useful life of a recognized intangible
asset under FAS 142 and the period of expected cash flows used to measure the
fair value of the asset under FAS 141R, and other U.S. generally accepted
accounting principles.  FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is
prohibited.  The Company is currently assessing what the impact of the
adoption of FSP 142-3 will be on the Company’s financial position and results of
operations.


75
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


Note B —  Revolving
Line of Credit




In October
2003, the Company entered into a 12- month revolving line of credit agreement
with Silicon Valley Bank.  In May 2006, the Company entered into an
amendment to the Facility (the “Amended Facility”) with Silicon Valley Bank that
extended the term of the Facility to April 30, 2007. Under the terms of the
Amended Facility, maximum borrowings were the lesser of 75% of eligible
receivables or $4,750, including up to $2,500 available for letters of
credit, foreign exchange contracts and cash management services. At December 31,
2006, maximum borrowings available under the Amended Facility were $4,750
million, including a $2,000 million letter of credit relating to a settled
legal proceeding (see Note G [2]). The rate of interest for the Amended Facility
was 0.75% above the prime rate. The Amended Facility was collateralized by all
of the Company’s assets, excluding intellectual property.




In May 2007,
the Company entered into another amendment to the credit facility (the “Second
Amended Facility”) that extended the term of the facility to April 29,
2008. Under the terms of the Second Amended Facility, the Company’s maximum
borrowings are $2,000 less the aggregate amounts undrawn on all outstanding
letters of credit, foreign exchange contracts, or any other accommodations
issued or incurred, or caused to be issued or incurred by the
bank.   Up to $500 of the facility is available for foreign
exchange contracts.  The rate of interest for the Second Amended
Facility is 0.75% above the prime rate. The facility is collateralized by all of
the Company’s assets, excluding intellectual property.


The Second
Amended Facility contains a number of restrictions that will limit the Company’s
ability, among other things, to do the following: borrow money; enter into
transactions outside the ordinary course of business; pledge accounts
receivable, inventory, intellectual property and most other assets as security
in other borrowings or transactions; pay dividends on stock, redeem or acquire
any of our securities; sell certain assets; make certain investments; guaranty
obligations of third-parties; undergo a merger or consolidation; or engage in
any business other than the business in which we are currently engaged or
business that is reasonably related to that business.  As required
under the Second Amended Facility, Silicon Valley Bank issued a consent for the
acquisition of TimeSpring.




In May
2008, the Company entered into another amendment to the credit facility (the
“Third Amended Facility”) that extended the term of the facility to April 29,
2009.  Under the terms of the amended credit facility, the Company’s
maximum borrowings, amount available for foreign exchange contracts and the rate
of interest remained the same as the Second Amended Facility.  The
Third Amended Facility modified the need for the consent for an acquisition of
100 percent of an entity’s stock or assets. The facility continues to be
collateralized by all of the Company’s assets, excluding the Company’s
intellectual property.
  At December
31, 2008, 2007 and 2006, there were no borrowings under this line of
credit.  At December 31, 2008, 2007, and 2006 there was a letter of
credit outstanding in the amount of $1,000, $1,500 and $2,000,
respectively.  As of January 2009, the letter of credit was reduced to
$250.







Note C —  CASH,
CASH EQUIVALENTS, SHORT TERM INVESTMENTS AND FAIR VALUE




Short term
investments, which are carried at fair value, generally consist of commercial
paper and corporate notes with original maturities of one year or less with
Standard and Poor’s ratings ranging from A to AAA, and United States Treasury
obligations with original maturities of one year or less. The Company classifies
these securities as available-for-sale.  Short term investments are
$32,524 as of December 31, 2008 and $38,977 as of December 31,
2007.  The Company has recorded $47 of unrealized gains in other
comprehensive income as of December 31, 2008 and $14 as of December 31, 2007.
During 2008 and 2007, there were no realized gains or losses due to disposition
of available-for-sale securities.




Interest
income as of December 31, 2008, 2007 and 2006 was $1,695, $3,019, and $319,
respectively.


76
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




The following
table sets forth a summary of the Company’s financial assets, classified as cash
and cash equivalents and short-term investments on its condensed consolidated
balance sheet, measured at fair value on a recurring basis as of December 31,
2008:





Description
                  
                  Total
                  
                  
                  Quoted
      Prices in Active Markets for Identical Assets (Level 1)
                  
                  
                  Significant
      Other Observable Inputs
                    (Level 2)
                  
                  
                  Significant
      unobservable
                    Inputs
                    (Level 3)Cash
      & cash equivalentsCash
      Management Funds
                  
                  $
                  19,949
                  
                  
                  $
                  19,949
                  
                  
                  $
                  —
                  
                  
                  $
                  —Total
                  
                  
                  19,949
                  
                  
                  
                  19,949
                  
                  
                  
                  —
                  
                  
                  
                  —Short-term
      InvestmentsCertificate
      of Deposit
                  
                  
                  700
                  
                  
                  
                  700
                  
                  
                  
                  —
                  
                  
                  
                  —Commercial
      Paper
                  
                  
                  1,390
                  
                  
                  
                  —
                  
                  
                  
                  1,390
                  
                  
                  
                  —Corporate
      Notes
                  
                  
                  4,820
                  
                  
                  
                  4,820
                  
                  
                  
                  —
                  
                  
                  
                  —Money
      Market Mutual Fund
                  
                  
                  4,376
                  
                  
                  
                  4,376
                  
                  
                  
                  —
                  
                  
                  
                  —United
      States Treasury Notes
                  
                  
                  11,739
                  
                  
                  
                  11,739
                  
                  
                  
                  —
                  
                  
                  
                  —United
      States Treasury Bills
                  
                  
                  9,499
                  
                  
                  
                  9,499
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  32,524
                  
                  
                  $
                  31,134
                  
                  
                  $
                  1,390
                  
                  
                  $
                  —








Note D —  Property
and Equipment




Property and
equipment consists of the following:





December 31,2008
                          
                          
                          2007Equipment
                          
                          $
                          188
                          
                          
                          $
                          183Furniture
      and fixtures
                          
                          
                          508
                          
                          
                          
                          637Motor
      Vehicles
                          
                          
                          109
                          
                          
                          
                          114Computer
      hardware
                          
                          
                          9,406
                          
                          
                          
                          7,060Leasehold
      improvements
                          
                          
                          712
                          
                          
                          
                          69510,923
                          
                          
                          
                          8,689Less
      accumulated depreciation and amortization
                          
                          
                          6,687
                          
                          
                          
                          4,505$
                          4,236
                          
                          
                          $
                          4,184





Property and equipment under
capital leases as of December 31, 2008 and 2007 are $145 and $185,
respectively.





During the years
ended December 31, 2008, 2007 and 2006, the Company recorded depreciation
expense of $2,348, $1,636 and $1,189, respectively.





Note e —
INTANGIBLE ASSETS





During the
years ended December 31, 2008, 2007 and 2006, the Company recorded amortization
of intangible assets of $1,290, $710 and $424, respectively.  These
amounts are included in depreciation and amortization.





77
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


Intangible
assets consist of the following:





December 31,2008
                  
                  
                  2007Customer
      relationships
                  
                  $
                  2,267
                  
                  
                  $
                  2,267Less
      accumulated amortization
                  
                  
                  (1,181
                  )
                  
                  
                  (727
                  )$
                  1,086
                  
                  
                  $
                  1,540






December 31,2008
                  
                  
                  2007Marketing
      relationships
                  
                  $
                  1,992
                  
                  
                  $
                  1,992Less
      accumulated amortization
                  
                  
                  (648
                  )
                  
                  
                  (399
                  )$
                  1,344
                  
                  
                  $
                  1,593






December 31,2008
                  
                  
                  2007Technology
      related intangibles
                  
                  $
                  4,936
                  
                  
                  $
                  1,936Foreign
      currency translation
                  
                  
                  (870
                  )
                  
                  
                  —Less
      accumulated amortization
                  
                  
                  (533
                  )
                  
                  
                  (8
                  )$
                  3,533
                  
                  
                  $
                  1,928




Future
amortization of intangible assets is estimated as follows:





Year
      Ending December 31,2009
                
                $
                1,5582010
                
                
                1,5582011
                
                
                1,2842012
                
                
                1,2142013
                
                
                249Thereafter
                
                
                100Total
                
                $
                5,963





Note F —
Provision for Income Taxes





The Company’s
net income (loss) before income taxes is as follows:





Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Domestic
                      
                      $
                      17,598
                      
                      
                      $
                      15,979
                      
                      
                      $
                      5,755Foreign
                      
                      
                      771
                      
                      
                      
                      3,310
                      
                      
                      
                      1,494Total
                      
                      $
                      18,369
                      
                      
                      $
                      19,289
                      
                      
                      $
                      7,249





78
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


The Company’s
income tax provision (benefit) is as follows:





2008
                    
                    
                    2007
                    
                    
                    2006CurrentFederal
                    
                    $
                    6
                    
                    
                    $
                    2,986
                    
                    
                    $
                    —State
      and Local
                    
                    
                    —
                    
                    
                    
                    1,093
                    
                    
                    
                    —Foreign
                    
                    
                    267
                    
                    
                    
                    1,021
                    
                    
                    
                    494DeferredFederal
                    
                    
                    372
                    
                    
                    
                    (4,959
                    )
                    
                    
                    —State
      and Local
                    
                    
                    79
                    
                    
                    
                    (930
                    )
                    
                    
                    —Foreign
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    $
                    724
                    
                    
                    $
                    (789
                    )
                    
                    $
                    494




The variances
between the Company’s effective income tax rate and the Federal statutory rate
are as follows:





Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006Statutory
      federal income tax expense (benefit) rate
                      
                      
                      35
                      %
                      
                      
                      34
                      %
                      
                      
                      34
                      %Increase
      (decrease) in valuation allowance
                      
                      
                      (48
                      )%
                      
                      
                      (46
                      )%
                      
                      
                      (47
                      )%State
      taxes (benefit)
                      
                      
                      4
                      %
                      
                      
                      5
                      %
                      
                      
                      6
                      %Impact
      of permanent difference
                      
                      
                      9
                      %
                      
                      
                      3
                      %
                      
                      
                      9
                      %Foreign
      taxes
                      
                      
                      2
                      %
                      
                      
                      0
                      %
                      
                      
                      7
                      %Other
                      
                      
                      2
                      %
                      
                      
                      0
                      %
                      
                      
                      (2
                      )%Effective
      income tax expense (benefit) rate
                      
                      
                      4
                      %
                      
                      
                      (4
                      )%
                      
                      
                      7
                      %




The Company
has deferred tax assets related to temporary differences and operating loss
carryforwards as follows:





Year Ended December 31,2008
                            
                            
                            2007Deferred
      tax assets:Current:Allowance
      for doubtful accounts
                            
                            $
                            184
                            
                            
                            $
                            185Deferred
      revenue
                            
                            
                            1,224
                            
                            
                            
                            816Accrued
      bonus
                            
                            
                            103
                            
                            
                            
                            —Foreign
      tax credit
                            
                            
                            240
                            
                            
                            
                            —Prepaid
      expenses
                            
                            
                            (744
                            )
                            
                            
                            (495
                            )Net
      operating loss carryforward
                            
                            
                            5,438
                            
                            
                            
                            2,678Total
      current deferred tax assets
                            
                            
                            6,445
                            
                            
                            
                            3,184Non-current:Fixed
      assets
                            
                            $
                            111
                            
                            
                            $
                            163Straight-line
      rent
                            
                            
                            106
                            
                            
                            
                            159Net
      operating loss carryforward
                            
                            
                            15,742
                            
                            
                            
                            28,630Deferred
      revenue
                            
                            
                            593Sales
      tax reserve
                            
                            
                            —
                            
                            
                            
                            39Other
                            
                            
                            364
                            
                            
                            
                            313Total
      non-current deferred tax assets
                            
                            
                            16,916
                            
                            
                            
                            29,304Total
      deferred tax assets
                            
                            
                            23,361
                            
                            
                            
                            32,488Valuation
      allowance
                            
                            
                            (17,354
                            )
                            
                            
                            (26,030
                            )Deferred
      liabilityIntangible
      assets
                            
                            
                            (569
                            )
                            
                            
                            (569
                            )Total
      deferred liability
                            
                            
                            (569
                            )
                            
                            
                            (569
                            )Net
      deferred tax assets
                            
                            $
                            5,438
                            
                            
                            $
                            5,889





79
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


At
December 31, 2008 and 2007, the Company has available state net operating loss
carryforwards in certain states ranging from approximately $25,000 to $37,000
and $47,000 to $59,000, respectively, depending upon the state, expiring in
various amounts through 2026. The Company also has available Federal net
operating loss carryforwards of approximately $36,000 and $59,000 at December
31, 2008 and 2007, respectively, expiring 2017 through 2026. The utilization of
these operating loss carryforwards are limited each year based upon changes in
ownership as defined in Section 382 of the Internal Revenue Code. In 2007, based
upon information available at the time, the Company determined the utilization
of the net operating loss carryforwards was limited to $7.1 million per
year.  During the fourth quarter of 2008, based upon newly available
information, the Company re-evaluated its ability to utilize the benefit from
the net operating loss carryforwards.  The Company concluded the net
operating loss carryforwards were limited to $15.2 million per year, thus
allowing the net operating loss carryforwards to be utilized more quickly than
originally anticipated in 2007.





Through
December 31, 2006 the Company’s net deferred tax assets were fully reserved due
to uncertainty of realization through future operating results.  In
2007, the Company determined that based upon a number of factors, including the
Company’s cumulative taxable income over the past two years and expected
profitability in future years that certain of its deferred tax assets were
more-likely-than-not realizable through future earnings. Accordingly, the
Company reversed $5,698 in the second quarter of 2007 and $3,262 in the fourth
quarter of 2007 of its deferred income tax valuation allowance and recorded a
corresponding tax benefit of $8,960. As a result of the acquisition of
TimeSpring, the Company acquired approximately $18,186 of Canadian federal net
operating loss carryforwards, $16,558 of Canadian provincial (Quebec) net
operating loss carryforwards, and $279 of investment tax credits all of which
expire in various amounts through 2026.  Additionally, approximately
$11,620 of research and development loss carryforwards were acquired, all of
which are available for use indefinitely.  Due to the uncertainty of
the realization of these Canadian carryforwards through future operating
results, the deferred tax assets attributed to these carryforwards are fully
reserved in the valuation allowance.  As of December 31,
2007, the Company’s valuation allowance for deferred tax assets and liabilities
was $26,030 due to uncertainty of realization through future operating
results.





In 2008,
as a result of the increased limit on the utilization of net operating loss
carryforwards, the Company concluded it is able to utilize the net operating
loss carryforwards more quickly than originally anticipated.  As a
result, the Company fully utilized the deferred tax asset recorded in
2007.  Due to the increased net operating loss carryforward limitation
available in 2008, the Company reversed the valuation allowance on $3.6 million
of deferred tax assets and recorded a corresponding tax benefit.  This
deferred tax asset was substantially utilized in 2008.  Additionally
the Company reversed and utilized $0.3 million of the available Canadian
net operating loss carryforwards in 2008.  In addition, as a result of
the increased net operating loss carryforward limitation, the Company expects to
receive refunds of income taxes paid in 2008.  The Company has
evaluated whether it is more likely than not that it would generate sufficient
taxable income to further use the net operating loss carryforwards eligible to
be utilized in 2009 and beyond.  Based upon our profitability over the
past two years and evaluation of the 2009 expected taxable income, the Company
believes it is more likely than not it would generate sufficient taxable income
to utilize at least a portion of the net operating loss carryforwards available
to be used in 2009 and beyond.  As a result, an additional $5.0
million of the valuation allowance on the deferred tax assets was reversed and a
net tax benefit and a deferred tax asset were recorded.  During 2009,
the Company will continue to evaluate whether it believes it is more likely than
not further net operating loss carryforwards will be able to be
utilized.  When further positive evidence exists that the Company will
be able to utilize the available net operating loss carryforwards, the Company
will reverse additional valuation allowance on the deferred tax
assets.





In
accordance with FAS 123R, excess tax benefits related to share based payments
should be credited to equity.  When determining this excess tax
benefit, the Company elected to follow the tax law approach.  As a
result, the Company’s excess tax benefit which was recorded to equity was
approximately $163 for the year ended December 31, 2008.





The
Company adopted the provisions of FIN 48 on January 1, 2007.  The
application of this Interpretation requires a two-step process that separates
recognition from measurement.  Upon implementing FIN 48 and performing
the analysis, there has not been any increase or decrease to reserves for
uncertain tax positions.


80
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


The
Company is subject to income taxes in the U.S. federal jurisdiction, and various
states and foreign jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and
require significant judgment to apply. With few exceptions, the Company is no
longer subject to U.S. federal, state and local, or non-U.S. income tax
assessments by tax authorities for the years before 2003.





The
Company has elected to record interest and penalties recognized in accordance
with FIN 48 in the financial statements as income taxes.  Any
subsequent change in classification of FIN 48 interest and penalties will be
treated as a change in accounting principle subject to the requirements of SFAS
No. 154, Accounting Changes and Error Corrections.





In 2008,
the valuation allowance decreased by $8,676 substantially due to the release of
the valuation allowance related to the net operating loss carryforwards
described above.  The valuation allowance increased in 2007 by a net
amount of $995 due to the acquisition of the tax carryforwards from TimeSpring
offset by the release of the valuation allowance and operating
income.  The valuation allowance decreased by approximately $3,443 in
2006 due to the utilization of net operating loss carryforwards.





Note G —  Commitments
and Contingencies





[1]
Leases:




In September
2001, the Company entered into a lease agreement for its offices in New Jersey
which expires in 2011. The Company entered into a lease during 2001 for its
office in Indiana that expires in 2010. In March 2003, the Company entered into
a sublease agreement for an office in Massachusetts that expired in
2006.    The lease was extended through February
2008.  In 2007, this lease was extended through February
2009.  During 2008 the Company extended this lease through February
2010.  The Company has a lease agreement for its offices in Paris,
France that expires in 2016 with the Company having the option to terminate in
2009 and Worcester, United Kingdom that expires in 2009 with the Company having
had the option to terminate in 2008, which it did not
exercise.  Future minimum annual payments are as follows:





Year
      Ending December 31,2009
                
                $
                1,7942010
                
                $
                1,3162011
                
                $
                5512012
                
                $
                5262013
                
                $
                174Thereafter
                
                $
                161$
                4,522




Rent expense
under operating leases amounted to approximately $2,174, $1,878 and $1,732 for
the years ended 2008, 2007 and 2006, respectively.




Rent expense
is calculated by amortizing total rental payments (net of any rental abatements,
allowances and other rental concessions), on a straight-line basis, over the
lease term.  Accordingly, rent expense charged to operations differs
from rent paid resulting in the Company recording deferred rent.





[2]
Litigation:




In May 2003,
a provider of information storage systems (“Plaintiff”), filed a complaint in
the State of California alleging that the Company infringed certain of its
patents. In December 2005 the Company and Plaintiff entered into a settlement
agreement (the “Settlement Agreement”) wherein all claims and counterclaims were
dismissed with prejudice. Under the terms of the Settlement Agreement, the
Company made an initial payment to Plaintiff of $3,760 in January 2006 and
further agreed to make additional minimum payments aggregating $2,000 which the
Company can use towards the purchase or resale of Plaintiff’s products over
4 years. This annual payment obligation is collateralized by a letter of
credit.  As the Company has the ability and intent to acquire
inventory or


81
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


fixed
assets for the $2,000, no accrual of this amount was made at
settlement.  In 2006 Company acquired $500 worth of computer equipment
from the plaintiff which was subsequently paid in January 2007.  In
2007 the Company acquired $500 worth of computer equipment.  In 2008,
$750 was acquired from the plaintiff leaving $250 required to be purchased in
2009.  As of December 31, 2008, the letter of credit was in the amount
of $1,000 and was subsequently reduced to $250 in January 2009.




In the normal
course of its business, the Company may be involved in various claims,
negotiations and legal actions; however, at December 31, 2008, the Company is
not party to any litigation that is expected to have a material effect on the
Company’s financial position, results of operations or cash flows.





Note H —  Concentration




The Company
sells its products primarily to or through Distributors, VARS and OEMS who in
turn sell to end-users of the Company’s products. The Company believes that the
loss of any of these reseller/distributors would require the Company to develop
other channels to sell its products to end-users.




During the
years ended December 31, 2008, 2007 and 2006, one domestic reseller
accounted for approximately 17%, 18% and 20%, respectively, of total
sales.  During 2006 one foreign reseller, which was acquired by the
Company on May 23, 2006, accounted for approximately 4% of total
revenue.  During 2008 and 2007, there were no foreign resellers which
accounted for a significant percent of total revenue. The domestic reseller
accounted for approximately 17% and 18% of accounts receivable at
December 31, 2008 and 2007, respectively.





Note I—  Employment
Agreements




In January
2001, the Company entered into a 4-year employment agreement with its former
Chief Executive Officer (the “Former CEO”) which provided for a base salary of
$250 per annum subject to 10% annual increases, plus bonuses. In connection
with the agreement, the officer was granted options to purchase
102,041 shares of common stock at an exercise price of $19.60 per
share, which was not less than fair market value on the date of the grant. These
options were fully vested as of December 31, 2004.




Subsequently,
in March 2005, the Company entered into a separation agreement (the “Separation
Agreement”) with the Former CEO. Pursuant to the Separation Agreement, the
Former CEO resigned from the Company and its Board of Directors and entered into
a two-year arrangement providing for consulting fees of $275 in the first year
and $175 in the second year. The Separation Agreement also contained various
provisions related to restrictive covenants concerning non-competition,
non-disclosure and non-solicitation. In addition, the Separation Agreement
provides that the Former CEO may be required to make certain reimbursements to
the Company. The reimbursements, were collateralized by shares of the Company’s
common stock owned by the Former CEO. Further, the consulting arrangement was
cancelable by the Company if the provisions of the Separation Agreement were not
met.




Under the
Separation Agreement, subject to any required repayments being made, the
unvested stock options owned by the Former CEO continued to vest over the term
of the consulting arrangement, and thereafter were exercisable for the remainder
of their term. The table below summarizes the stock options that had been
granted to the Former CEO as well as the related outstanding stock options as of
December 31, 2007 and 2006:





December 31,
      2007
                        
                        
                        December 31,
      2006Number of Options Granted
                        
                        
                        Exercise Price
                        
                        
                        Vested
                        
                        
                        Outstanding
                        
                        
                        Vested
                        
                        
                        Outstanding
                        
                        Expired102,040
                        
                        
                        $
                        19.60
                        
                        
                        
                        102,040
                        
                        
                        
                        102,040
                        
                        
                        
                        102,040
                        
                        
                        
                        102,040
                        
                        200810,209
                        
                        
                        $
                        4.90
                        
                        
                        
                        10,209
                        
                        
                        
                        —
                        
                        
                        
                        10,209
                        
                        
                        
                        —
                        
                        2008366,181
                        
                        
                        $
                        0.94
                        
                        
                        
                        366,181
                        
                        
                        
                        —
                        
                        
                        
                        366,181
                        
                        
                        
                        366,181
                        
                        20086,125
                        
                        
                        $
                        0.94
                        
                        
                        
                        6,125
                        
                        
                        
                        6,125
                        
                        
                        
                        6,125
                        
                        
                        
                        6,125
                        
                        20086,637
                        
                        
                        $
                        1.52
                        
                        
                        
                        6,637
                        
                        
                        
                        6,637
                        
                        
                        
                        6,637
                        
                        
                        
                        6,637
                        
                        2008491,192
                        
                        
                        
                        
                        
                        
                        
                        491,192
                        
                        
                        
                        114,802
                        
                        
                        
                        491,192
                        
                        
                        
                        480,983





82
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




On
November 2, 2006, the Company entered into a settlement agreement with the
Former CEO. Under the terms of the settlement agreement, all actual or potential
claims by both the Company and the Former CEO are released and both deny any
liability or wrongdoing. Additionally, the consulting agreement with the Former
CEO terminated effective October 1, 2006, all unvested stock options
immediately vested and the expiration dates of the options were set at the
earlier of their original expiration dates or June 22,
2008.  During 2008, the 114,802 outstanding options were either
exercised or cancelled.




In connection
with the modification of the terms of the options granted to the Former CEO and
the change in the grantee’s status and the settlement, the Company recorded a
compensation charge of $1,198 and $119 for the years ended December 31,
2006 and 2005, respectively, based on the estimated fair value of the options
during those periods.




On
October 30, 2006, the Company entered into a settlement agreement with its
former Chief Operating Officer (the “Former COO”). Under the terms of the
settlement agreement, the Former COO agreed to pay $1.2 million to the
Company within 5 years of the date of the settlement agreement. The
settlement amount bore interest at 4.96% per year compounded semi-annually.
In the event of an IPO by the Company, all payments due under the settlement
agreement were accelerated and became due within 10 days of the IPO date.
Under the terms of the settlement agreement, all actual or potential claims by
both the Company and the Former COO were released and both denied any liability
or wrongdoing. The $1.2 million payment was received in December 2006 and was
recorded in 2006, as a reduction in general & administrative
expense.




The
employment terms for the Company’s current Chief Executive Officer (“CEO”), as
revised in August 2006, provide for annual compensation of $340,000 and provide
for certain transaction and IPO related bonuses. Under the terms of his
employment, the Company initially granted the CEO options to purchase
380,182 shares of common stock at $1.52 per share, the fair market
value on the date of grant. The options were to vest over 4 years. The CEO
subsequently received an additional option grant to purchase 152,073 shares
of common stock at $1.96 per share, the then fair market value, and an
additional option grant to purchase 38,018 shares of common stock at
$1.96 per share, the then fair market value, both of which were to vest
over 4 years. In the event of a change in control, all unvested options
would immediately vest.  Vesting of the initial option grant was
accelerated in full, and vesting of 25% of all other options held by the CEO was
accelerated in connection with the IPO. In addition, upon the IPO the Company
agreed to grant to the CEO shares of common stock equivalent to 1.45% of the
fully-diluted shares of common stock outstanding immediately prior to the IPO
which vested immediately. Accordingly, the Company granted 269,845 shares to the
CEO and recorded a charge of $3,241 equal to the fair value of the shares
granted.  Under SFAS 123(R), the Company recorded a compensation
charge of $544 based upon the fair value of the options that were
accelerated.  On November 9, 2007 the Company entered into a letter
agreement with the CEO.  The letter agreement provides for severance
payments, in the event the CEO’s employment with the Company is terminated
without cause, in the amount of one times the CEO’s annual salary, which amounts
will be paid in accordance with the Company’s regular payroll periods, and
provide for the continuation of certain health care benefits for a 12-month
period following the CEO’s termination. The payments and benefits
under the letter agreements are subject to the CEO executing and not revoking a
release of claims shortly aftertermination and compliance
with the terms of a non-disclosure agreement between the Company and the
CEO.




In addition,
the Company entered into severance agreements with certain key employees which
generally provide for severance if the employees are terminated without
cause.  On November 9, 2007, the Company entered into letter
agreements or an amended/restated employment agreement with certain key
employees.  In general upon termination without cause, these
agreements provide for severance payments equivalent to one times annual salary
and continued health benefits for a 12-month period following
termination.  The payments and benefits under these agreements are
subject to the person executing and not revoking a release of claims shortly
after termination and compliance with the terms of a non-disclosure agreement
between the Company and the person.  Additionally, on December 2,
2008, the Company entered into a severance letter agreement as well as
non-disclosure confidentiality and intellectual property assignment agreement
with an additional key employee.  The letter Agreement and
non-disclosure agreements were entered into to provide this key employee with
severance and other arrangements similar to those provided to the other key
employees in 2007.


83
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)





Note J —  Stockholders’
Equity





[1]  Common
stock:




The Company
completed an initial public offering of its common stock in December
2006.




In connection
with the Company’s initial public offering:





•
            The
      Company effected a 1 for 4.9 reverse stock split of its common stock
      on November 3, 2006. All share and per share amounts related to
      common stock, options and warrants included in the consolidated financial
      statements have been restated to reflect the reverse stock split. The
      conversion ratios of the Company’s Series B Preferred Stock and
      Series C Preferred Stock have also been adjusted to reflect the
      reverse split.





•
            There
      were 7.5 million shares of common stock sold at $11.00 per share to the
      public, comprising 5 million shares of common stock sold by the Company
      and 2.5 million shares of common stock sold by existing
      stockholders.   The Company received gross proceeds of
      $55,000, or $47,549 after deducting underwriting discounts and commissions
      of $3,850 and offering costs of $3,601.  Upon closing of the
      IPO, all shares of redeemable preferred stock automatically converted into
      11,553,130 shares of common stock.





•
            On
      January 4, 2007, the underwriters of the Company’s initial public offering
      exercised their over-allotment option to purchase an additional 1,125,000
      shares of common stock of the Company from certain existing
      stockholders.  The Company did not receive any proceeds from the
      sale of the shares of the selling
stockholders.





The
      Company completed a secondary offering of its common stock in August
      2007.





In
      connection with this secondary
offering:





•
            There
      were 2.8 million shares of common stock sold at $16.00 per share to the
      public, comprising 100,000 shares of common stock sold by the Company and
      2.7 million shares of common stock sold by existing
      stockholders.   The Company did not receive any proceeds
      from shares of common stock sold by the selling
      stockholders.  The Company received gross proceeds of $1,600, or
      $1,002 after deducting underwriting discounts and commissions of $88 and
      offering costs of $510.  The Company paid the offering costs of
      the selling stockholders.





•
            On
      August 13, 2007, the underwriters of the Company’s secondary offering
      exercised their over-allotment option to purchase an additional 15,750
      shares from the Company and 402,750 shares from one of the selling
      stockholders.  The Company did not receive any proceeds from the
      sale of shares by the selling stockholder.  The Company received
      gross proceeds of $252, or $238 after underwriting commissions of
      $14.





[2]  Warrants:




Warrants to
purchase 81,632 shares of  common stock were  exercised for the year
ended December 31, 2006.  Per the terms of the agreement, the holders of
the warrants performed a cashless exercise in which the Company received 13,636
shares of common stock in lieu of cash proceeds of $150.  These shares
were retired into treasury stock.




As a result
of the Company’s 2006 IPO and the conversion of the Series B Preferred
shares to common shares, warrants previously issued for purchase of Series
B Preferred were converted into warrants to purchase 45,918 shares of common
stock at $2.94 per share. These warrants were outstanding at December
31, 2006.  In addition, 35,714 warrants were also outstanding to
purchase common stock exercisable at $1.84 per share at December 31, 2006. 
All warrants have a cashless exercise provision and expire either
in 2007 or 2013.  In 2007, the Company


84
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)


issued
67,918 shares of common stock upon the exercise of warrants to purchase shares
of common stock.  The warrants were exercisable for up to 81,632 shares of
common stock; however, pursuant to the terms of the warrant agreements, the
holders of the warrants performed cashless exercises in which the Company issued
fewer shares in lieu of receiving cash proceeds of $201.  As of
December 31, 2008 and 2007, there were no outstanding
warrants.





[3]  Stock
option plans:




In November
1996, the Company adopted the Non-Executive Director Stock Option Plan (the
“Directors Plan”), which was amended in 2003. The Directors Plan, as amended,
allows the Company to issue up to 61,224 options to non-executive directors of
the Company. The Plan provides that commencing June 30, 2004, all
non-executive directors on the Board of Directors will initially be granted
options to purchase 10,204 shares of common stock at the fair market value
at the date of grant and that annually thereafter, each non-executive director
will be granted an option to purchase 5,102 shares of common stock at the
fair market value at the date of grant.




In November
1996, the Company adopted a stock option plan (the “1996 Option Plan”), which
was amended in 2000. The 1996 Option Plan, as amended, allows the Company to
issue up to 1,020,408 options to employees of the Company under incentive
and nonstatutory stock option grants. The options generally become exercisable
over a period of 3 years commencing at the date of grant and expire in
4-10 years from the date of grant. The exercise price of options granted
pursuant to the 1996 Option Plan shall be no less than one hundred percent
(100%) of the fair market value at the date of grant for incentive stock
options, and eighty-five percent (85%) of the fair market value at the date of
the grant for other options.




In September
2003, the Company adopted the 2003 Employees Stock Option Plan (the “2003 Option
Plan”). The 2003 Option Plan allows the Company to issue up to
2,244,897 options to employees of the Company under incentive and
nonstatutory stock option grants. In March 2006, the Plan was amended to allow
the Company to issue 3,367,346 options. The options generally vest over a
period of 3-4 years commencing at the date of grant and expire in
10 years. In 2003, the Company issued 1,721,565 options to purchase
shares of common stock at $0.94 per share, which was the fair market value
on the date of the grant.





In 2005, the
Company issued options to purchase 832,011 shares of common stock
exercisable at $1.52 per share, which equaled fair market value on the
dates of grant, to employees.




In
September 2006, the Company adopted the 2006 Omnibus Incentive Plan (the
2006 Plan). The 2006 Plan allows the Company to issue stock options, restricted
stock, restricted stock units, stock appreciation rights, unrestricted stock,
cash based awards or any combination of the foregoing. Any of the foregoing
awards may be made subject to attainment of performance goals over a performance
period of up to one or more years. The 2006 Plan allows the Company to issue up
to 224,490 shares of common stock subject to awards pursuant to the 2006
Plan. The vesting period of the options granted is at the discretion of the
Board of Directors and the options expire in 10 years. The exercise price
of options granted shall be no less than one hundred percent (100%) of the fair
market value at the date of grant or one hundred-ten percent (110%) if the
option is granted to a ten percent stockholder.  In November 2006, the
number of shares eligible for issuance was increased to 2,653,061.




In 2006, the
Company issued options to purchase 638,637 shares of common stock, with a
weighted average exercise price of $4.55 per share, which is based on
exercise prices equal to the fair market value per share on the dates of grant
to employees.




In 2007, the
Company issued options to purchase 612,603 shares of common stock, with a
weighted average exercise price of $17.66 per share, which is based on
exercise prices equal to the fair market value per share on the dates of grant
to employees.




In 2008, the
Company issued options to purchase 791,920 shares of common stock, with a
weighted average exercise price of $12.17 per share, which is based on exercise
prices equal to the fair market value per share on the dates of grant to
employees.


85
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)





Year Ended
December 31,2008
                      
                      
                      2007
                      
                      
                      2006Shares
                      
                      
                      Weighted
                        Average
      ExercisePrice
                      
                      
                      Shares
                      
                      
                      Weighted
                        Average
      ExercisePrice
                      
                      
                      Shares
                      
                      
                      Weighted
                        Average
      ExercisePriceOutstanding
      at beginning of year
                      
                      
                      2,423,495
                      
                      
                      $
                      4.43
                      
                      
                      
                      2,929,081
                      
                      
                      $
                      3.12
                      
                      
                      
                      2,561,309
                      
                      
                      $
                      3.79Options
      granted
                      
                      
                      791,920
                      
                      
                      $
                      12.17
                      
                      
                      
                      612,603
                      
                      
                      $
                      17.66
                      
                      
                      
                      638,637
                      
                      
                      $
                      4.55Options
      cancelled
                      
                      
                      (148,121
                      )
                      
                      $
                      17.28
                      
                      
                      
                      (99,782
                      )
                      
                      $
                      10.31
                      
                      
                      
                      (112,667
                      )
                      
                      $
                      26.32Options
      exercised (1)
                      
                      
                      (84,945
                      )
                      
                      $
                      1.34
                      
                      
                      
                      (1,018,407
                      )
                      
                      $
                      1.55
                      
                      
                      
                      (158,198
                      )
                      
                      $
                      0.98Outstanding
      at end of year
                      
                      
                      2,982,349
                      
                      
                      $
                      8.15
                      
                      
                      
                      2,423,495
                      
                      
                      $
                      7.15
                      
                      
                      
                      2,929,081
                      
                      
                      $
                      3.12Options
      exercisable at year end
                      
                      
                      1,805,711
                      
                      
                      $
                      5.24
                      
                      
                      
                      1,566,352
                      
                      
                      $
                      4.43
                      
                      
                      
                      2,048,651
                      
                      
                      $
                      3.05Options
      not vested at year end
                      
                      
                      1,176,638
                      
                      
                      $
                      12.61
                      
                      
                      
                      857,143
                      
                      
                      $
                      12.13
                      
                      
                      
                      880,430
                      
                      
                      $
                      3.26





(1)
            Intrinsic
      value of $907, $16,147 and $1,398 in 2008, 2007 and 2006, respectively.
      Cash received of $114, $1,589 and $453 in 2008, 2007 and 2006,
      respectively.






A summary
of the status of the Company’s nonvested options and changes during the year is
presented below:





Year Ended December 31,2008Shares
                  
                  
                  Weighted
                    Average Grant Date Fair ValueNonvested
      options at beginning of year
                  
                  
                  857,143
                  
                  
                  $
                  12.13Options
      granted
                  
                  
                  791,920
                  
                  
                  $
                  12.17Options
      vested
                  
                  
                  (435,458
                  )
                  
                  $
                  10.18Options
      cancelled
                  
                  
                  (36,967
                  )
                  
                  $
                  12.33Nonvested
      options at end of year
                  
                  
                  1,176,638
                  
                  
                  $
                  12.61









86
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




The
following tables summarize information about stock options outstanding at
December 31, 2008 and 2007:


December 31,
      2008ExercisePrice
                    
                    
                    Number
                      of
      Shares
                      Outstanding
                    
                    
                    Number
                      of
      Shares
                      Exercisable
                    
                    
                    Weighted
      Average
                      Remaining
      Contractual
                      Life
      of Shares Exercisable
                      (in years)$
                    0.94
                    
                    
                    
                    357,873
                    
                    
                    
                    357,873
                    
                    
                    
                    4.55$
                    1.52
                    
                    
                    
                    708,026
                    
                    
                    
                    682,235
                    
                    
                    
                    6.16$
                    1.96
                    
                    
                    
                    321,707
                    
                    
                    
                    228,409
                    
                    
                    
                    7.22$
                    7.06
                    
                    
                    
                    161,471
                    
                    
                    
                    124,749
                    
                    
                    
                    7.71$
                    7.40
                    
                    
                    
                    3,600
                    
                    
                    
                    83
                    
                    
                    
                    9.83$
                    11.00
                    
                    
                    
                    28,677
                    
                    
                    
                    24,518
                    
                    
                    
                    7.95$
                    11.14
                    
                    
                    
                    103,500
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    12.01
                    
                    
                    
                    443,645
                    
                    
                    
                    80,054
                    
                    
                    
                    9.14$
                    12.61
                    
                    
                    
                    5,000
                    
                    
                    
                    5,000
                    
                    
                    
                    0.11$
                    12.65
                    
                    
                    
                    150,400
                    
                    
                    
                    10,311
                    
                    
                    
                    9.11$
                    12.85
                    
                    
                    
                    38,500
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    14.66
                    
                    
                    
                    29,900
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    14.90
                    
                    
                    
                    20,054
                    
                    
                    
                    9,370
                    
                    
                    
                    8.12$
                    16.77
                    
                    
                    
                    384,680
                    
                    
                    
                    158,422
                    
                    
                    
                    8.33$
                    17.20
                    
                    
                    
                    16,400
                    
                    
                    
                    5,996
                    
                    
                    
                    8.57$
                    17.42
                    
                    
                    
                    37,500
                    
                    
                    
                    37,500
                    
                    
                    
                    8.35$
                    19.60
                    
                    
                    
                    40,816
                    
                    
                    
                    40,816
                    
                    
                    
                    1.25$
                    21.27
                    
                    
                    
                    100,750
                    
                    
                    
                    25,186
                    
                    
                    
                    8.98$
                    21.58
                    
                    
                    
                    21,200
                    
                    
                    
                    6,539
                    
                    
                    
                    8.83$
                    24.94
                    
                    
                    
                    1,000
                    
                    
                    
                    1,000
                    
                    
                    
                    8.94$
                    37.29
                    
                    
                    
                    7,650
                    
                    
                    
                    7,650
                    
                    
                    
                    1.512,982,349
                    
                    
                    
                    1,805,711






December 31,
      2007ExercisePrice
                    
                    
                    Number
                      of
      Shares
                      Outstanding
                    
                    
                    Number
                      of
      Shares
                      Exercisable
                    
                    
                    Weighted
      Average
                      Remaining
      Contractual
                      Life
      of Shares Exercisable
                      (in years)$
                    0.94
                    
                    
                    
                    415,354
                    
                    
                    
                    412,382
                    
                    
                    
                    5.39$
                    1.52
                    
                    
                    
                    724,942
                    
                    
                    
                    620,706
                    
                    
                    
                    7.13$
                    1.96
                    
                    
                    
                    337,692
                    
                    
                    
                    186,688
                    
                    
                    
                    5.24$
                    7.06
                    
                    
                    
                    166,760
                    
                    
                    
                    101,963
                    
                    
                    
                    5.71$
                    11.00
                    
                    
                    
                    28,995
                    
                    
                    
                    23,202
                    
                    
                    
                    5.96$
                    14.90
                    
                    
                    
                    22,706
                    
                    
                    
                    4,679
                    
                    
                    
                    6.13$
                    16.77
                    
                    
                    
                    399,190
                    
                    
                    
                    65,977
                    
                    
                    
                    6.34$
                    17.20
                    
                    
                    
                    16,400
                    
                    
                    
                    249
                    
                    
                    
                    6.58$
                    17.42
                    
                    
                    
                    37,500
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    19.60
                    
                    
                    
                    142,856
                    
                    
                    
                    142,856
                    
                    
                    
                    2.26$
                    21.27
                    
                    
                    
                    100,750
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    21.58
                    
                    
                    
                    22,700
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    37.29
                    
                    
                    
                    7,650
                    
                    
                    
                    7,650
                    
                    
                    
                    2.522,423,495
                    
                    
                    
                    1,566,352





87
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




The aggregate
intrinsic value of stock options outstanding at December 31, 2008 was
approximately $10,718 and the weighted average remaining contractual life was
approximately 7.33 years. The aggregate intrinsic value of stock options
exercisable at December 31, 2008 was approximately $9,796 and the weighted
average remaining contractual life was approximately 6.41 years.




All options
granted are equity awards and the Company has not granted any liability awards.
The Company expects to recognize future compensation costs aggregating $9,024
for options granted but not vested as of December 31, 2008. Such amount will be
recognized over the weighted average requisite service period, which is expected
to be approximately 3 years.




The Company
has reserved shares of common stock for issuance upon redemption of preferred
stock and the exercise of warrants and options as follows:








December 31,2008
                  
                  
                  December 31,2007Shares
      reserved for:The
      Directors Plan
                  
                  
                  5,102
                  
                  
                  
                  25,5101996
      Option Plan
                  
                  
                  48,466
                  
                  
                  
                  150,5062003
      Option Plan
                  
                  
                  1,396,989
                  
                  
                  
                  1,472,3502006
      Option Plan
                  
                  
                  2,629,975
                  
                  
                  
                  2,631,7674,080,532
                  
                  
                  
                  4,280,133





Upon adoption
of SFAS 123(R), the Company selected the Black-Scholes option pricing model
as the most appropriate model for determining the estimated fair value for
stock-based awards. The fair value of stock option awards subsequent to
January 1, 2006 is amortized on a straight-line basis over the requisite
service period of the awards, which is generally the vesting period. Expected
volatility was calculated based on reported data for a peer group of publicly
traded companies for which historical information was available. The Company
will continue to use peer group volatility information until historical
volatility of the Company is relevant to measure expected volatility for future
option grants. The average expected life was determined according to the “SEC
shortcut approach” as described in SAB 107, Disclosure about Fair Value of
Financial Instruments, which is the mid-point between the vesting date
and the end of the contractual term. The risk-free interest rate is determined
by reference to U.S. Treasury yield curve rates with a remaining term equal
to the expected life assumed at the date of grant. Forfeitures are estimated
based on the Company’s historical analysis of actual stock option forfeitures.
Prior to 2006, the Company used the minimum value method for disclosing the pro
forma effects of stock options as permitted for private companies under
SFAS 123. The assumptions used in the Black-Scholes option-pricing model
are as follows:





Year Ended
      December 31,2008
                              
                              2007
                              
                              2006Expected
      Term
                              7
      years
                              
                              7
      years
                              
                              7
      yearsVolatility
                              41.3%
      - 46.31%
                              
                              77.46%  -
      80.0%
                              
                              80.00%Risk
      free
      rate
                              3.29%
      - 3.54%
                              
                              4.12%-4.82%
                              
                              4.36%-5.12%Dividend
      Yield
                              —
                              
                              —
                              
                              —





88
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)




The following
table presents the stock-based compensation expense for the years ended
December 31, 2008, 2007 and 2006.





Year
      Ended December 31,2008
              
              
              2007
              
              
              2006Cost
      of revenue, maintenance and professional services
              
              
              369
              
              
              
              190
              
              
              
              118Sales
      and marketing
              
              
              827
              
              
              
              451
              
              
              
              242Research
      and development
              
              
              1,066
              
              
              
              280
              
              
              
              266General
      and administrative
              
              $
              1,686
              
              
              $
              1,700
              
              
              $
              1,589$
              3,948
              
              
              $
              2,621
              
              
              $
              2,215








Note k —
Profit Sharing Plan





Effective
March 1, 1996, the Company adopted a defined contribution plan (the
“Plan”), which, as amended, qualifies under Section 401(k) of the Internal
Revenue Code. The Plan covers all employees who meet eligibility requirements.
Employer contributions are discretionary. The Company made discretionary
contributions to the Plan of $495, $258, and $0 for the years ended December 31,
2008, 2007 and 2006, respectively.





Note l —
Segment Information





The
Company operates in one reportable segment.





The
Company operates in three geographic regions: The Americas (which includes
North, South and Central America and the Caribbean), Europe, Middle East &
Africa and Asia-Pacific (which includes Australia and Korea). All transfers
between geographic regions have been eliminated from consolidated revenues.
Revenue, property and equipment, and intangible assets by geographic region are
as follows:





Year Ended December 31,2008
              
              
              2007
              
              
              2006Revenue:The
      Americas
              
              $
              61,433
              
              
              $
              51,468
              
              
              $
              41,156Europe,
      Middle East & Africa
              
              
              29,668
              
              
              
              27,265
              
              
              
              16,623Asia-Pacific
              
              
              5,202
              
              
              
              4,035
              
              
              
              3,061$
              96,303
              
              
              $
              82,768
              
              
              $
              60,840





December 31,2008
                      
                      
                      2007Long-lived
      assets:North
      America
                      
                      $
                      3,998
                      
                      
                      $
                      3,921Europe,
      Middle East & Africa
                      
                      
                      238
                      
                      
                      
                      263Asia-Pacific
                      
                      
                      —
                      
                      
                      
                      —$
                      4,236
                      
                      
                      $
                      4,184






December 31,2008
                    
                    
                    2007Intangible
      assets:North
      America
                    
                    $
                    3,553
                    
                    
                    $
                    1,928Europe,
      Middle East & Africa
                    
                    
                    2,430
                    
                    
                    
                    3,133Asia-Pacific
                    
                    
                    —
                    
                    
                    
                    —$
                    5,963
                    
                    
                    $
                    5,061





89
 DOUBLE-TAKE
SOFTWARE, INC.
 Notes
to Consolidated Financial Statements - (Continued)





Note m —
Related Party Transactions





After the
acquisition of Double-Take EMEA, the Company has had transactions with Sunbelt
Software Distribution, Inc., or Sunbelt Distribution. An officer of Double-Take
Software Inc. is the director and chief executive officer of Sunbelt
Distribution. The balances and transactions with Sunbelt Distribution are
described below:





December 31,2008
                
                
                2007Trade
      Receivable
                
                $
                2,334
                
                
                $
                2,901Trade
      Payable
                
                $
                25
                
                
                $
                47






Year Ended
      December 31, 2008
                
                
                Year Ended
      December 31, 2007
                
                
                May
      24, 2006 to December 31, 2006Sales
      to Sunbelt Distribution
                
                $
                11,522
                
                
                $
                10,865
                
                
                $
                4,537Purchases
      from Sunbelt Distribution
                
                $
                304
                
                
                $
                233
                
                
                $
                265


90




Double-Take
Software, Inc.






Schedule II — Valuation and Qualifying
Accounts




Balance
      at Beginning of Period
                                                                  
                                                                  
                                                                  Additions
      Charged to Cost and Expense
                                                                  
                                                                  Deductions
      (See Notes Below)
                                                                  
                                                                  Balance
      at end of PeriodYear
      ended December 31, 2006:Allowance
      for doubtful accounts
                                                                  
                                                                  $
                                                                  274
                                                                  
                                                                  
                                                                  $
                                                                  296
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  570Valuation
      allowance on deferred tax assets
                                                                  
                                                                  $
                                                                  28,478
                                                                  
                                                                  
                                                                  $
                                                                  (3,443
                                                                  )
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  25,035Year
      ended December 31, 2007:Allowance
      for doubtful accounts
                                                                  
                                                                  $
                                                                  570
                                                                  
                                                                  
                                                                  $
                                                                  43
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  14
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  599Valuation
      allowance on deferred tax assets
                                                                  
                                                                  $
                                                                  25,035
                                                                  
                                                                  
                                                                  $
                                                                  9,955
                                                                  (3
                                                                  )
                                                                  
                                                                  $
                                                                  8,960
                                                                  (2
                                                                  )
                                                                  
                                                                  $
                                                                  26,030Year
      ended December 31, 2008:Allowance
      for doubtful accounts
                                                                  
                                                                  $
                                                                  599
                                                                  
                                                                  
                                                                  $
                                                                  166
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  $
                                                                  765Valuation
      allowance on deferred tax assets
                                                                  
                                                                  $
                                                                  26,030
                                                                  
                                                                  
                                                                  $
                                                                  (64
                                                                  )
                                                                  
                                                                  
                                                                  $
                                                                  8,612
                                                                  (2
                                                                  )
                                                                  
                                                                  $
                                                                  17,354


(1)
                    
                    Deductions
      from provisions represent losses or expenses for which the respective
      provisions were created. In the case of the provision for doubtful
      accounts, such deductions are reduced by recoveries of amount previously
      written-off.(2)
                    
                    Adjustments
      associated with the Company’s assessment of its deferred tax assets
      (principally related to federal and state net operating loss
      carryforwards.(3)
                    
                    Includes
      a valuation allowance of $6,425 representing 100% of the deferred tax
      asset of Double-Take Software Canada, Inc. acquired in December
      2007.


91





Item 9.
            Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure.






None






Item 9A.
            Controls
      and Procedures.






Disclosure
Controls and Procedures






We
maintain disclosure controls and procedures, which are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and
communicated to our management, including our chief executive officer and chief
financial officer as appropriate to allow timely decisions regarding required
disclosure.






Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, an evaluation was performed on
the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this annual report. Based on
that evaluation, our management, including our Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of December 31, 2008.






Changes
in Internal Controls and Procedures






There
were no changes in the Company’s internal controls over financial reporting
during the fourth quarter of 2008 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over
financial reporting.






Management’s
Annual Report on Internal Control Over Financial Reporting






Management
of Double-Take Software, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in
Rule 13a-15(f) of the Securities Exchange Act of 1934).






Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purpose in accordance with
U.S. generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that (1) pertain
to maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of management and directors; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the financial statements.






Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are


92


subject
to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.






Under the
supervision of and with the participation of the Chief Executive Officer and the
Chief Financial Officer, our management conducted an assessment of the
effectiveness of our internal control over financial reporting based on the
framework and criteria established in Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment our management has concluded that, as of
December 31, 2008, our internal control over financial reporting was
effective.






Management’s
assessment of the effectiveness of internal control over financial reporting as
of December 31, 2008 did not include the internal controls of emBoot, Inc.
because it was acquired by the Company in July 2008. emBoot, Inc is a
consolidated subsidiary whose total assets and total revenue represent
approximately 1% and 1% respectively, of related consolidated financial
statement amounts as of and for the year ended December 31,
2008.






Our
Independent Registered Public Accounting Firm, Eisner LLP, has audited and
issued a report on our internal control over financial reporting. The report of
Eisner LLP appears below:






REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board of
Directors and Stockholders


Double-Take
Software, Inc.





We have
audited Double-Take Software, Inc.'s (the "Company") internal control over
financial reporting as of December 31, 2008, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management's Annual Report on Internal
Control over Financial Reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial
statements.


93





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





As
described in the accompanying ‘’Management's Annual Report on Internal Control
over Financial Reporting’’, management's assessment of the effectiveness of
internal control over financial reporting as of December 31, 2008 did not
include emBoot, Inc. because it was acquired by the Company in July 2008.
emBoot, Inc is a consolidated subsidiary whose total assets and total revenue
represent approximately 1% and 1% respectively, of related consolidated
financial statement amounts as of and for the year ended December 31, 2008. We
have also excluded emBoot, Inc. from our audit of internal control over
financial reporting.





In our
opinion, Double-Take Software, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control-Integrated Framework issued by
COSO.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Double-Take
Software, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years in the three-year period ended December 31, 2008, and our report dated
March 12, 2009 expressed an unqualified opinion on those consolidated financial
statements.














/s/
Eisner LLP





New York,
New York


March 12,
2009








Item 9B.
            Other
      Information.






None.


94





PART III






Item 10.
            Directors,
      Executive Officers and Corporate
Governance.






Executive
Officers






Pursuant
to General Instruction G(3) of Form 10-K, information regarding our
executive officers is set forth in Part I of this annual report under the
caption Item 1. “Executive Officers of Double-Take
Software”.






Code
of Ethics






As part
of our system of corporate governance, our board of directors has adopted a Code
of Business Conduct and Ethics that is applicable to all of our employees, and
also contains provisions only applicable to our Chief Executive Officer and
senior financial officers. Our Code of Business Conduct and Ethics is available
on the Investor Relations — Corporate Governance page of our web site at
http://www.doubletake.com.
We intend to satisfy any disclosure requirement under Item 5.05 of
Form 8-K regarding an amendment to, or waiver from, a provision of the Code
of Business Conduct and Ethics that applies to our Chief Executive Officer or
senior financial officers, by posting such information on our web site at the
address above.






Additional
Information






Additional
information regarding directors, executive officers and corporate governance is
incorporated herein by reference to our 2009 Proxy Statement to be filed with
the SEC within 120 days after the end of the fiscal year covered by this
annual report with respect to our Annual Meeting of Stockholders to be held on
May 14, 2009.






Item 11.
            Executive
      Compensation.






Information
responsive to this item is incorporated herein by reference to our 2009 Proxy
Statement to be filed with the SEC within 120 days after the end of the
fiscal year covered by this annual report with respect to our Annual Meeting of
Stockholders to be held on May 14, 2009.






Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.






Securities
Authorized for Issuance under Equity Compensation Plans






The
following table sets forth information about securities available for issuance
under our equity compensation plans as of December 31,
2008:






Equity
Compensation Plan Information





Plan
      Category
                        
                        Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
                        
                        
                        Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
                        
                        
                        Number
      of Securities Remaining Available for Future Issuance Under
      Equity Compensation Plan (Excluding Securities Reflected in Column
      (a)(a)
                        
                        
                        (b)
                        
                        
                        (c)Equity
      compensation plans approved by security holders (1)
                        
                        
                        2,982,349
                        
                        
                        $
                        8.15
                        
                        
                        
                        1,098,183Equity
      compensation plans not approved by security holders
                        
                        
                        —
                        
                        
                        $
                        —
                        
                        
                        
                        —Total
                        
                        
                        2,982,349
                        
                        
                        $
                        8.15
                        
                        
                        
                        1,098,183





(1)
              
              Consists
      of shares of common stock to be issued upon exercise of outstanding
      options granted under our Non-Executive Director Stock Option Plan, 2003
      Employees Stock Option Plan and 2006 Omnibus Incentive Plan. Of these
      plans, the only plan under which options may be granted in the future is
      the 2006 Omnibus Incentive
Plan.





95


Security
Ownership of Certain Beneficial Owners and Management






Information
responsive to this item is incorporated herein by reference to our 2009 Proxy
Statement to be filed with the SEC within 120 days after the fiscal year
covered by this annual report with respect to our Annual Meeting of Stockholders
to be held on May 14, 2009.






Item 13.
            Certain
      Relationships and Related Transactions, and Director
      Independence.






Information
responsive to this item is incorporated herein by reference to our 2009 Proxy
Statement to be filed with the SEC within 120 days after the fiscal year
covered by this annual report with respect to our Annual Meeting of Stockholders
to be held on May 14, 2009.






Item 14.
            Principal
      Accountant Fees and Services.






Information
responsive to this item is incorporated herein by reference to our 2009 Proxy
Statement to be filed with the SEC within 120 days after the fiscal year
covered by this annual report with respect to our Annual Meeting of Stockholders
to be held on May 14, 2009.






PART IV






Item 15.
            Exhibits,
      Financial Statement Schedules.






(a)
                                                (1) The
      information required by this item is included in Item 8 of
      Part II of this annual report.(2) The
      information required by this item is included in Item 8 of
      Part II of this annual report.(3)
      Exhibits:  See Index to Exhibits.  The Exhibits listed in the
      accompanying Index to Exhibits are filed or incorporated by reference as
      part of this annual
report.





(b) Exhibits:
      See Index to Exhibits. The Exhibits listed in the accompanying Index to
      Exhibits are filed or incorporated by reference as part of this annual
      report.(c)
      Not applicable











96




SIGNATURES






Pursuant
to the requirements of Section 13 or 15(d) 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, in the City of Southborough,
Commonwealth of Massachusetts, on March 13, 2009.






Double-Take Software,
      Inc.By:
                    /s/ Dean
      GoodermoteDean
      GoodermotePresident,
      Chief Executive Officer and Chairman of the Board of Directors(Duly
      Authorized Officer)




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities and on the dates
indicated.






Name
                            
                            Title
                            
                            Date/s/  Dean
      Goodermote
                              Dean
      Goodermote
                            
                            President,
      Chief Executive Officer, and Chairman of the Board of Directors (Principal
      Executive Officer)
                            
                            March
      13, 2009/s/  S.
      Craig Huke
                              S.
      Craig Huke
                            
                            Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)
                            
                            March
      13, 2009/s/  Deborah
      M. Besemer
                              Debra
      M. Besemer
                            
                            Director
                            
                            March
      13, 2009/s/  Paul
      D. Birch
                              Paul
      D. Birch
                            
                            Director
                            
                            March
      13, 2009/s/  Ashoke
      (Bobby) Goswami
                              Ashoke
      (Bobby) Goswami
                            
                            Director
                            
                            March
      13, 2009/s/  John
      B. Landry
                              John
      B. Landry
                            
                            Director
                            
                            March
      13, 2009/s/  John
      W. Young
                              John
      W. Young
                            
                            Director
                            
                            March
      13, 2009





97
 INDEX
TO EXHIBITS





Exhibit
      Number
                        
                        Exhibit
      Description2
                        .01(1)
                        
                        Share
      Purchase Agreement dated as of May 23, 2006, by and among Double-Take
      Software, Inc. (the “Company”), Sunbelt International S.A.R.L. and
      Mr. Joe Murciano.2
                        .02(7)
                        
                        Share
      Purchase Agreement among Double-Take Software Canada, Inc. a Canadian
      Corporation, Double-Take Software, Inc., a Delaware Corporation,
      TimeSpring Software Corporation, a Canadian Corporation, and the
      Shareholders of TimeSpring Software Corporation for the sale of all of the
      issued and outstanding shares of TimeSpring Software Corporation as of
      December 24, 2007.3
                        .01(1)
                        
                        Second
      Amended and Restated Certificate of Incorporation of the
      Company.3
                        .02(8)
                        
                        Second
      Amended and Restated Bylaws of the Company.3
                        .03(9)
                        
                        Certificate
      of Designation, Preference and Rights of Series A Junior
      Participating Preferred Stock.4
                        .01(1)
                        
                        Form
      of certificate representing the Common Stock, par value $.001 per share,
      of the Company.4
                        .02(10)
                        
                        Rights
      Agreement, dated as of November 19, 2008, between the Company and
      Continental Stock Transfer and Trust Company, as Rights
    Agent.10
                        .01*(1)
                        
                        1996
      Employees Stock Option Plan.10
                        .02*(1)
                        
                        Form
      of Incentive Stock Award pursuant to the 1996 Employees Stock Option
      Plan.10
                        .03*(1)
                        
                        Non-Executive
      Director Stock Option Plan.10
                        .04*(1)
                        
                        Form
      of Non-Qualified Incentive Stock Option Award pursuant to the
      Non-Executive Director Stock Option Plan.10
                        .05*(1)
                        
                        2003
      Employees Stock Option Plan.10
                        .06*(1)
                        
                        Form
      of Incentive Stock Award pursuant to the 2003 Employees Stock Option
      Plan.10
                        .07*(1)
                        
                        Double-Take
      Software 2006 Omnibus Incentive Plan.10
                        .08A*(1)
                        
                        Form
      of Incentive Stock Option Agreement pursuant to the Double-Take Software
      2006 Omnibus Incentive Plan.10
                        .08B*(1)
                        
                        Form
      of Nonqualified Stock Option Agreement pursuant to the Double-Take
      Software 2006 Omnibus Incentive Plan.10
                        .08C*(1)
                        
                        Form
      of Director Nonqualified Stock Option Agreement pursuant to the
      Double-Take Software 2006 Omnibus Incentive Plan.10
                        .09*(1)
                        
                        Form
      of Double-Take Software, Inc. Indemnification
Agreement.10
                        .10*
                        
                        Amended
      and Restated Executive Compensation Plan.10
                        .11(1)
                        
                        Amended
      and Restated Registration Rights Agreement dated as of October 6,
      2004, among the Company and the Holders Named Therein (the “Registration
      Rights Agreement”).10
                        .12(1)
                        
                        Amendment
      and Joinder to the Registration Rights Agreement dated as of July 31,
      2006.10
                        .13(1)
                        
                        Lease
      Agreement, dated June 12, 2000, between E-L Allison Pointe II, LLP
      and the Company.10
                        .14(1)
                        
                        First
      Amendment to the Lease Agreement, dated June 15, 2000, by and between
      E-L Allison Pointe II, LLP and the Company.10
                        .15(1)
                        
                        Loan
      and Security Agreement dated as of October 16, 2003, among the
      Company and Silicon Valley Bank.10
                        .16(1)
                        
                        Loan
      Modification Agreement, dated as of April 26, 2004, by and between
      Silicon Valley Bank and the Company.10
                        .17(1)
                        
                        Third
      Loan Modification Agreement, by and between Silicon Valley Bank and the
      Company.10
                        .18(1)
                        
                        Fifth
      Loan Modification Agreement, by and between Silicon Valley Bank and the
      Company.10
                        .19(1)
                        
                        Seventh
      Loan Modification Agreement, by and between Silicon Valley Bank and the
      Company.10
                        .20(1)
                        
                        Eighth
      Loan Modification Agreement, between Silicon Valley Bank and the
      Company.10
                        .21(1)
                        
                        Ninth
      Loan Modification Agreement, between Silicon Valley Bank and the
      Company.10
                        .22*(1)
                        
                        Employment
      Letter, dated August 7, 2006, between Double-Take Software, Inc. and
      Dean Goodermote.10
                        .23*(1)
                        
                        Employment
      Letter, dated October 31, 2006, between Double-Take Software, Inc.
      and S. Craig Huke.10
                        .24*(1)
                        
                        Employment
      Letter, dated October 31, 2006, between Double-Take Software, Inc.
      and
Daniel M. Jones.


98





Exhibit
      Number
                
                Exhibit
      Description10
                .25+(15)
                
                Products
      License and Distribution Agreement, dated as of November 16, 2001, by
      and between the Company and Dell Products L.P. by and on behalf of itself
      and Dell Computer Corporation.10
                .26(1)
                
                Amendment
      3 to Products License and Distribution Agreement, dated as of
      December 2, 2003, between the Company and Dell Computer
      Corporation.10
                .27+(1)
                
                Amendment
      4 to Products License and Distribution Agreement, effective as of
      July 25, 2003, between the Company and Dell Computer
      Corporation.10
                .28+(1)
                
                Amendment
      5 to Products License and Distribution Agreement, dated as of
      December 2, 2003, between the Company and Dell Computer
      Corporation.10
                .29(1)
                
                Amendment
      6 to Products License and Distribution Agreement, effective as of
      February 26, 2004, between the Company and Dell Computer
      Corporation.10
                .30(1)
                
                Amendment
      7 to Products License and Distribution Agreement, effective as of
      February 18, 2005, between the Company and Dell Computer
      Corporation.10
                .31+(1)
                
                Amendment
      to Products License and Distribution Agreement, effective as of
      January 31, 2006, between the Company and Dell Computer
      Corporation.10
                .31A(3)
                
                Amendment
      to the products License and Distribution Agreement, effective as of
      June 13, 2007, between the Company and Dell Computer
      Corporation10
                .32(1)
                
                Restated
      Xcelerate! Distributor Agreement, dated as of August 28, 2006,
      between Double-Take Software, Inc. and Sunbelt
    International.10
                .33(1)
                
                Xcelerate!
      Partner Agreement, dated August 2, 2001, between the Company and
      Sunbelt Software Distribution Inc.10
                .34(1)
                
                Addendum
      1 to Xcelerate Partner Agreement, dated August 2, 2001, between the
      Company and Sunbelt Software Distribution Inc.10
                .35(1)
                
                Addendum
      3 to Xcelerate Partner Agreement, dated November 27, 2001, between
      the Company and Sunbelt Software Distribution Inc.10
                .36(1)
                
                Addendum
      4 to Xcelerate Partner Agreement, dated May 31, 2002, between the
      Company and Sunbelt Software Distribution Inc.10
                .37(1)
                
                Addendum
      4 to Xcelerate Partner Agreement, dated August 27, 2002, between the
      Company and Sunbelt Software Distribution Inc.10
                .38(1)
                
                Amendment
      5 to Xcelerate Partner Agreement, dated February 13, 2004, between
      the Company and Sunbelt Software Distribution Inc.10
                .39(1)
                
                Amendment
      6 to Xcelerate Partner Agreement, dated February 14, 2004, between
      the Company and Sunbelt Software Distribution Inc.10
                .40(1)
                
                Amendment
      7 to Xcelerate Partner Agreement, dated March 22, 2005, between the
      Company and Sunbelt Software Distribution Inc.10
                .41(1)
                
                Amendment
      8 to Xcelerate Partner Agreement, dated April 1, 2005, between the
      Company and Sunbelt Software Distribution Inc.10
                .42(1)
                
                Amendment
      9 to Xcelerate Partner Agreement, dated February 15, 2006, between
      the Company and Sunbelt Software Distribution Inc.10
                .43(11)
                
                Amendment
      10 to Xcelerate Partner Agreement, dated January 1, 2007 between the
      Company and Sunbelt Software Distribution, Inc.10
                .44(12)
                
                Amendment
      11 to Xcelerate Partner Agreement, dated January 1, 2008 between the
      Company and Sunbelt Software Distribution, Inc.10
                .45
                
                Amendment
      12 to Xcelerate Partner Agreement, dated January 1, 2009, between the
      Company and Sunbelt Software Distribution Inc.10
                .48*(1)
                
                Form
      of Non-Disclosure Confidentiality Agreement.10
                .49(2)
                
                Loan
      Modification Agreement dated May 9, 2007 between Silicon Valley Bank
      and Double-Take Software, Inc.10
                .50*(4)
                
                Form
      of Change in Control Severance Agreement between Double-Take Software,
      Inc. and Dean Goodermote, S. Craig, Huke, Daniel M. Jones and Michael
      Lesh.10
                .51*(5)
                
                Amended
      and Restated Employment/Severance Agreement, dated November 9, 2007,
      between Double-Take Software, Inc. and Robert L.
Beeler.10
                .52*(6)
                
                Amended
      and Restated Employment/Severance Agreement, dated November 9, 2007,
      between Double-Take Software, Inc. and David J. Demlow.10
                .53*(13)
                
                Letter
      Agreement, dated December 2, 2008, between Double-Take Software, Inc. and
      Jo Murciano.10
                .55(14)
                
                Eleventh
      Loan Modification dated May 1, 2008 between Silicon Valley Bank and
      Double-Take Software,
Inc.


99





Exhibit
      Number
                
                Exhibit
      Description21
                .01
                
                Subsidiaries
      of the Company.23
                .01
                
                Consent
      of Eisner LLP.31
                .01
                
                Certification
      of Chief Executive Officer and pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.31
                .02
                
                Certification
      of Chief Financial Officer and pursuant to Rule 13a-14(a) under the
      Securities Exchange Act of 1934 as adopted pursuant to Section 302 of
      the Sarbanes-Oxley Act of 2002.32
                .01
                
                Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to
      18 U.S.C. Section 1350 as adopted pursuant to Section 906
      of the Sarbanes-Oxley Act of
2002.









*
            
            Represents
      a management contract or compensatory plan or
  arrangement.+
            
            Confidential
      treatment has been requested for certain portions of these agreements, and
      the confidential portions were filed separately with the
    SEC.(1)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Registration Statement on Form S-1 (File No. 333-136499) is
      incorporated herein by reference.(2)
            
            The
      copy of this exhibit filed as Exhibit 10.1 to the Company’s Quarterly
      Report on Form 10-Q (File No. 001-33184) for the quarter ended
      March 31, 2007 is incorporated herein by
reference.(3)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Current Report on Form 8-K/A (File No. 001-33184) filed on
      July 23, 2007 is incorporated herein by reference.(4)
            
            The
      copy of this exhibit filed as the Exhibit 10.48 to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended September 30, 2007 is incorporated herein by
      reference.(5)
            
            The
      copy of this exhibit filed as the Exhibit 10.49 to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended September 30, 2007 is incorporated herein by
      reference.(6)
            
            The
      copy of this exhibit filed as the Exhibit 10.50 to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended September 30, 2007 is incorporated herein by
      reference.(7)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Current Report on Form 8-K (File No. 001-33184) filed on
      December 28, 2007 is incorporated herein by
  reference.(8)
            
            The
      copy of this exhibit filed as exhibit number 3.1 to the Company’s Current
      Report on From 8-K (File No. 001-33184) filed on November 19, 2008 is
      incorporated herein by reference.(9)
            
            The
      copy of this exhibit filed as exhibit number 3.2 to the Company’s Current
      Report on From 8-K (File No. 001-33184) filed on November 19, 2008 is
      incorporated herein by reference.(10)
            
            The
      copy of this exhibit filed as exhibit number 4.1 to the Company’s Current
      Report on From 8-K (File No. 001-33184) filed on November 19, 2008 is
      incorporated herein by reference.(11)
            
            The
      copy of this exhibit filed as Exhibit 10.53 to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended March 31, 2008 is incorporated herein by
    reference.(12)
            
            The
      copy of this exhibit filed as Exhibit 10.54 to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended March 31, 2008 is incorporated herein by
    reference.(13)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Current Report on From 8-K (File No. 001-33184) filed on December 8, 2008
      is incorporated herein by reference.(14)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Quarterly Report on Form 10-Q (File No. 001-33184) for the quarter
      ended June 30, 2008 is incorporated herein by
    reference.(15)
            
            The
      copy of this exhibit filed as the same exhibit number to the Company’s
      Annual Report on Form 10-K (File No. 001-33184) for the year ended
      December 31, 2007 is incorporated herein by
  reference.


100